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Siraj Ali is the COO at Singapore-based family office AJ Capital. The opinions expressed here are his own and do not represent those of DealStreetAsia.
The Chinese have a saying, ‘Fu bu guo san dai’, or ‘Wealth never survives three generations’. A large portion of Asia’s wealth has been created in recent times by first-generation entrepreneurs who are still very much focused on their operating businesses rather than showing much concern for succession planning or wealth preservation for their future generations. In 2017, China produced two new billionaires a week with a combined wealth of $1.12 trillion. However, of the 106 newly minted billionaires, 51 have dropped off the list illustrating the need to manage wealth prudently and the inherent volatility of doing business in Asia.
Family offices (FOs) are, by their very nature, private – their roles are rarely understood and often mistaken. It is widely recognised that the first ‘family office’ was started in the US by private entrepreneur and oil baron John D. Rockefeller Sr. in 1882. Seeking the need to organise his complex business operations and invest his family’s growing wealth, he hired various advisors to handle his family’s affairs which ranged from taxes, legal questions, operational matters related to Standard Oil, along with his philanthropic initiatives and generational planning requirements. This structure which exists in various forms till this day would become the original blueprint for the modern single-family office which now has been widely implemented across the globe.
In recent times, however, there has been a fundamental shift in mentality with regard to FOs with the increasing levels of education and sophistication of wealthy families in Asia. Traditionally, Asian wealth has avoided giving up control of family wealth to third-party money managers for fear of opaque fees resulting in overcharging by banks and a fundamental mistrust of financial products which they ‘push’. This has resulted in the need for setting up in-house structures where such investments and costs can be monitored by professionals, taxes managed and institutional level information made available when making complex investment decisions. The role of the family office thus has become as diverse as the needs of their principals.
It is estimated that the world’s billionaires control close to $9 trillion, of which it is further estimated that $3-4 trillion sits with family offices (FOs) globally, making these private investment offices one of the most powerful sources of private capital globally.
In the past 10 years, Singapore and Hong Kong have become the hub for managing wealth in Asia which has resulted in the number of Asia-based FOs increase from approximately 50 to somewhere between 500 and 1,000. This growth has resulted in FOs of various sizes mushrooming in the region. Depending on the capital they manage, some are smaller ($25-100 million) with a focus primarily on public markets while larger family offices ($500 million-$1 billion) invest in a broad range of public and private markets ranging from sectors such as cannabis, crypto-investing to more traditional assets such as gold and real estate.
Increased activity by FOs in the private equity markets has been observed as well in Asia. FOs are seen by target companies as more patient and nimble capital as compared to funds and banks which look to divest after 5-7 years. Often times, target companies for investment identify with principals of FOs as they have created wealth in similar sectors and prefer to do private deals with FOs as they are perceived as ‘true partners with aligned interests’ as compared to traditional PE funds, resulting in quicker deals and stable long-term partnerships.
The second generation of wealth in Asia is now benefitting from investment structures such as FOs. Succession planning is markedly clearer and often family members have formal and defined roles within the FO depending on their areas of interest. A majority of family offices have taken to ‘impact’ investing as part of their philanthropic initiatives where the goal is a social or environmental cause coupled with financial return. This concept has gotten the millennial heirs, who typically are very socially conscious, excited about such investments of family wealth, resulting in continuity and active involvement in family affairs rather than handing the reins completely over to professionals working in the organisation.
Asia continues to be poised for growth and with it the number of newly minted billionaires rising every year. The Asian FO seems to be on the uptrend for the foreseeable future with the willingness of wealthy families to set up such offices with more regularity to keep up with the complexity of investments in the ever-changing global political environment.