An increasing number of family offices are setting up shop in Asia, particularly in the financial hubs of Hong Kong and Singapore, where they are attracted by a raft of government measures including preferential tax. These family offices have become an important source of funds for alternative investments, which offer a way for them to diversify their portfolios and gain higher returns.
The steep interest rate environment has dimmed the near-term outlook for most asset classes, according to Preqin, an alternative assets data and intelligence provider. From a record high of US$1.6 trillion in 2021, fundraising in the alternative asset industry has slowed to US$1.2 trillion last year. It is expected to attract a similar level of new funds in 2024 with a potential for downside risk. Capital raising in the sector is not expected to recover until 2025, Preqin forecasts.
Institutional investors have been the main source of capital for alternatives. While accounting for a small part of the pool, family offices with a more flexible investment allocation approach have become more familiar with alternative assets in recent years. Preqin data shows that at least two-thirds of family offices have exposure to alternatives.
Source: Preqin
As of January 2023, there were over 4,500 family offices globally, with North America and Europe accounting for the biggest shares of 37% and 30% respectively. Asia only had 16% of the pie, but the number of family offices in the region is growing rapidly, having doubled since 2020.
Source: Preqin
Moreover, Asian investors have shown greater interest in alternative investments, with three-quarters of family offices in the region having an exposure to alternatives, higher than in North America and Europe.
“Diversification and returns are the key drivers of family office interest,” says Angela Lai, head of APAC and valuations, research insights, Preqin, at a recent webinar hosted by the firm.
Family offices prefer to invest in private equity, real estate, infrastructure, and hedge funds for diversification, while venture capital attracts family offices for its potentially high absolute returns. On the other hand, private debt and real estate are chosen for their reliable income streams.
Private equity and venture capital are the most popular among family offices so far, although infrastructure is being considered the most for investment by family offices in the next 12 months, Preqin data shows.
Going forward, family offices are seeking new sources of diversification with slightly different return characteristics. There’s more interest towards private debt for its stable income stream, and real estate is also attracting attention. “That’s interesting because it’s an area where we see institutional investor sentiment weaken a lot in the past year. This may highlight how family offices can have higher risk appetite than institutional investors,” Lai observes.
In the fund selection process, family offices seek, first of all, greater transparency at the fund level, but they also place much value on GP commitments to a fund and management fees. This is so because family offices are small operations, often with a maximum of ten employees. As such, they may have less capability to perform the same high level of due diligence as institutional investors.