Asia family offices focus on equity, property: report

The region's family offices are keen on real estate, equities and increasingly US private credit, according to a joint report by UBS and Campden Research.
Asia family offices focus on equity, property: report

Family offices in Asia prioritised equities and real estate investing in 2016, a strategy that helped bolster their annual returns into positive territory versus the previous year, according to 'The Global Family Office Report 2017' by UBS and Campden Research that was released today.

The region's family offices are also seeking to invest more into private credit and co-invest, particularly in the US. 

The portfolios of regional family offices posted zero returns on average in 2015, but bounced back to record a 6.7% gain last year. That marked the second best performance by region, according to the report. Only North American family offices reported a higher return, of 7%.

The overall strong performance was driven by gains in developed market equities and ongoing strength in private equity in 2016, the survey said.

Asian family offices allocated 25% of their portfolios to developed and emerging public equities in 2016, while assigning 20.9% to private equity (including direct venture capital, co-investing and private equity funds). Real estate direct investments—a staple asset class for wealthy Asian families—was next, receiving 20.3% of average portfolio allocations.

The public equity and direct real estate totals were notably higher than those recorded by survey respondents in the previous year, when the family offices invested 22% and 15% of their portfolios, respectively. However they were generally less aggressive on private equity, dropping their allocation from 26% in 2015.

A Campden spokesperson cautioned about reading too deeply into year-on-year comparisons, noting that most of the Asia-Pacific survey respondents differed over the two years.  

Click for full view. Source: UBS Campden Wealth

The investing habits of Asia Pacific family offices during 2016 were broadly similar to global family office portfolios. They allocated 27.1% to equities, 20.3% to private equity, and 16.2% to property investments.

Bonds accounted for 14% of Asia portfolios, while commodities accounted for another 6%. Alternative investments (private equity, real estate direct investments, hedge funds, exchange-traded funds, Reits and tangibles) accounted for a total of 47.8% of family office portfolios. 

Private credit appeal

Anurag Mahesh, head of global family office, Asia Pacific, UBS Wealth Management, said a particularly notable area of interest of regional family offices was demand for private credit. 

“The interest in private credit is a trend that became noticeable in 2016 and it has continued into this year," Mahesh told AsianInvestor

Private credit investments were included underneath the private equity investments for the purposes of the study.   

The asset class has benefited from a broader desire of family offices in Asia to move more of their portfolios outside of home markets, he added. The main destination has been the US, with investors keen to buy into assets such as private mezzanine loans and small and medium enterprise credit.

With the US economy doing reasonably well, and interest rates not expected to rise rapidly over the next few years, Asian family offices see many opportunities to gain decent annual returns in this space, Mahesh noted. 

Anurag Mahesh

“The targeted internal rate of return for such investments is between single high digits and low double digits for investments between four to six years.”

Co-investing (which is considered as part of the private equity allocation) is also gaining traction with Asia Pacific offices. They allocated 4.4% of their investment portfolios to such opportunities compared with the global average of 3.9%, the report noted.

Most family offices in the Asia Pacific are looking to invest in sectors such as healthcare or technology or the consumer sector, it said.

The US remains the preferred investment destination overall. Asian family offices are increasingly co-investing with high net worth families based on the west coast. However, families are also looking at investment opportunities with a regional angle. For instance, giant Asian technology companies are putting more resources into genomics, which needs high computing power and engineering capabilities, said Mahesh.

"Family offices are eager to have a slice of that pie."

Cash on hand

While Asia's family offices are picking their investments, they remain relatively cagey and are keeping relatively high overall cash levels compared to global peers. 

Hong Kong family offices are particularly conservative, holding 12.4% of their investment portfolios in cash. That compares to 8.7% for Asia family offices and 6.6% for global family offices.

Mahesh said this is down to a greater awareness of generally increasing valuations and consequentially higher risks. “While family offices in Asia Pacific have been in risk-on mode in 2016, the more sophisticated clients have been focused on risk management and mitigation as well."

The region's more established family offices, especially in Hong Kong, have been more circumspect about the rallying markets and booked some profits. 

“It’s also possibly one reason why their overall performance has been slightly lower than the US, which has lower cash levels of 5%," Mahesh added.

Forty-two family offices participated from Asia Pacific, with nine family offices based in Hong Kong and 11 in Singapore for the report. On average, regional family offices had managed $445 million in assets. The report received 262 participants from around the world.

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