Family offices are a booming business, but present challenges

Singapore

FAMILY offices are a big business - though they are not without their challenges.

One concern, said Morten Bennedsen, professor of economics at the business school INSEAD, is that the quality of some family offices may not be high. This patchiness in standards could hurt the reputation of the sector.

"Privacy and hidden structures often make key individuals in charge of very large resources," he noted.

"When these individuals are not up to standard, there are little checks and balances in the family office structure to save bad investments."

This unevenness in standards has been at the bottom of "some big investment disasters" in the family-office space - the latest one among them being Archegos Capital Management, set up as a so-called family office by investor Bill Hwang. It defaulted on margin calls, which resulted in billions in losses by banks.

US-based Archegos had used financial derivatives to accumulate massive leveraged stakes without having to disclose them to banks and regulators.

A single-family office (SFO) takes care of the investment and financial planning affairs of a wealthy family. A multi-family office is one set up to do the same - except for several such families.

Professor Bennedsen said family offices have traditionally been "under the radar" because they used to be rare and conservative.

"In recent years, the industry has grown aggressively and some family offices represent more than one family or develop a profile which is more like a private equity firm or a hedge fund."

But Desmond Teo, Asia-Pacific Family Enterprise Leader at EY, said it is "not common" for SFOs to adopt investment strategies like hedge funds or take on investment strategies with high risks and volatility.

Instead, the mandate for family offices usually relates closely to family succession and wealth transition, he added.

At a media briefing late last week, Edmund Koh, president of UBS Asia-Pacific, said that it is common for a family office to require prime brokerage, but that the bank has not experienced such a "high prime brokerage requirement" for this part of the world as was seen in the Archegos case.

Since SFOs manage only the assets of the family and do not take on managing third-party monies, they are not required to hold a capital-markets services licence for fund management in Singapore. SFOs are not registered or licensed by MAS.

Multi-family offices, however, generally follow the same licensing rules as third-party fund managers, with MAS having oversight.

Professor Bennedsen added that another big challenge in growing the family-office business is talent.

"Family offices are increasingly competing to hire senior fund management personnel with experience at the leading third-party management firms," he said. "The competition for this talent is fierce - demand severely outstrips supply."

The increased popularity of the SFO comes from the structure and rigour that appeal to Asian families, said EY's Mr Teo.

Their needs have become more complex and so, more sophisticated solutions are demanded.

Mr Teo expects these SFOs here to follow the path of SFOs in the US and Europe. There, they take on other functions for the family, such as in philanthropy, fiduciary trusts, estate management, risk management, as well as legal and concierge support.

"Such activities will bring further spin-offs for Singapore, creating a richer and more diverse ecosystem and can help Singapore grow beyond being an international financial centre, and possibly a cultural or philanthropy hub," he added.

The MAS said last week that it would work closer with the private sector to identify emerging industry trends and devise strategies to build the asset management and fund domiciliation business.

Singapore has more than 1,000 fund managers, with assets under management having grown at a compound annual growth rate of 11 per cent over the last five years to S$4 trillion at the end of 2019.

These developments come as private banks are positioning themselves to capture a slice of the family-office pie.

Late last month, HSBC launched a new institutional family-office service in Hong Kong and Singapore that will cater to family offices in Asia.

Its team of investment banking specialists can offer SFO clients across Asia a full array of financing solutions and product capabilities. These include institutional market access, prime services and private deals.

Meanwhile, UBS' growth in the first quarter this year is a reflection of how Singapore has captured the rise of family offices in the region,

As an indication, its latest figures show that the portion of new assets booked in Asia Pacific is split 50:50 between Singapore and Hong Kong - the two wealth hubs through which UBS books flows.

Five years ago, that split was 75 per cent through to Hong Kong, and 25 per cent, to Singapore.

This jump in family offices in South-east Asia is in part due to the availability of investment opportunities with "far more reasonable" valuations, said UBS' Mr Koh.

But all in, family offices are a clear growth area for Asia's largest wealth manager, which cracked a record high in the first quarter. Family offices make up less than 5 per cent of wealth management clients at UBS, but are expected to bring in about 30-40 per cent of invested assets.

READ MORE: Singapore sees jump in family offices as Asia's ultra-rich set up camp