The rapid expansion of wealth in China has driven a sharp rise in the number of ultra-high-net-worth individuals there and consequent swift growth in demand for help with managing these swelling pools of assets.
While China’s family office (FO) segment remains a relatively nascent one relative to that in Europe or the US, it is maturing fast, finds new research published yesterday (January 8) by Swiss bank UBS, research house Campden Wealth, Avic Trust and Beijing-based Family Office Think Tank.
Rich Chinese families are increasingly looking to use or set up professional structures to manage their money and are increasingly diversifying their portfolios, according to this inaugural report on Chinese FOs, which collected data between March and August 2019.
The average net wealth of Chinese families surveyed is Rmb6.5 billion ($943 million), and the average assets under management of their family offices is Rmb4.2 billion ($604 million). Hence some two-thirds of the average family’s assets are managed – lower than the global average of 76% – which suggests that a huge pool of wealth could be set for a shift over time.
Of those Chinese FOs that do not currently use family office services, around three-quarters are interested in either setting up a single-family office (44%) or joining a multi-family office (33%), the report found. Of those interested, 84% are actively taking measures towards this goal.
In terms of dates for setting up or joining a family office, most of the relevant families said that they were planning to do so sometime in 2019 (45%). There was also significant activity planned for this year (21%) and some for 2021 (10%).
Momentum is clearly building. Some three-quarters of the families surveyed reported that they either set up or joined a family office after 2010. Almost one-third reported that they began to use family office services in either 2018 (13%) or in the first eight months of 2019 (18%).
When it comes to investment strategy, long-term preservation of capital was the most popular reason given by Chinese families for setting up or using a family office (see chart 1 below).
Yet their model still appears strongly focused on expanding wealth. Only 13% said that they had adopted a preservation-oriented strategy (13%), while 44% are pursuing a growth-oriented investment strategy and 43% a balanced approach.
And nearly a fifth (18%) of respondents said that "tactical investment management" was the key reason, not much below the 22% who cited long-term preservation of capital.
This is perhaps not surprising, given the robust 11% investment returns they had averaged in the previous 12 months despite the global low-yield environment.
Private equity was the top-performing asset class – direct investments returned 19% and fund-based investing 15%, reported respondents. Real estate also performed well, with direct investments returning 14% and real estate investment trusts (Reits) 9.0%.
Not surprisingly, then, the most popular asset class in which to increase allocations was private equity funds, with 62% saying they planned to invest more in that area (see chart 2 below). Direct private equity (53%), hedge funds (56%) and fixed income (53%) were also heavily in favour.
Direct real estate and commodities, however, were less popular, with 73% saying that they planned to reduce their allocations to both and only 27% to increase them.
This presumably reflected concerns that some family respondents flagged about the sustainability of China’s rising property prices.
Chart 3 below shows the average allocations of Chinese family offices surveyed for the report.
Meanwhile, almost 90% of respondents reported that the family’s private assets are either currently separated from its business assets (72%) or will be separated in the future (17%), which indicates that wealth management in China is more developed than is sometimes assumed, the report said.
Some families, however, urged a nuanced interpretation of such figures, particularly because “if there is any problem and the operating business finds that it requires capital, the entrepreneur will typically be the first person to inject capital into the business”.
Despite the push to use professional services, Chinese FOs retain much of their investment-related activities in-house. Most reported that asset allocation, traditional investment and alternative investment are performed wholly in-house rather than wholly outsourced (59% versus 9.4%; 56% versus 6.3%; and 48% versus 6.1%, respectively).