Family offices – wealth management’s jewel in the crown
26 Oct 2022
Decades of consistent economic growth in China has led to extraordinary levels of wealth creation. The country is now home to more billionaires than anywhere else in the world, with 745 people with assets greater than USD1 billion last year, and family offices are an increasingly popular vehicle for China’s ultra-high-net-worth-individuals (UHNWIs) to manage their wealth.
“The family office is the jewel in the crown of the global wealth management industry, used by the leaders of industry and technology entrepreneurs to manage their investments,” said Dr. Hao Gao, Director, Global Family Business Research Center, PBC School of Finance, Tsinghua University.
Dr. Gao co-authored a research paper with the Financial Services Development Council, the China Family Office Report 20221, and was speaking as part of the FSDC’s Industry Exchange Series2 to discuss the findings.
Family office trends
A family office is an institutional structure that manages and governs the balance sheet of a UHNW family, while also governing strategic matters of the family. This means that its responsibility often stretches beyond asset allocation, portfolio management, and wealth distribution, to areas including risk management, family governance, succession planning, and philanthropy.
Family offices are relatively new in Mainland China, with two thirds of the family offices interviewed in the research established after 2013, and 90% after 2010. In terms of assets, there has also been rapid growth in the size of Chinese family offices. The average assets under management are now RMB30 billion (USD4.2 billion), representing an increase of 200% compared with 2018.
There are two broad categories of UHNWIs driving the rise of family offices in China. The first is entrepreneurs in traditional industries – such as manufacturing, real estate, and consumer goods. These businesses might be decades old, with a complex family structure that creates complex wealth management and inheritance needs with a long investment horizon.
In addition to businesspeople in traditional industries, there are also technology entrepreneurs. Over the last decade, these innovators have quickly joined the ranks of China’s wealthiest people. They tend to be younger than the first generation of UHNWI and are more likely to expect their wealth-management services to be delivered digitally.
Seeking alpha and operational efficiency
There are two broad areas of focus for family offices: “They are looking to generate alpha on their investments and make improvements in operational efficiency,” said Rex Ho, Asia Pacific Financial Services Tax Leader, Mainland China and HKSAR Financial Services Tax Leader, HK AWM Tax Leader, PWC.
To meet their investment goals, Mr. Ho highlighted how family offices are relying less on equities and fixed income, and looking more at alternatives. These include private equity, private credit, and even digital assets. They have also improved their risk management to get a better risk-adjusted return.
In terms of operational efficiency, he described the drive towards digitalisation, with automation allowing family offices to reduce the need of manual processes in reporting and accounting, while at the same time reducing risk. There is also a need for digital infrastructure to be secure so that family’s sensitive data is protected.
To meet these growing demands, family offices need more talented professionals. They need investment managers who can handle a broad range of assets, as well as IT professionals who can ensure that the office’s systems are up to date and safe. Finding the right talent is one of the key challenges facing family offices in Mainland China, where the industry is still in its infancy.
The Hong Kong advantage
When establishing a family office, location is one of the most important decisions. The family will consider the local business environment, the quality of its talent, liveability and the regulatory situation. Across all these factors, Hong Kong stands out.
“Hong Kong is an international finance centre that has unique strengths to serve UHNWIs from Mainland China,” said King Au, Executive Director, FSDC. “We have breadth of product, depth of liquidity, and vast resources in professional services.”
He explained how the One Country Two Systems principle is important for the managers of family offices in Hong Kong. They benefit from the local common law system, best international practice, as well unparalleled access to Mainland China’s huge market.
Hong Kong’s policymakers have also been working hard to make an attractive environment for family offices. At the forefront of this drive is taxation. New rules are expected to come into place in the current financial year that will give the investment vehicles managed by single family offices an exemption from profits tax on a range of transactions.
“Tax is a key influence on where a family will decide to set up its family office and manage investments. The proposed tax regime will create certainty for family offices managing their assets in Hong Kong,” said Mr. Ho.
Taken together, all these factors make Hong Kong the natural choice for Mainland China’s UHNWIs to establish a family office. As the Chinese economy continues to expand, more of the country’s most successful businesspeople will trust Hong Kong as the place to protect and grow their wealth.