Family Offices

Why Asia’s under-the-radar investors are putting money into tech startups

By NAYANTARA BHAT

Those who haven’t heard the term ‘family office’ (FO) before may think it’s referring to some sort of service-oriented business run by a friendly mom-and-pop duo. Far from the quaint image this impression suggests, FOs control vast amounts of money on behalf of the world’s wealthiest.

Ultra high net worth individuals (UNHIs) are people who have accumulated vast fortunes, usually through one or more business empires, and are looking to grow that wealth through investments and other endeavors. Private wealth managers are often deputed to handle investments and portfolios, but many UNHIs choose to set up FOs instead.

Looking at the numbers, it’s clear that UNHIs aren’t as rare a breed as one would imagine. Estimates vary, but the 2016 EY Family Office Guide approximates the number of single-FOs to be ‘at least 10,000’ globally, and others peg the number at 5,000 to 6,000.

Defined as having at least US$200 million worth of assets under management, FOs have largely been concentrated in the United States and Europe. However, Asia-Pacific UHNIs are not to be ignored: the UBS 2018 Global Family Office Report found that 17% of the offices surveyed are based in this region.

The essential difference between an FO and a wealth manager as told by Eva Law, Chairman and Founder of the Association of Family Offices in Asia (AFO), is that an FO manages much more than just money. Preventing future conflicts, managing family disputes, and preparing for family and enterprise succession are a few of the tasks handled by FOs.

Since the goal of FOs is to grow the family fortune, their investing strategy is generally risk-averse, relying on investments that will guarantee returns. But according to Law, the past few years have marked an interesting and out-of-character trend: investing in startups.

Investing across generations

Law notes that the historically high price of real estate globally in 2018 caused FOs to start “selling their portfolios and reducing their exposure in real estate.” FOs needed a new investment allocation for the money that was freed up by real estate divestment, and where better to put that money than into tech?

At the forefront of pushing tech investments is the ‘next gen,’ or the children of tycoons and billionaires who already hold executive positions in their families’ enterprises. They often act as financial investors, putting money into a number of different projects, but some have other motivations–demonstrating investing knowledge to their parents, or investing in their own passions.

“The increase in direct investments comes from families who want to be more hands-on and involved in the areas they invest,” says Francois Botha, founder of international family office strategy consultancy, Simple.

In many cases, the next gen don’t have the full financial power of the family enterprise on their side, and circumvent this by finding other like-minded heirs to co-invest with them. These ‘club deals’ result in several next gen investors owning minority stakes in startups, and in some cases, outright ownership and management of new ventures.

For a startup, family office investment can be a refreshing change of pace when there is an alignment of values and less pressure on earnings figures.

“Family offices offer ‘patient capital,’ where they don’t necessarily look for huge returns right away, as they have the ability to plan in generations, and not quarters,” says Botha.

The sectors they invest in paint an intriguing picture. At AFO, Law and her team are responsible for bringing FOs together to co-invest in club deals, allowing them an eagle-eye view of where money is flowing.

“Last year, 40% of our club deals were into blockchain companies,” Law says.

The next generation may be advocating for more tech investing, but when patriarchs throw their hats in the ring, the dollar volumes are backed by the substantially deeper pockets of the family enterprise. Unlike the next gen, patriarchs invest purposefully rather than passionately, and are constantly seeking technologies that could offer their enterprise a competitive edge.

“People acknowledge innovation is very important, and they also see the Internet making a lot of changes,” says Law. “That’s why they are interested in making changes to the business while investing into new companies–it’s an opportunity to fuel the future growth of their business.”

Given the size of the companies involved, there’s a board of directors and squad of key executives who need to sign off on any investments, but Law believes where Asian companies are concerned, one person usually has the final say.

Venture investing has not been a popular choice among FOs in the past, perceived as an untenably risky vehicle for the family fortune. Instead, FOs enthusiastically put money into private equity funds, banking on the fact that their beneficiaries would be close to either an IPO or acquisition.

“That means they can still capture the growth momentum, while avoiding the risk-taking period in the early years,” Law says. “I would say about 80% of investments are into companies in this kind of development stage.” UBS found that private equity now makes up 22% of the average portfolio globally.

Exceptions to this rule are gradually growing in number. Law cites one of AFO’s members as an example: a property developer who now has a string of investments into proptech startups. Investing in tech to augment their existing business is becoming a strategy for FOs, particularly with fast and lean early-stage ventures entering the playing field.

Association of Family Offices in Asia Chairman and Founder Eva Law.

Photo courtesy of AFO.

Simple Founder Francois Botha.

Photo courtesy of Simple.

Tech is also making its presence known within the space of customer relationship management. FOs are paying more attention to AI and big data tools to help them manage customer databases, which have allowed them a deeper understanding of their clients.

“Effective digitization has been a focus area for many family offices lately,” says Botha. “The main tools we’ve seen relate to business management, consolidated reporting, and tools to help manage deal flow.” These tools allow families and family offices to become more agile, engaged, and purpose-driven organizations.

A lasting legacy

Law forecasts impact investing to be the next trend for FOs. The Global Family Office Report notes it as a hot area, with one-third of the surveyed FOs engaged in impact investing via private equity. Law and her team have been advocating for more impact investing among AFO’s members.

“We want to make it mainstream. It’s okay for them to pursue investment, but at the same time, do something good for the community,” she says.

It’s still an area of investing that hasn’t picked up traction from Asian FOs, largely due to traditional ideas around charity and giving back. Patriarchs, who have firm ideas about what charity should be, struggle to separate impact investing from conventional philanthropic activities like building schools and hospitals.

“We’re actively having these discussions and dialogues with the next gen, not with the patriarchs,” says Law. She predicts that the tech investment trend will continue at least for the next few years.

Botha also believes families are transitioning away from purely financial priorities–which can be handled by wealth managers and brokers–and putting more emphasis on ‘soft’ or intangible assets such as agility, culture, and goodwill. Simultaneously, the next generation is preparing to take over their families’ legacies.

“It is estimated that currently, over 80% of the world’s wealth is sitting with people over the age of 60,” he says. “That means that over the next 20 years, we will see an enormous transfer of wealth from the Baby Boomers to the purpose-driven Millennials.”

FOs provide unique opportunities for startups looking for funding, but due to their private nature, it’s difficult to say what kind of long-term impact they will have. The growing number of UHNIs suggests that private wealth will have a growing influence in the Asian investment landscape. Meanwhile, as long as there are startups in need of funding, the next generation of billionaires will be on the hunt for prospects.

Nayantara is Jumpstart’s Editorial Associate.