Single family offices in Asia are increasingly branching out from direct investments, as they rethink work processes, diversify into more adventurous assets and find ways to work around Covid-induced travel restrictions.
“From an observation standpoint, over the last five, maybe even up to 10 years, we've seen an increase of co-investment from different families,” Patrick Tsang, chair of Hong Kong-based single family office Tsangs Group told AsianInvestor.
“Ten or 15 years ago, or even longer, the Asian family office has been very traditional in just parking the money in a bank or investing into real estate in London, New York - in general, very old school stuff.”
Now, however, family offices have delved into “more adventurous assets that they did not usually do,” he said, citing crypto, blockchain and other private equity investments as examples.
To invest in new asset classes, family offices could hire and manage those assets internally, or they could tap external expertise and co-invest with fund managers. At the start of the pandemic, Tsangs Group chose to move into the latter when investing in areas such as cryptocurrencies, blockchain and biotech.
Before 2020, the group had always opted for direct investments but it was Covid that finally pushed them to take the plunge, even though they had been considering it for a while.
He added that it was not strictly Covid that drove the decision, but that the pandemic had driven the team to think about how they could do things differently.
“The first six months, everyone was on Zoom nonstop from eight in the morning until night. And in fact, it was physically even more exhausting than having a normal day. As a result we thought, well, we need to slow down a little bit. That was when we changed the business model by taking a shot and said let's look at one or two funds. And once you are invested in one, you sort of invest in a few more,” he shared.
“Once we did it, it was easy. I think the beginning was difficult, because we kept thinking, are we doing this? And you want to pick the fund managers quite carefully. Because we don't really have a portfolio of fund managers, we just had to go through introductions from people we trust, and just talk to the people,” he said.
The firm is mostly invested real estate because “that’s where the wealth began”. The next largest allocation is in early-stage and private equity investments mainly within the technology space, followed by listed equity across the US, mainland China and Hong Kong.
Other investments include crypto and blockchain, some funds and some low-yielding assets such as government bonds.
In choosing funds to co-invest with, the most important factor is the human connection, Tsang said. “As Asians, we value relationships very highly. Zoom calls are important, but for me, they're only a facilitation of things. You can build the relationship on the Zoom, but I think the deep relationships have to be done over dinner.”
“What we strive for is to try to build fewer relationships, but more quality relationships. And once we establish that trust, we're able to piggyback and co-invest into other deals. We’re looking long term, and if you have this kind of mutual respect of qualities, then the long-term relationship can be solidified.”
Aside from the trust, the obvious quality he looks for in fund managers is the knowledge, expertise or relationships they have that his firm lacks, whether it is the industry, asset class or other areas.
MOVE TO SINGAPORE
The travel restrictions in Hong Kong – which require a seven-day quarantine in a hotel for incoming travellers – contributed to the move towards co-investments, as well as other strategic considerations such as the opening of a third office in Singapore. The firm opened a Dubai office earlier this year.
“Singapore is probably the most open place in Asia for the time being. I still have hope and belief that Hong Kong will come back, but it will take some time,” Tsang said.
“It won't be a big office,” he said. “We'll just have a few people, we'll probably do some kind of joint venture with some local guys there. It will still operate as a single family office, but it's probably our way of getting more deal flow and accessing more co-investors in Singapore.”
The firm will also use the Singapore office to access other parts of Southeast Asia such as Indonesia, in which it would consider co-investment deals too.
“We do look everywhere, we're quite agnostic, but I would say we try not to get overloaded with too many geographies. Let's say we wanted to have exposure in Indonesia, then we would be investing into a fund focused on Indonesia, rather than investing directly into Indonesia. Unless it's sort of a big, famous deal, then maybe we'll do something directly,” he said.
FAMILY OFFICE EVOLUTION
Another senior executive at a Hong Kong-based single family office (SFO) agreed that SFOs like hers choose the co-investing mode when they seek to diversify their portfolio, and that it is a stepping stone for many to eventually make direct deals in a new market.
“A lot of people tried to do a lot of things on their own in the old days. A lot of entrepreneurs believed that if they hire the best fund manager to work in my family office, they were done,” she said. “As people realise that they need more expertise and more diversification, family offices in general will be much more open to working with partners of all sorts. That is also a new trend that we are seeing in the past decade.”
However, she cautions that family offices that co-invest need to have the talent and resources to assess the fund they co-invest with.
“A very classic example is that most family offices nowadays invest in funds to get access to co-investments. I mean, that is partnership in itself,” she said. “Not only do you have to make a big commitment to the fund - so that's already a big chunk of money - another thing is, even if somebody gives you a co investor, then you've got to be able to assess it. So you really do need to have a full private investment team to be able to assess that kind of investment opportunities.”
She compared this to the Canadian pension funds that started out investing in Asian private deals through co-investments with PE funds, but have since grown their deals and opened offices in Asia.
“Now they've become a force to be reckoned with in the buyout world. They’ve earned a lot of respect, even from the Americans in the buyout world. So in a way, I'm not saying we're going to do big buyouts, but it's a similar approach, where you’re partnering with the best experts, then you dabble in these lightly, surely. And once you feel that you've gained enough expertise, you can do it on your own,” she said.
GO IT ALONE
Over in Taiwan however, co-investments are in short supply among SFOs, mostly because of the lack of definitions for family offices and the more isolated working styles of family businesses.
“There still is a need for greater clarity by regulators on the status of what constitutes a family office in Taiwan, compared with how they are recognised in other locations such as Hong Kong and Singapore. As such, it is difficult to identify the number of family offices locally,” Chris Cottorone, president of SFO TriOrient Investments told AsianInvestor.
“Second, Taiwan has had a long and successful history of family-run businesses in its economy. However, traditionally these family-run businesses did not partner with other families on investment or financial opportunities, for a variety of reasons such as protecting business secrets and defining how financial rewards may be distributed.”
While the SFO he runs does not make club deals or co-investments because it is focused on wealth protection rather than profit maximisation, hypothetically, some factors they would consider when entering a co-investment deal include carrying out due diligence, assessing the impact from the investment, and level of liquidity.
Generally, he thinks that co-investment deals will likely become more prevalent in Taiwan as family offices seek greater returns on their investment and consider greater exposure to other kinds of investment opportunities.
“Another important factor that will spur greater desire to enter into co-investment deals is that family offices are often smaller in scale in terms of their organisation size, including the scope and size of their investment research teams. This means they will have to partner with other investment institutions in order to go after deals they themselves may have less in-house ability to consider,” he said.
Echoing Tsang’s note about relationships, he added that “trust will continue to play an important role in their willingness to pursue such joint opportunities. This issue of trust will require greater transparency, too, which in part will be enhanced by regulatory requirements.”