The family office market is booming. According to Campden Wealth, an advisory group, the number of family offices has grown by 38% globally over the past two years alone, overseeing an estimated $5.9 trillion worth of assets. Nowhere has this growth been more visible than in Asia. The same report anticipates a 23% rise in the region’s UHNWI population over the next five years, with 8 of the 10 fastest growing wealth populations to be located in Asia[i]. This burgeoning consumer wealth, combined with an increasingly sophisticated funds industry and tax incentives, have helped fuel a dynamic family office ecosystem. This is evidenced by data from The Economist, which found the number of Asia-based family offices has multiplied tenfold to reach 500 in the last 10 years alone.
Looking for alternatives
Family offices are looking for multi-asset class solutions in order to obtain enhanced yield and downside protection. As part of this, alternative investments are becoming increasingly popular and now account for nearly half of all assets in family offices’ portfolios. However, it is not just positive returns that are driving family office investments. Increasingly, these investors – especially among some of the younger (i.e. millennial) family members are actively searching for managers who can demonstrate a commitment to ESG.
Some family offices in the region are even forgoing external managers opting instead to internalise investment decisions or participate in co-investment opportunities alongside private equity in order to strengthen their returns and reduce third party fees. A by-product of this has been the growing number of hedge fund and private equity professionals that are now being recruited by some of the larger family offices. However, this internalisation of investment management is also symptomatic of the increasing number of hedge funds who are converting into family offices (over thirty since 2011, according to the Wall Street Journal).
New asset classes, new challenges
As family offices’ underlying investments become increasingly complex and diverse, so too do their internal operations. In our experience, family offices investing in alternatives will face a number of risks that will need to be managed effectively, including:
- The need to have a performance reporting tool covering private equity, infrastructure and/or hedge fund asset classes;
- Difficulty pricing illiquid positions and valuing more complex instruments;
- A complex reporting structure depending on the ownership model;
- Extensive regulatory filings and audit support (particularly if investments are cross border); and
- Effective collateral management and the ability to handle more treasury demands.
In addition, those family offices pursuing sustainable strategies will also need to familiarise themselves with the specificities of ESG investing, something which might require hiring new skillsets. At a time when margins are dissipating, family offices need to find ways to ensure costs are minimised. Generally speaking, family offices will have small operations teams, and so achieving the scalability to invest across multiple asset classes will be tough.
Doing more with less
In order to industrialise their existing operational infrastructure in a cost-efficient way, family offices are beginning to outsource a number of front-to-back office activities including fund accounting and performance reporting to third party service providers. This can ease the operational and cost burden on the investor/beneficial owner, as it reduces the need for family offices to increase headcount or spend large sums of capital on upgrading and future-proofing their technology platforms. As a result, outsourcing is an optimal solution allowing family offices to scale their businesses in a way that does that not compromise return generation, wealth preservation or succession planning.
Service provider selection is critical, however. It is essential family offices engage with providers who can deliver multi-asset class solutions – including robust ESG coverage – and provide reporting in a way that is globally consistent and in real-time using best-of-breed systems. As more family offices look to internationalise their portfolios, leveraging global service providers with strong geographical footprints and extensive local knowledge will also be key. It is important that they engage with partners who are familiar with the local markets that they are investing in, and have a solid understanding of domestic tax laws, the processes around entity and fund structuring (particularly relevant for managed accounts and new vehicles such as Singapore’s Variable Capital Company (VCC) structure) along with regulation and reporting requirements. This can help reduce risk for family offices, especially those running portfolios in esoteric markets, and facilitate a more streamlined annual auditing and tax reporting process overall.
A final word
With an estimated USD 2 trillion expected to be passed down from wealthy entrepreneurs to their heirs over the next 15 years, the rise of the family office shows little sign of slowing. Asia-based family offices in particular – while emerging and still comprising a relatively small percentage of total family offices globally – are primed for exponential growth that cannot be overstated. We are already catching glimpses of the budding clout the UHNW community wields as their foray into alternative investments gains pace – building out hedge fund capabilities internally and pursuing private market deals once reserved for the likes of large investment banks and private equity firms. However, with the added complexity these ambitions present, the running costs and operational strain family offices face can be substantial. As a result, we expect continued growth in outsourcing as a way to reduce the fixed cost base and leverage best-of-breed systems and value-added services of independent providers, with a preference for one-stop shop partners that allow them to bring administration, middle office, collateral management, prime brokerage and cash/financing solutions together under the one roof.
What we offer
BNP Paribas Securities Services has built a global platform to provide a one-stop shop service across all types of alternative strategies and investor profiles – covering the full spectrum of hedge funds, fund-of-hedge funds and private capital, in addition to asset owners such as family offices. BNP Paribas has also been on a long-term journey to build up its US and Asian business over the last 10 years, selectively enhancing its capabilities to take advantage of the huge growth potential in the region. Globally, we are also committed to partnering with leading fintechs to bring client focused solutions that facilitate the bespoke requirements of many funds and their investors. BNP Paribas Securities Services’ integration with the BNP Paribas Group allows the bank to easily supplement its award winning[ii] end-to-end securities services business with prime solutions and financing options. Our breadth of coverage, combined with its market leading[iii] sustainability credentials, makes it an ideal partner for family offices.
If you would like to find out more about our offering or discuss your specific needs, please contact us.
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[i] In order: India; Philippines; China; Indonesia; Vietnam; Malaysia; South Korea; Romania; Thailand; Poland. Source: Global Data WealthInsight
[ii] Best bank for securities services - The Banker's Transaction Banking Awards 2019
[iii] Best bank in the world for Corporate Responsibility and Sustainable Finance – Euromoney