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Asia's Family Office Journey: A View From AJ Capital

Jackie Bennion, Deputy Editor, 11 December 2019

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Asia is renowned for a high share of all businesses being owned by families. This makes the region ripe for big family office growth, certainly when first-generation owners begin to transfer assets to children and other individuals. It is still a nascent market and keen to learn from overseas sectors, such as America's and Europe's. What are the pitfalls to consider and opportunities to embrace? We talk to the firm A J Capital, in Singapore.

Continuing our look at how philanthropy is developing across different parts of the world, we spoke to Siraj Ali, chief operating officer at Singapore-based AJ Capital, for views on how the sector is growing among Asian family offices, and some of the broader trends fuelling family office growth in the region. (For more coverage on philanthropy in other regions, see here, and for a general overview see here.)

The family office sector is, depending on how one measures it, as large as 10,000 family offices in total (although there is debate about the specific figure). It continues to grow, and hotspots include regions such as Asia. In general, what’s your view on the overall health of the sector?
Family office creation will be as robust as the economies which create the wealth that is managed by family offices, so in regions like Asia, which is seeing a rapid pace of wealth creation, the trend will continue to look very healthy. I would be wary of calling it a ‘sector’ as such since each FO is a unique entity with its own unique set of rules and structures which can be as complex or simple as the personality and investment mandates of the founders.

What do you think drives the creation of most family offices and are these drivers changing? If so, how?
Once wealth has been created, the next logical step is to formalise the infrastructure around managing this wealth in an institutional manner. This need to formalise and restructure is behind the recent boom of family officess in Asia. We expect this trend to continue in Asia as there is enough wealth management talent and capability available for hire. This is due to senior bankers and financial planners leaving large regulated platforms to join more niche and boutique firms which offer flexibility of investment and deal making without the burden of complex compliance faced by many global banks today.

Do you think it is likely that viable family offices will continue to have to have higher minimum amounts of assets under management? Is regulation and complexity going to keep driving the AuM baseline higher?
I think that for any asset management business to remain viable there will have to be a constant asset accumulation and expansion strategy. This trend is driven by the fact that fee compression has become systemic in the industry due to increased price competition from banks and brokers, along with rising compliance costs. This combination of increasing cost pressures and falling revenue and fees due to increased competition has put pressure on family offices and asset management houses to find ways to earn enough to stay viable while still remaining aligned with their end client’s interests. In order to pay for top talent and ensure that family offices are compliant and well run without charging more for the services, it is natural that the AuM baseline needs to continue to grow at a faster pace than the fee compression being experienced in the market in order to remain viable as an asset management business.

What are in your view the essential ingredients of a family office and is the term “family office” used too loosely?
The term family office is already becoming outdated, as most family offices are now being re-categorised as “Private Investment Offices” to elude to the nature of the capital they are managing.  In my view a good family office needs to be proactive in managing wealth and legal/regulatory requirements given the ever-changing regulatory landscape rather than being reactive.

Being proactive means not only having a clear investment and regulatory road map and strategy for the pool of capital being managed but also planning for the family’s expenses and cashflow needs in line with the AuM being managed. The advisors and investment managers need to exhibit "courage" to manage their respective principals and learn to put expenses and spending habits in perspective or in line with the earning capacity of the pool of capital being managed. This is often the most challenging part of any family office CEO’s job, but it is important to inculcate discipline and protect the wealth being managed.These traits are essential for a well-run family offices.

How are family offices changing and adapting from your viewpoint in terms of recruiting non-family members to run things, using external services, outsourcing functions such as investment, bill-paying, reporting, other? How much can a family office outsource while keeping track efficiently of what is going on?
I am a firm believer in outsourcing and paying for expertise in areas which are important from an investment, administrative, legal and compliance point of view. There is a balance to be had by recruiting the right people for the right job while also outsourcing tasks which can be mundane and subject to automation, tasks which primarily tend to be associated with reporting, compliance and aggregation of assets at various custodians.

We are seeing a combination of trusted advisors for the family having oversight of all functions including investments, bill-payments, reporting etc, but outsourcing the execution work to trusted vendors or advisors who have better technology and processes to assist with such work rather than trying to build it from the ground up in-house.

We have had a few stories about cybersecurity breaches and how FOs are often highly vulnerable, given their relatively tight resources. What is your take on the state of play here?
Most of the data we interact with on a day-to-day basis is digital and that automatically means that cybersecurity and business continuity planning for family offices is crucial. I think that basic cloud-based security and email encryption is fairly easy to access and is cost efficient since it is now a commodity. It depends on the family office management to decide on the degree to which you want to encrypt or store data which depends on the nature of the information being protected.

We live in a world where data breaches happen, the best we can do is have processes and security infrastructure in place to prevent it and hope that the information is being protected to the best of our ability.

Are the structures of family offices changing much in your view, such as mostly gravitating to a limited partner structure akin to a private equity firm, or in some cases adopting a more corporate structure?
I do believe that there has been a strong move towards institutionalising private capital which is managed by family offices. Principals who had informal investment structures are now hiring professionals and managers to help with investment, legal and administrative work. The structure in which this private pool of capital is managed is mainly driven by the end use of the capital and often done to maximise return and optimise tax, be it direct investment from a corporate balance sheet or capital invested in an LP GP structure.

Principals who believe in making strategic acquisitions, which will help benefit their core business, might opt for a more corporate set up since such M&A style investments are operationally more intensive and require larger operating teams. For principals who are content with making investments purely for financial gain and often times being a minority in a larger deal, a GP LP structure might be more relevant and offer flexibility of investment mandates.

How much of a trend is there of single FOs becoming multi-FOs? Are some families pausing before joining multis or are they driven by considerations of cost and efficiency?
The decision to evolve from a single family office to a multi-FO is purely driven by rising costs, access to deals, the need to scale AuM and the track record of the family office manager. Single family offices which have over $1 billion are big enough to manage their cost structures efficiently as they can afford top management and quality infrastructure to manage capital globally. UHNW individuals, whose wealth is lower than say $50 million but who want access to institutional deals and pricing, often deal directly with private banks. They don’t have the same level of service that a family office can provide globally, and often approach single family offices to manage their capital under a larger family office framework. I do believe that there will be a stronger demand for multi-family offices, which will be purely driven by new wealth being created and demand for cost efficiency, because setting up your own shop is often cumbersome and takes time for the new breed of wealth.

There can be a big difference between family offices which are attached to a functioning operating company generating cash and FOs which only manage liquid assets and real estate, etc. What type of FO do you know about which is more common, in your experience and region?
Single-family olffices (SFOs) typically manage wealth which is concentrated in a particular company founded and run by the principal who has created his wealth through the commercial success of that company, and still might be operationally involved quite intensively. Liquidity management and divorcing the correlation of personal assets from the operating business are high priority items for such a family office set-up. Managing a pool of "personal savings" in a personal capacity and building a cash flow stream which is not dependent on the financial health of the business is of paramount importance in case things go south with the operating business. These structures are increasingly common in new family office set-ups.

Awareness of family offices has risen considerably – we journalists write a lot about them these days! In your view, how aware are people about family offices, what they can do, and what are their limitations?
I don’t think the concept is fully understood as it is very fluid and is often a misleading terminology since it doesn’t give us all the information needed to understand what a family office truly is. Family offices are typically set up with the primary objective of preserving the family fortunes and for other non-financial activities such as philanthropy, tax advising, real estate advisory or other operational and logistical matters which the family may need to be addressed. It doesn’t help that family offices are, by their very nature, private entities and only spoken about it in very small investment circles on a need-to-know basis.

This leads to an aura of secrecy. Also, because family offices are set up for confidentiality reasons, they remain an enigma to many journalists or individuals looking for detailed information on them. I think the awareness of family offices and their capabilities is increasing due to their direct participation in larger investment deals and their being viewed as a flexible source of capital compared with banks and private equity firms.

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