Why the wealth boom in Asia doesn’t lead to many more family offices

The boom in wealth in Asian financial hotspots like Hong Kong should be leading to a corresponding boom in new family offices, right? In fact, few are being set up as new wealth is channelled into other businesses, rather than into professionally managed family offices.

Since the beginning of the year, the number initial public offerings on the Hong Kong Stock Exchange have surged to more than 170, making it the biggest year for IPOs in the city since 2010. So far more than $30 billion has been raised, and many shareholders of these companies have cashed in, making fortunes.

Wealth managers say this is leading to a boom in family office startups. “This year the activity for setting up family offices is definitely more,” said Lee Wong, Lombard Odier Asia’s head of family services, in a Reuters article a few days ago. “The growth of family offices in Asia should continue on its current trajectory.”

The same article said private bankers reckon the number of new family offices in Asia has risen 15% in the first three quarters of this year, compared with the same period a year ago.

Much of the excess cash is being used to pump into their and their friends’ businesses

Unfortunately, the same article fails to name one family office that has been set up in the last year, which makes Family Capital somewhat sceptical of the boom in new family offices being set up in Hong Kong, and the rest of China.

Yes, no doubt, some new family offices are being established. And given the sector is particularly shrouded in secrecy in Asia it’s difficult to get a definitive number. So these private bankers might be right.

But there’s a number of trends particular to the region which are likely to keep the growth rate of new family offices, despite the boom in personal wealth, low. At least smaller than many private bankers are saying.

That’s because the money made from IPOs is reinvested in other businesses. Richard Harris, who runs asset management group Port Shelter in Hong Kong, and previously worked for a local single-family office, agrees that the boom has led to some new family offices, but, he says, much of the excess capital is going into other businesses.

“Many of the IPOs are just making rich people richer,” he says. “More importantly, much of the excess cash is being used to pump into their and their friends’ businesses.”

The robustness of the Asian conglomerate model is another reason growth in the number of family offices has been slow in regional financial centres like Hong Kong. Many Asian-based entrepreneurs are more likely to use a holding company structure to build their portfolio of businesses and other investments around rather than using a family office structure. Often these conglomerates will have an embedded family office-type structure linked to the operating company, which mitigates the need to set up an independent family office.

Often, as well, liquidity from an IPO is stored in a special purpose vehicle-type arrangement before it is re-invested in another investment opportunity, or a number of opportunities. The treasury division of an operational business is likely to have some oversight into the management of this money, rather than independent family office managers. Again, this type of structure mitigates the need for a separate family office.

That said, family offices and private investment offices in Hong Kong do exist, and there is a growing eco-system around them. Here are the most prominent ones:

Jack Ma and Joe Tsai of Alibaba fame have very much used Hong Kong to base their private investment vehicles. These are Blue Pool Capital and YF Capital (Yunfeng Capital), which are both based in Hong Kong. Both offices have been extremely busy in direct deals in startups and more established businesses.

Hong Kong’s most famous business person, Li Ka-shing, is a good case in point about the preference the very rich in Asia have towards using conglomerates to channel much of their investment activities through. He uses various bits of his vast business empire to do this, but he does own a private investment group called Horizons Ventures. Indeed, he might have others, but they aren’t known to the broader community.

His youngest son Richard Li appears to favour the private investment office model more and his Pacific Century Group is a family office, more like that in the US and Europe.  

RS Group is an excellent example of a Hong Kong family office embracing the trend towards impact investing and sustainability. It’s owned by Annie Chen, whose father is Tseng Tao Chen, one of the founders of property group, Hang Lung Group. Here’s a profile on the group.

Billionaire Russian-Israeli entrepreneur Yuri Milner set up his investment office DST Global in Hong Kong. But he’s probably one of the few non-Chinese individuals to use Hong Kong as a base for a family office. Singapore tends to be a more favoured location for non-Asians to set up family offices.

Other family offices based in Hong Kong include:

Fulai Investments

Family/Entrepreneur: Cheng Kin Ming

Junson Capital

Family/Entrepreneur: Cai Kui

Mandra Capital

Family/Entrepreneur: Song-Yi Zhang

UNIR

Family/Entrepreneur: Ina Chan