China's big pool of institutional capital has long been of interest to asset managers, but fast-growing incomes are now making the mainland increasingly important as a home to wealthy private clients as well.

Increasingly, rich Chinese are considering setting up family offices to manage this capital, very often those who have generated their wealth from family businesses. They are most likely to establish one offshore, given domestic restrictions on inbound and outbound capital flows.

Hong Kong would seem the most obvious choice for them to locate an office, but there are reasons to choose other places.

“I’ve had some experience with mainland China family offices [FOs], and some are not necessarily based in Hong Kong,” says Henry Lee, founder and managing director of multi-family office Hendale Advisors in Hong Kong. “Some choose Singapore, because that’s one sovereignty level removed [from China]. But it’s very early days for mainland families at the moment.”

Another reason a family might set up an office in Singapore is to have it close to business operations they have in Southeast Asia, such as a palm oil company in Indonesia or Malaysia.

Most affluent Chinese clients are first-generation wealthy, note FO executives. And if there is a second generation, they tend to be quite young, says TK Chiang, founder and managing partner of Hong Kong-based Orion Partners, which runs family and pension money.

“Typically they’re given a little allocation of their wealth to do something with,” he adds, “but generally the investment decision is led by a patriarch or matriarch.”

Many have made their money via a listing or by selling all or part of their business to another party, says Chiang. “In all cases, the majority of what they’re looking at are opportunistic deals in areas they know."

The risk profile of mainland clients spans a wide spectrum, says Chiang, who also works with clients from Europe, Japan and the Middle East and specialises in property investments.

“There are more sophisticated ones that want to protect the pot they have, particularly offshore wealth. They’re looking for diversified yield, and we tend to work most closely with them.”

There are also those expecting the same kinds of returns they have achieved in a “sweetheart” land deal in China, he adds. “But once they get offshore, they’re still going through first-generation hiccups, so there is still a bit of a learning curve.”

It can be a successful approach to come to such less sophisticated or experienced clients with a specific product, notes Lee. That way, “they know what they’re buying, so in many ways it’s more of a single investment decision”.

But it's often challenging to work with newly wealthy clients – they have made their money relatively recently and have strong views on how it should be managed, adds Lee. “And that may not be translatable into deals that work from a market’s perspective.”

Still, there is no shortage of rich individuals potentially looking to partner wealthy Chinese families on deals. For example, Orion was approached last year by a European family in the retail sector looking for a local lead on an investment in retail properties in China, for an allocation of several hundred million dollars.

Interest in China from the Middle East has also grown, notes Steven Johan, an independent family adviser in Hong Kong. “Five or 10 years ago, most of the investments [from the Middle East] came from Saudi Arabia and were government to government [G2G], with a few industry participants tagging along,” he notes. “Unfortunately most of those investments into China turned to dust, as G2G investments tend to do."

Now there is a lot more interest in private deals in China, says Johan. These are not necessarily G2G, he adds, but the better deals in the country have some state involvement, which usually results in a faster or more profitable investment.

The number of high-net-worth individuals – those with $1 million or more available for investment – in China rose 5.2% to 562,000 in 2011, from 535,000 in 2010 and 477,000 in 2009, according to the Asia-Pacific Wealth Report 2012 published by Capgemini and RBC Wealth Management.

An extended Q&A discussion with FO executives appeared in the February issue of AsianInvestor magazine.