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Asian family offices can provide unique resources to the startups they invest in
As more high net worth individuals (HNIs) are added to the world, their family businesses have been becoming increasingly visible in the funding space. While these businesses focus on building wealth, investments offer them an avenue to put their wealth to work.
However, not all family businesses possess the acumen to cash in on golden investment opportunities. Even though family businesses in Asia prefer to be more hands on, they are slowly accepting the idea of roping in a professional team, or setting up a family office (FO), to manage their wealth.
FOs are, in essence, a financial company for a family company. They manage private assets for family businesses, with the goal of preserving and growing family wealth through investments.
These offices are fairly young but growing in number. 68% of FOs were founded in the last 20 years, a majority of those coming into existence only after 2010. This number is forecast to grow by 44% in the Asia-Pacific (APAC) region in the next four years, a UBS survey suggests.
The cumulative wealth of APAC-based single-FOs stands at $908 million as of 2019, with $600 million in assets under management (AUM), slightly below the global average of $1.3 billion family wealth and $802 million in AUM. However, FOs in the region reported the highest investment returns, according to the survey.
“If you look at FOs in Asia, I think they are still quite new, maturing and growing. Typically, the founding family or members are closely involved in [managing their wealth]. It’s only now that Asian families are bringing in professional management,” Aradhna Dayal tells Jumpstart.
Dayal is Founder and CEO at Access Alts Asia, an exclusive global investing network comprising prominent FOs, foundations, strategic investors and others, with $2.1 trillion in represented assets.
She also manages a single-family office based out of Hong Kong, and has over two decades’ worth of experience in Asian financial markets.
The Upsides of FO investors
FOs have two priorities with their investment strategies: to preserve wealth, and grow it. Most families in the APAC region prefer taking a balanced strategic approach between the two, while a smaller percentage lean toward preservation over growth, according to the survey.
Dayal, however, has observed that families have slowly been emerging out of their comfort zone over the past decade, and startup investments have started to feature on their portfolios.
Where real estate or private equity once dominated their portfolios (though these asset classes are still the most preferred), FOs are now looking closely at investing in higher risk profiles, such as future technologies.
“Families are not only investing strategically which they’ve been doing historically, but many of them are also looking at an external investing as a defensive play, which was not the case earlier,” Dayal says.
As FOs diversify investments, longer term capital is opening up to startup founders, even as the venture capital (VC) deals are shrinking in number. FOs are patient with their money and in no rush to get it back, and this puts less pressure on young business as compared to VC funding.
Another benefit of sealing the deal with a FO is the nature of the support it might bring to the table. Dayal calls this the three Ns – knowledge, networks, and navigation.
Firstly, family businesses have amassed a pool of inter-generational business expertise and acumen that becomes instantly available to startups when they onboard a FO investor.
Further, family offices also have a vast network of other business families, banks and institutions, which become accessible to their portfolio companies. This has an obvious advantage for business growth, but is also extremely useful for customer acquisition.
Finally, family businesses are well poised to offer business counsel and advisory to startups on account of their own historical experience navigating the ups and downs of industry.
Dayal illustrates the compound effect of this triad of resources through the case study of an Access Alts member family – Los Angeles-based Forever 21, which was family-run before its sale to a group of mall operators.
“[Forever 21] moved a few billion dollars globally [between suppliers, stores and the head office]. They needed a global payment gateway that was fast and efficient, so they invested in a very interesting B2B payment system, using SWIFT, treasury and cryptocurrency,” she says.
Eventually, Forever 21 integrated the platform into their own systems, and became a major client for the early-stage payments company. This also opened up opportunities for the company with other fast fashion global retailers such as H&M and Zara.
FOs Prefer Global, Scalable Business Ideas
Along with an alignment of values between the startup founders and family businesses, FOs also like to see an alignment between the business concept and the family’s business mission, owing to their preference for a diversified portfolio, Dayal says.
Accordingly, they invest in diverse businesses that are global and scalable, and this reflects in the industries that are favored among FOs.
Consumer concepts, such as ride-sharing apps and ecommerce business, are a huge hit with Asian families, Dayal says, owing to their exponential growth potential and the prestige associated with an Uber or a GoJek.
Another industry that FOs are looking at is deeptech, which includes fields such as artificial intelligence, autonomous vehicles, robotics or digital infrastructure. Deeptech has become nothing short of a buzzword in Southeast Asia, and family businesses are catching on because of their value proposition in terms of steady growth and longevity.
Against the backdrop of the Covid-19 pandemic, telemedicine, future of work technologies, and collaborative technologies have also come to the forefront as lucrative investment opportunities.
Further, sustainable technologies and impact investments are also on the FO radar, and family businesses are expressing excitement about potential investments in sectors such as food innovation, edtech and agritech.
Moreover, 40% of FOs in the APAC region have made sustainability-focused investments, and 25% have dealt with impact investments, according to the survey.
However, adjusting conservative investment strategies to accommodate riskier bets can sometimes lead to a disproportionate increase in their expectations for returns.
“Families are very confident of generating a certain percentage of returns in their own tried and tested businesses. So, when they look outside that safety net, they want huge returns, sometimes a little unrealistic,” Dayal explains.
FOs as Reliable Investors
Dayal emphasizes the importance of remembering that these developments are relatively recent, taking place just within the past two to three years.
As compared to bigger FO markets such as North America or Europe, Asian FOs are fairly young. Subsequently, they are not as evolved, mature, or institutionalized as the bigger markets, and have a smaller philanthropic footprint.
While Western FOs, as fully fledged institutions, are entirely run by professional teams and tend to work individualistically, the Asian landscape is characterized by FOs who prefer to network and partner with each other, and invest in private equity or hybrid assets.
“FOs in Asia have some sort of a defined mission and values, but they also want commercial returns. I think that a good combination of both is something a lot of Asian families want to achieve,” Dayal says.
The fact remains that Asian FOs are a ways away from becoming the kind of institutional investors as in North American or European markets.
At the same time, they are demonstrating a keen interest in investment trends, possess vast resources, and have learned how to stay in business over the years. For startups, this represents a capital route through niche, yet powerful legacy investors who are willing to invest in the future.
Header image courtesy of Access Alts