Stamford Privee Blog
22nd November, 2012 - Posted by admin - No Comments
Asian family offices are catching up with their Western peers in terms of sophistication and structure, but face challenges with regards to finding and rewarding staff.
The Asian wealth boom of the past two decades has meant the number of dollar millionaires in the region has surpassed that in Europe and will soon overtake the number for North America. Asia’s rich are increasingly aware that, having generated substantial wealth, the next challenge is to preserve and manage it wisely.
Enter the family office (FO), a concept less well understood or realised in Asia than in Europe or the US, but one that is gaining traction.
Like the families themselves, one FO is very different from the next. Each has its own goals, preferences and requirements when it comes to business, culture or investment approach.
So it is difficult to make generalizations about them, but there are some observable characteristics and trends.
Asian FOs are, on the whole, less advanced in terms of investment approach, size, sophistication and structure than their Western peers. That is largely because rich Asian families tend to have generated their wealth more recently (in the past 20 years or so) than ‘old money’ in Europe – or the US, come to that. (That said, there are Asian FOs that have been investing for a long time. AsianInvestor spoke to one in Hong Kong that has been around for several decades and others well over 10 years old.)
Hence the desire to create wealth has so far largely trumped the need to protect it. But as more of the children of Asian first-generation wealthy develop strong business and financial acumen, so their parents are increasingly considering how to pass on their accumulated capital.
Still a nascent sector
The question is: to what extend are FOs are being set up in the region and what approach are they taking to investments and other activities?
Establishing a family office doesn’t happen overnight – it is an evolutionary process, note FO executives. Nonetheless, the FO model is gaining traction in Asia, and each is looking to implement a certain version, says Ong Iu-Jin, chief executive of Deauville Private Office, a Singapore-based MFO.
“We are in the early days of this first cycle and we won’t really see who’s going to emerge with a sustainable model for three or four years,” he says.
One question is whether to remain a single-family-office (SFO) or join a multi-family-office (MFO) to obtain greater economies of scale and a ready-made infrastructure.
Others echo that progress is happenining, but slowly. Mykolas Rambus, Singapore-based CEO of consultancy Wealth-X, feels it will be some 10 to 15 years “before we see the first big wave of high-net-worth individuals passing wealth to the next generation. Asian families are still very much in wealth-creation mode, so there doesn’t seem to be a reason for a seperate structure at the moment.”
Still, new offices are being set up, particularly in the past two years. TK Chiang, co-founder and managing partner of Hong Kong-based Orion Partners, points to a growing wave of Chinese FOs. Orion Partners runs $1.3 billion for pension funds and private families.
And a major trend among both existing and new Asian FOs is a growing desire to deal and invest direct and outsource less to private-bank intermediaries. The latter are still relevant, but the younger generation are more well educated now and often have the skills to invest directly, notes Scott MacDonald, Sydney-based CEO of the International Family Office Association.
Daughters of high-net-worth-individuals in particular have been playing a much bigger role in recent years, he adds. “They are coming back smarter and more well educated to the family and now compete with male siblings for responsibility.”
Moreover, Asian families in recent years have become readier to share their knowledge with – and learn from others about – how to look after their wealth. They are more willing than in the past to get together with like-minded wealthy families and trusted advisers to learn about the best way to manage assets.
MacDonald cites a growing number of rich Asians appearing at FO conferences and seminars. Meanwhile established Western events are appearing in Asia, such as one jointly promoted by University of Pennsylvania’s Wharton School, the Institute for Private Investors and Singapore Management University. The programme in Singapore was the first of its type in the region.
Wanted: FO professionals
The kind of expertise they are obtaining from such events is likely to prove crucial, since the biggest challenge FOs face is finding and retaining talent. The issue is not only to find employees with the right skills – such as investment, legal, tax or accounting expertise – but also to ensure they fit with the aims, culture and personalities of the family.
The fact that FOs are directly involved with managing the wealth of very rich, often highly successful individuals, adds a layer of trickiness. The family members will generally be very skilled in certain areas of business and will often have a certain, understandable level of arrogance. They do not always take advice well on what to do with their money.
Moreover, executives hired from fund houses or private banks have to adapt to a very different approach to sourcing investments, particularly those with sales experience. FO executives – whether working at an SFO or MFO – must be fully aligned with the family or families and not source products because they result in commissions or backhanders. “The mindset is very different,” notes William Chan, founder and chief executive of Singapore-based MFO Stamford Priveé (see also here).
This also presents problems for families around how they remunerate individuals: overpaying for performance may result in unwanted risks, but underpaying may mean no risk is taken at all. The whole remuneration approach has to engender loyalty to the family and not jeopardize the family’s objectives, says Chan.
With specific regard to MFOs, Deauville’s Ong says: “If there’s no strategic fit and no chemistry [between the family and the professional FO], the client may not want to deal with the FO.”
FOs certainly present attractive job opportunities for private bankers disillusioned with the PB model – particularly in Asia, where they still tend to be transactional-type product pushers more than trusted advisers.
Singapore-based recruitment consultant Matthew Streeton says he is seeing many veteran relationship managers looking to move in the FO sector.
There are several motivations for doing so, including the potential to oversee an entire client portfolios; and the ability to source investments and products not available to private bankers in their previous firm.
Still, it’s easier post-crisis than it used to be for families to afford the right people, says Peter Douglas, founding principal of Singapore-based GFIA, which runs family office money. Investment bankers, for instance, “used to think their market worth was $1 million a year; now they might ask for $250,000, as long as there is some jupside on that”, he notes.
Yet Asian FOs remain smaller in headcount than those in the West. The average FO in Europe has 13 staff, but in Asia that figure drops below six, indicating a potentially greater need for Asian FOs to outsource functions, according to a study published in February by consultancy Campden Wealth and UBS.
Insource or outsource?
Views vary on the amount of assets that justify setting up an FO with a full staff and infrastructure. One chief investment office at a Hong Kong-based SFO says assets of $500 million or above justify setting up an operational infrastructure, but that a family with $100 million in net worth is unlikely to do so and would be better off, say, joining an MFO.
“Let’s say you have $200 million,” he says. “If you outsource to a private bank, that might cost 1-2% of AUM, so you’d need to budget $2 million a year. But that can’t build you a very big FO – you’d only get a few people”.
Nevertheless, there are well established MFOs with substantially less than $500 million that provide substantial services.
As a rule of thumb, an FO will need to spend 0.6% to 1 % of the AUM in salaries and expenses, says Stamford Priveé’s Chan. “For example, a $100 million FO may have a $1 million salary budget. That means, says, three or four staff, each on $200,000 or $300,000 a year, depending on how senior they are.”
The size of a family office will partly depend on how much investment it wants to do in-house. A common approach for Asian FOs with several hundred million dollars or more is to make allocation decisions internally and have a private bank execute them..
SO where are they putting their money?
Only 40% of family wealth in Asia is invested in traditional asset classes such as equities and fixed income, with the rest in the core family business or other liquid investments such as real estate, according to the Campden-UBS study. (One reason for that is that 80% of Asian FO executives are closely involved with the family business.)
A 2011 Cambridge Associates survey of FOs found the typical alternatives allocation among global SFOs is 15-25% to hedge funds, and 10-15% to private equity. The average number of investment professionals at the SFOs surveyed is two, and five non-investment professionals.
The investment consultancy says private clients make up around 20-25% of its client base. It provides them with advice on asset allocation, portfolio construction and manager selection, as well as assistance with portfolio monitoring, says Alvin Tay, Singapore-based managing director at Cambridge Associates.
The more established, larger FOs tend to focus on private deals, such as direct hedge-fund and private-equity investments, as they get better access to them than investors going through private banks.
“We invest more on the alternatives side, mostly because of the size of the deals we can participate in,” says one Hong Kong-based executive at an SFO with several hundred million in dollars under management and a 10-year track record.
However, as the “bandwidth” of FOs is fairly small, they tend to do relatively few deals, says GFIA’s Douglas, and there is a disconnect between the extent to which banks and advisers want to sell to FOs and the number of deals that can be absorbed.
Meanwhile, the long-standing FOs will also invest outside their home region; for example, the SFO in question has over the years been allocating to UK, US and other assets globally. They are also more likely to take the view that while wealth generation is important, capital preservation is more so.
In turn, European and US wealthy families are hoping to taking a share in Asia’s growth. Europeans in particular are looking to escape domestic woes ranging from the debt crisis through to rising taxes.
Campden Wealth says it has seen up to 10 European family offices move to Singapore since the financial crisis started in 2008.
Other Western Fos are looking to co-invest in Asian projects rather than set up in the region. But they may find it difficult to find partners, since Asian families often view doing so as risky.
“We’ve been approached by Americans and Europeans about co-investing,” says one Hong Kong-based SFO executive. “But it requires extremely deep due diligence and knowing your partner very well.”
It’s more likely that such joint investments will happen through the family’s business rather than its FO, agrees AS Johan, a Hong Kong-based adviser with substantial experience of helping to set up SFOs in the Middle East.
Ultimately, the reality private banks and other advisers in Asia must accept is that the old model placed the private bank in the centre, whereas the FO now needs to be in the centre, says IFOA’s MacDonald. “More Wealthy are seeking empowerment of their affairs,” he adds. “The smart money is getting smarter.”
Source : AsianInvestor May 2012 Issue