I recently completed an interview for an Asian magazine on my work and views on $1B+ families. Here are the questions that the group asked and my answers:
How are single family offices operating in Asia & Latin America compared to Europe and the United States?
Many of the $1B+ single family offices in Asia and Latin America are much more focused on operating businesses, commercial real estate, and hard assets than their U.S. and European counterparts. The last time I met with a room full of private bankers, wealth managers, and multi-family office types in Moscow, there was not a single one who had a “Westernized” diversification model in their investment portfolio, which included hedge funds, private equity, public markets, commodity/hard assets, bond investments, etc. They were all invested almost exclusively in commercial real estate and operating businesses. In both Asia and Eastern Europe, secrecy is valued as much as—if not more than—investment returns. These wealthy individuals fear being hit with additional regulation, investigations, or corruption in one form or another if anyone was to know their true net worth.
Many of the larger family offices in the East, with the exception of the most formalized in Singapore, Hong Kong, Tokyo, and Australia, are managed by family members or close friends and confidants of the family. As a family’s wealth increases, their need to employ professionals underneath family members to help run operations and manage partnerships increases, but in 85%+ of my relationships with $1B+ families, there is at least one family member serving in a top position, typically as CEO or CIO. This is at odds with family offices of the West, which are typically managed by investment professionals. The biggest factors driving this divergence are secrecy concerns and loyalty.
In Latin America, I have found a middle ground; strong business ties to the U.S. and a robust Westernized banking center have led to well over 500 hedge funds and private equity funds operating in Sao Paulo alone. Furthermore, the concept of allocating to investment fund managers is becoming much more widely accepted in Latin America. Many of the most affluent families in Latin America have diversified their wealth through investment fund managers, but not to the degree of the average U.S. single family offices.
Do Asian and Latin American family offices need to formalize and become more like their U.S. counterparts?
One of my least favorite comments regarding family offices is that Eastern European and Asian family offices need to formalize themselves more to become more like U.S. families. Often this type of remark is said in a somewhat condescending tone, but the more time I spend in Asia, and Singapore specifically, the more I see that U.S. families could learn from families in other regions of the world. Some Asian families are trying to become more diversified with Western third-party investment fund management, but at the same time, U.S. families are looking for co-investments, club deals, and direct investments, almost as if it is a new solution to their troubles. A lot of U.S. families are struggling to complete due diligence, decide on a direct investment portfolio strategy, and to find talent to help them manage all of the investment due diligence and operating improvements long-term. Many Western families could learn a lot about how Eastern families have been focusing on direct investments for generations, without the distraction of public market investments.
For example, a 2nd generation family that we just started working with has over $1B and 20 operating businesses, employs 100’s of team members, has brought in a seasoned CIO from Singapore to help run the single family office, and the family is now formalizing a process for acquiring assets. The family has reached an impressive level of success in a turbulent political state, and this success will likely continue due to their diversified approach, which leverages their core abilities in food production and supply chain management. Many food and agriculture families could take notes on their approach.
How do you see Single Family Offices developing in BRIC countries, and how does activity there reflect the growth of wealth globally?
Statistics and studies show that in the future, much of the new wealth and a larger percentage of new billionaires will come from Asia. BRIC countries in general will outpace most non-BRIC nations in terms of new wealth. The 2013 Wealth Report by Knight Frank suggests that only the U.S., Germany, and the UK will remain in the top seven countries, along with the four BRIC countries, in terms of most billionaires living in each country by 2022. The only reason that the U.S., Germany, and the UK are able to maintain these positions is that they attract capital, businesses, and billionaire families due to the financial marketplace and business benefits of operating in places such as Berlin, London, New York, Miami, etc.
I see the single family office industry becoming 7-10 times larger than it is now by 2035. More single family offices will emerge as families start to identify themselves as single family offices and better understand what a family office means.
When single family offices are operating on a large scale in a country known for corruption, how do families operate while staying under the radar?
Many families break up the assets across the world and across different investment managers so no one party or country knows how much money the family has. For example, one family in Singapore has $40M with a large private bank, $30M in operating businesses, and over $50M in cash. Those are the pools of capital that I know of, but I have only known the family for a few years, so the full extent of their wealth is unknown to me as well. There are some business benefits to being relatively “invisible” and under-the-radar, as sometimes state-sponsored or government-backed cell phone companies or manufacturing businesses could target a sector if they see that the industry leader of that niche has produced enormous personal wealth in the recent past.
For the complete interview, order a copy of my latest book: The Single Family Office: Creating, Operating & Managing Investments of a Single Family Office.