Meeting of minds

  • Author : Patricia Woo
  • Author : Vincent Lam
  • Author : Doris Ma
  • Date : April 2013
ABOUT THE AUTHORS: Patricia Woo TEP is a Fund and Trust Lawyer with King & Wood Mallesons, focusing on wealth management and succession planning for affluent families. She is also a Chartered Alternative Investment Analyst. Vincent Lam is Chief Financial Officer of a Hong Kong-based top-tier family office and Doris Ma is Head of Relationship Management of a multi-family office serving Asian families

PatriciaThe concept of a family office is like the Indian story of the blind men and the elephant. People have different views on what a family office is or should be. Many lawyers look at it as a tool to organise assets and coordinate decision-making within the family. But in my experience a family office can also be proactive and innovative in the creation of wealth and other values. What do you think ‘family office’ represents?

Vincent Wealth creation is indeed at the core of many family offices in Asia. Property families tend to have more formal family offices that function as internal investment managers. But there are many hidden gems – very often, the financial controller or head of finance of the family business also manages the chairman’s personal investments and private banking relationships.

Doris I had my first contact with a family office when I was still a banker providing fund services to a single-family office. It was a separate entity from the family business to deal with estate planning and financial management. Vividly I can recall it was like a generalist going between specialists like lawyers, accountants, bankers and real estate managers.

PatriciaQuite unlike both of you, my involvement with family offices as an external lawyer is project-based. I try to understand the family, its business and assets, and consider regulatory and tax issues to come up with a suitable structure, which would normally consist of trusts or foundations, companies and funds. Once the family office is set up, senior executives like both of you will run the show and I will work with you when legal help is needed for new projects. Can you describe your ongoing roles with the family office?

Vincent As CFO, the basic duty is to make sure both the operational and financial sides comply with the family constitutions and internal guidelines. Risk management is a less-known part of my position, but is equally important. If the family portfolio holds listed securities, the CFO should be updated on the latest corporate actions so that he can assess the possible impacts on the portfolio. I am involved in other interesting projects such as converting a single-family office to a multi-family office and restructuring compensation packages for senior staff.

Doris There are two key aspects to my role in the front office of a multi-family office: to understand the risk appetite of the families and to generate good returns within the mandates. Many think family offices are there only for capital preservation, but, because of the operating fees, our activities are very much performance-driven. We constantly put together investment solutions and platforms.

PatriciaNow can you tell us how family offices usually start in your experience?

Doris I think it is demand-driven. A typical path is when a career investment banker or private banker has developed a good relationship or track record with an existing family client; he leaves the bank to set up the family office. History, connection and sometimes blood or marital relationships with the family are important.

Vincent I would agree with Doris. Quite often, it is started by a private banker who has known the family for a long time or is a relative of the family. When the family office yields good returns, the family puts in more funding and slowly it starts to manage funds of other families while the original family remains the key client.

“I strongly believe that the value-add of a family office goes beyond customised wealth creation”

Patricia Indeed, some single-family offices are started with multi-family office potential in mind. If this is the case, I would embed scalability in the initial structure. When needed, the matrix of trusts, companies and funds can be expanded and reconfigured. Executives’ remuneration and equity incentives will need to be adjusted and licensing requirements met.

PatriciaBoth of you worked for external managers such as funds and banks before joining a family office. How is an internal fund manager in a family office different from an external manager?

Vincent A family office is quite different from an institutional fund. We serve a very small number of investors, but can be managing even more assets under management (AUM) than a fund. We enjoy an extremely high level of trust from the family compared to private banks or institutional funds. The operation is very exclusive.

Patricia Yes, and many family offices want to stay out of the public eye. Fortunately, it is easier for them to achieve this than institutional funds. We can use offshore trusts, unauthorised funds and structuring methods to avoid regulatory and licensing requirements. Some clients execute trades through different banks so that the market cannot reverse-engineer their strategies.

Doris I think it is more demanding but creative to be an investment manager of a family office than a fund. Fund offering documents contain fixed parameters such as leverage capped at 20 per cent of the AUM and investment in a certain sector or location restricted to 10 per cent of the AUM. Family offices also have mandates, but they are less defined because the family relies more on the independent judgment of the manager. In a nutshell, fund managers serve the mandate, and family offices serve the people.

Vincent I have the same observation with investment guidelines and restrictions. Investment decisions in a family office are made more on a deal-by-deal basis. Unlike most funds, we might not even want to diversify the portfolio. If we understand the risk of a project and are confident that we are able to mobilise resources to manage this risk, high return is possible at reduced risk. It is almost like defying the risk-return trade-off.

Patricia Before we move on to the next question, I would like to add I strongly believe that the value-add of a family office goes beyond customised wealth creation. Many functions made possible by family offices, including family governance, succession planning, protection of assets from external and internal claims, personal care and welfare, philanthropy and art collection and appreciation, are instrumental to the passing on of the core values of the family. This is something not just any external manager can deliver.

PatriciaFor some families, the family office is an independent unit that proactively reviews and manages the overall business and financial risk of the family. With this approach, diversification becomes important. It means the family office is likely to avoid investing in the same sector as the family’s core business or sectors that demonstrate high correlation with the sectors of the family business. However, Vincent, I know you have come across family offices that invest quite a lot in the same sectors as the families that fund the offices. Can you tell us more?

Vincent The diversification approach makes a lot of sense, but it is true that some family offices put money in the same industries and sectors as the core family business. There are usually strategic, undisclosed reasons, but the challenge is to minimise the possible conflict of interest between the family office and the family business. Good communication, therefore, is necessary.

Doris I have seen both approaches. If the family office is to invest in the same sectors, for the family members, they benefit from being able to understand fully the family office’s reports and to perhaps participate in the investments if they wish. But I also understand why some families want to diversify. If they have paid to hire external professionals, why not ride on their expertise in industries other than the family business? That said, I have noticed that family offices that make real estate investments are usually funded by property families. This is a very industry-specific investment where a developer background is a huge advantage.

PatriciaOne last question. During the public consultation for the exemption of family offices from the Investment Advisers Act of 1940, the US Securities and Exchange Commission released a proposal that said ‘single-family offices generally serve families with at least USD100 million or more of investable assets’ and that ‘industry observers have estimated that there are 2,500 to 3,000 single-family offices managing more than USD1.2 trillion in assets’. How is the family office scene in Asia compared to the US?

Doris Asia is accumulating a lot of wealth, and this wealth will be handed down to the next generation in the next five to ten years. However, at this moment, much of the Asian wealth is still in the hands of the patriarchs. I believe, in this part of the world, a family office starts to make sense for families with assets in excess of USD50 million. Again, the AUM of a family office has to be of a considerable size, or else the expense ratio is simply too high.

Patricia I think an AUM of USD20 million is a good starting point – it would be sufficient to generate some economies of scale. But like any venture, each family office is different and there will be a learning curve. It is always prudent to fine-tune the infrastructure before making it big.

Vincent A mature family office might be managing, say, USD1 billion. But family office AUMs can fluctuate a lot, especially if transactions take place on a deal-by-deal basis. Sometimes the family office even provides investment advice to the family business, and in this sense the de facto AUM is even higher.


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