PE driving performance of Asian family offices
The relatively high returns of family offices in Asia Pacific have been attributed to the high proportion of assets they have invested in private equity, based on the findings of a study released yesterday.
The average Asia-Pacific family office holds 45% of their portfolio in illiquid assets such as private equity and direct real estate investments. These figures are significantly higher than seen in the portfolios of high-net-worth individuals, says the report.
The research from Campden, sponsored by UBS, is a global study representing more than $200 billion in private family wealth. The Asian component represents 35 family offices with total assets of $15 billion.
Their collective investment return in 2014 was 6.3%, down from 7.6% in 2013. Nevertheless, this was still the second best regional performance globally, behind Europe with 6.4% but ahead of North America at 5.8% and emerging markets at 4.9%.
Francis Liu, regional market manager for the UHNW client segment in Greater China at UBS Wealth Management, said: “The sound performance of family offices in Asia-Pacific can be attributed to their relatively large holdings in private equity, with over 27% of a Hong Kong family office portfolio invested on average.”
One principal of an Asia-Pacific single family office stressed their need for control with regards to their PE investments: “We would rather take bets on ventures that we are involved with, because we can control the management, we can control the quality, we can control the client service.”
The survey reveals the importance of family finance, unity and education in the overall objectives of a family office. “Families are primarily concerned with ensuring that the family offices facilitate inter-generational wealth management successfully,” says Liu.
"As Asian billionaire families grow in size and complexity, succession planning becomes increasingly important in creating a lasting family legacy.”
Despite these robust returns relative to peers, offices in Asia-Pacific were more cautious in their investment strategies than the average family office in the study and are exhibiting a move away from growth-focused investment strategies towards balanced and preservation strategies.
Relative to last year, costs have risen in the family-office space. The research shows that a number of factors are driving costs. The biggest direct impact this year is a willingness to take on staff or restructure, buoyed by the positive investment returns of previous years.
This accounts for the significant year-on-year rise in administrative costs from 15 to 24 basis points. Asia-Pacific offices continue to have the highest total operating costs regionally at 115 basis points, with Hong Kong reporting even higher costs at 121 basis points.
Although down the list of family priorities - after wealth management, estate planning, family unity and education – philanthropy is an important activity. Fifty-five percent of family offices in Asia-Pacific are engaged in philanthropy through the family office, particularly in Hong Kong, where families typically support youth projects, poverty initiatives and education.
In the next three years they expect to increase slightly the allocation of AUM reserved for philanthropy, which currently stands at 3% of AUM, according to the study.