The largest retirement funds in the Netherlands and South Korea have formed a landmark partnership to focus on real asset mega-deals. Their investment heads tell AsianInvestor why.
Asia’s family offices have experienced an eventful few years, but the coming half-decade promises to be particularly interesting.
The region contains a rising number of increasingly affluent family offices, courtesy of the increasing levels of wealth. According to a 2019 UBS/PwC report the aggregate wealth of regional billionaires grew by over a third in the five years to 2018, to an aggregate $2.2 trillion. Asia has six of the 10 fastest growing wealth markets and China has the second-largest number of billionaires, according to research firm Wealth-X.
While their numbers are rising, the offices are having to grapple with several major issues. Environmental, social and governance (ESG) factors are expanding, technology continues to advance, while the macroenvironment is set to ensure investment returns in mainstream asset classes remain even lower, for even longer.
Predicting how family offices will respond is difficult because they vary so much. The internal dynamics of each family differs, which affects what their investing priorities and how much they are prepared to embrace new ideas and trust external advisers. Trust is easy to lose and almost impossible to regain; family offices are probably the hardest investor segment to advise.
Heman Wong, the former chief investment officer (CIO) of Hong Kong’s Hospital Authority Pension Fund and now an adviser to Tata Consultancy Services, says families do not follow generally accepted investment disciplines like, say, a pension fund.
“You can very easily guess what a pension fund will do. Globally, pensions are guided by clear disciplines and think along the same lines,” he told AsianInvestor. “But of course, there is a problem with that. They all go into high yield bonds at the same time and sell out at the same time.”
A combination of the need to look further for decent investment returns and the rise of ESG is beginning to lead family investment priorities to reflect the philosophy and beliefs of a range of family members, not just the patriarch. Technological advances are also helping family offices shift away from their traditional emphasis of real estate towards other capital allocations.
Add into this an accelerating shift in generational wealth, and families across Asia – and particularly China – will increasingly have to grapple with issues of investing and use of external advisers.
One issue many family offices will have to contend in these changing times is their innate conservatism.
Wong said Asian families tend to be extremely cautious. He mentioned a very rich Asian family’s head, who asked him to be his CIO. “He wanted to be in US dollars – nothing but, basically, cash. I said ‘why do you want a CIO? I can’t make much of a return for you.’”
Patricia Woo, partner in Hong Kong with law firm Squire Patton Boggs, agrees.
“They tend to stay away completely from new asset classes and alternatives, which means they are not adapting to new developments,” she told W. “They are not ready to embrace them without a deep understanding, which happens if the family office does not have internal resources to review all asset classes.”
However, not all family offices are hidebound. A UBS global family office report last year noted that over 40% of the average family office portfolio is now invested in alternative investments. More adventurous family offices are increasingly looking to direct investments to improve returns on their capital.
The research suggests that a huge pool of Chinese family wealth could be set to move into private equity, with the assistance specialist advisers.
UBS’s report quoted a director for an Asia Pacific multi-family office (MFO) which had shifted their interest from hedge fund and private equity fund investments to private equity direct deals.
“When you are meeting hedge fund or private equity managers, most of the time you are learning nothing,” he noted. “But when you have a direct deal on your hands, you are meeting the entrepreneur, the salesman – you are learning about the business, the finances.”
Deloitte similarly noted a steady increase of family offices in co-investment deals in its 2019 ‘Family Office Trends’ paper. Their aim was to by-pass traditional investment pathways and invest direct in areas such as hotels, real estate and entrepreneurial businesses, said the report.
Technology, and particularly the sub-sets of financial technology, health technology and medical technology, also look set to become major investment targets for family investment.
A notable 87% of respondents in the 2019 UBS report agreed that artificial intelligence will be the biggest disruptive force in global business, while 56% said that blockchain technology will fundamentally change the way they invest.
Henry Chong, chief executive officer (CEO) of the Asian MFO Fusang, is one of a new generation of fintech adopters and developers. He observed that families are exploring digital assets and security tokens as a way of bridging public and private markets, “allowing them access to public capital while retaining control”.
Of his family wealth and that of his associates, Chong said, “lots of family offices and family businesses are beginning to rethink their approach to capital markets and fundraising ... [particularly] with everything that is going on in public markets, the massive increase in volatility and uncertainty about the long term returns.”
Timothy Tsui, another Hong Kong-based family investor, is taking an entrepreneurial approach to the utilisation of digital assets. He has shifted his focus in the last five years from prime real estate in the world’s major cities to developing a portfolio of unicorn investments in the fintech space, including FansWifi, a social media hotspot platform.
This article was adapted from a feature that originally appeared in AsianInvestor's 20th anniversary edition, which was published in late June 2020.
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