Asian family offices circle the wagons as they look beyond volatility
If there’s one economic phenomenon that can be said to have defined 2022 more than any other, it’s likely to be inflation, which has swept the world, prompting interest rate rises and impacting the value of many investments.
Family offices have been put on the defensive as much as any other investors in order to protect their wealth.
A report released today has detailed family offices’ response to galloping inflation, finding that it is perceived as the most critical risk to financial markets. The survey also examines other investment trends in the family office sector.
The Asia-Pacific Family Office Report 2022, published by Raffles Family Office, a Hong Kong-headquartered multi-family office, and Campden Wealth, a family-owned, global membership organisation headquartered in London, found that among 76 Asia-Pacific family offices surveyed, almost nine in 10 identified inflation as the leading risk.
The report found that 42% of Asia-Pacific family offices are now operating a balanced investment strategy, up slightly from last year, but author Chi-man Kwan, group chief executive and co-founder of Raffles Family Office, suggested that figure could now be higher, given the time taken for data collection and processing, and a subsequent increase in economic uncertainty.
“Inflation popped up on our radar, but it was still a couple of months before it became headline news worldwide,” Kwan told AsianInvestor. “Stock markets and even fixed-income markets became extremely volatile, with the Federal Reserve hiking interest rates the most in the longest time. Nobody even saw it coming months before that.”
PATIENT CAPITAL
Even the data collected before the interest rate rises showed that 28% of Asia-Pacific family offices were focusing on wealth preservation, far higher than the global average of 18%.
Amid the poor performance of both equities and bonds on public markets, Asia-Pacific family offices have been increasingly allocating funds to private equity (PE), the report said, noting that 23% of their assets under management were in PE and predicting that the allocation trend would continue.
“Seventy-five percent of the next generation who are taking over single-family offices put PE at the top of their list,” Kwan said.
Harmen Overdijk, chief investment officer at multi-family office Leo Wealth, however cautioned that securing attractive PE returns will not be as straightforward as it was until recently.
“Private equity firms have made very high returns for their investors over the last 10 years, but typically in the tech space or the high-growth space,” he told AsianInvestor. “They’ve made their returns not so much by the growth of the companies, but by the increase in valuations. Now, the increase in price-to earnings or price-to-sales is going to be a lot harder.”
“The longer it takes to make your internal rate of return (IRR), the more quickly it’ll fall, because time is the enemy of the IRR formula,” Overdijk said. “The other thing is that the opportunity cost has gone up a lot. You now have basically a risk-free way to get close to 4%, and if you buy high-quality, investment-grade bonds, you're looking at 5%-plus, so from a very long-term perspective, I'm not sure if this is the right time to invest in private equity.”
Dominic Samuelson, chief executive at Campden Wealth, framed the importance of private markets more broadly, advocating a long-term view.
“There's a significant move at the moment in the family office space towards private markets, and that’s actually very natural,” he told AsianInvestor. “It's called ‘patient capital’. These are families who have 15- to 20-year outlooks, most of whom have built their fortunes over 50-100 years, so they've seen plenty of market cycles in their time.”
NEXT-GEN CHOICES
Kwan said that in Greater China alone, some $17 trillion of family office wealth could be passed from one generation to the next in the next decade. The investment choices of those beneficiaries would have a huge impact on investment trends in the space, a sentiment that Samuelson echoed.
“A lot of the next generation are very well educated,” Samuelson said. “Most of them have had experience in the financial markets, are in significant advisory businesses, and then come home and have big choices to make: Do they wish to take on the family business or do they wish to diversify and spend their time investing and buying into more future-focused industries and, in essence, following their passions rather than just simply following the family?”
Samuelson said that the latter would likely lead to continued interest in digital assets such as cryptocurrencies.
Iu-Jin Ong, founder of Hong Kong-headquartered single-family office Ambitum Capital, told AsianInvestor he believes digital assets continue to be promising, despite the difficulties the industry faced recently with the collapse of cryptocurrency exchanges and lending platforms.
“We're still looking at opportunities in the sector. There’ll likely be more failures and it’s short-term ‘not bullish’, but in the long term we believe in the asset class,” he said, singling out blockchain as an enabling technology.
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“We see the application of blockchain in many commercial terms, but much less so the metaverse,” he said. “The blockchain use cases for transactions, for security of payments, privacy – all of those are much more interesting things.”
BETTER ALPHA
Shiraz Poonevala, investment director at a Bangkok-headquartered single-family office, shared a similar view.
“It’s not our strength,” he said, referring to the family office’s current investment policies. “But for sure the next generation will look at it differently, and it's very important that we’re cognisant of this, because when we look at something new, we always keep one eye on the next gen. At the end of the day, they’ll have to learn it and manage it.”
Another trend that the report said was likely to gather pace among Asia-Pacific family offices was environmental, social and governance (ESG) investing, in which more than four in 10 respondent family offices were engaged, up from last year and higher than the global average, according to the survey.
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Raffles’ Kwan said the ESG phenomenon has taken hold for more than simply ethical reasons, telling AsianInvestor: “Ultimately, it’s also for family offices’ benefit in terms of investment returns, because a lot of statistics show that if your investment portfolio is more ESG-compliant, over the longer term, your alpha is actually better than a portfolio that is not ESG-compliant.
“By 2030, Asia-Pacific family-office ESG assets under management are likely to be worth more than venture capital funds and hedge funds put together,” he added.