IMAGINE a world in which Asia’s family offices are competing with the likes of Blackstone and Sequoia in private market investments.
This scenario, which seemed a pipe dream just a few years ago, could be steadily taking shape in this region.
To give an example – investment firm TE Capital Partners agreed to pay US$100 million on behalf of a family office client in 2022 to acquire a set of 16 Tokyo rental residence properties.
More recently, in June, Singapore-based fintech startup Dtcpay raised US$16.5 million in a pre-Series A round led by Pontiac Land chairman Kwee Liong Tek.
Lots of dry powder
Citi Private Bank’s family office survey report in 2022 found that the top worries of families globally were rising inflation and interest rates. Eight months into 2023, those concerns remain largely unchanged.
Inflation and its effects on the global economy remain a key influencing factor in how family offices think, operate, and invest. Family offices’ views of the economic climate have soured over the first half of 2023, amid sharp rises in inflation and interest rates.
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Our Q1 2023 family office investment report has shown that many family offices continue to maintain a large portion of their portfolio in investible cash, and this allocation is about 25 per cent in Asia.
This “dry powder” indicates that family offices are well-poised to weather any turbulent economic conditions while being at the ready to capitalise on opportunistic deals.
Why look to private markets?
Since 2022, family offices have found the private markets to be a good hedge against inflation. They have increased their exposure to private equity, private credit, hedge funds and real estate.
The long-term, buy-and-hold nature of these investments, coupled with their ability to absorb or pass on increases in costs, means that, to an extent, these strategies can provide family offices protection against inflation – both from a mark-to-market and a fundamental perspective.
Depending on the asset class, some family offices may start with an investment of US$200,000. Larger family offices may have minimum ticket sizes of US$2 million. Substantial – and usually more institutionalised – family offices are known to commit up to US$20 million per investment.
The Monetary Authority of Singapore recently revealed that 1,100 single family offices (SFOs) had qualified for tax incentives last year, an increase of 57 per cent from 700 in 2021.
These SFOs had around S$90 billion in assets under management (AUM) in 2021. Applying the same 57 per cent growth rate, the AUMs of Singapore’s SFOs last year could be around S$141 billion.
Based on our 2022 family office survey findings, family office clients allocated as much as 40 per cent of their portfolio to alternative investments or private markets.
Thus, we could be looking at about S$56.5 billion worth of private markets investment appetite among Singapore-based family offices. That’s a huge war chest ready for deployment.
Diversifying and uncovering a potential gem
Family offices like private market investments for several reasons.
Investing in private markets is a form of diversification. It allows a family office to broaden its investment base away from an ever-shrinking set of listed companies. It is estimated that Asia’s family offices allocate 15 per cent to 30 per cent of their portfolio to private investments.
The recent US equities rally around generative artificial intelligence has centred on a handful of stocks. Private markets investing means owning a wider and more diverse selection of companies and disruptive technologies too early for public markets. Think early-days Zoom or Tesla.
Even with illiquidity risk and higher complexity, many family offices believe private markets can generate higher returns than public markets.
Private markets’ high investment return potential often guarantees its seat at the table during any family office asset allocation discussion.
One such example would be private credit lending. As banks tighten their loan books due to rising interest rates, medium-sized companies may be left out in the cold.
Starved of liquidity, these companies could be willing to pay returns of between 10 per cent and 18 per cent, typically over three years, to family office investors.
Family offices are also well-positioned to find attractive investments in today’s buyers’ market, with many companies settling for significantly lower valuations.
Management teams and founders seeking patient capital are more accommodating to family office investors because family offices are able to weather a great deal of volatility.
Playing the long game
With the public equity markets as volatile as they have been in the past 18 months, traditional private equity firms have not been able to exit their portfolio companies as quickly – restricting their ability to deploy capital.
Family offices can, therefore, act quickly to take advantage of market dislocations. Opportunities are available to invest with less competition, in sectors with long-term value accretion potential, such as technology, fintech and healthcare.
Families are able to play the long game. With multi-generational time horizons and associated long-term pools of capital, they can hold essentially in perpetuity. They can invest for generations with a lot less mark-to-market focus.
Based on recent findings by KPMG, less than 40 per cent of the family offices in Asia have been in operation for more than 10 years.
Compare this with 60 per cent in the Americas and 53 per cent in Europe, and it paints the picture of the inevitable next phase evolution of the family office in Asia.
As family offices in the region continue to grow and institutionalise, the alignment between SFOs and company founders could change the landscape of private capital markets in Asia.
As more family offices become efficient and less siloed, they will more easily co-invest with other family offices and compete for larger deals with the big boys.
The writer is global family office head for South Asia at Citi Private Bank
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