In the post-pandemic era, how can Crouching Tiger, Hidden Dragon's family office unleash its influence? 丨 BEYOND view

The construction of the family office can be traced back to the early 19th century, and after the death of Irenee, the founder of Dupont Company, in 1834, the company envisioned the establishment of a family office, with his three sons sharing the management responsibilities, inheriting his father's business and continuing to expand the business, which was the first family office in the world.

From the 1980s onwards, family offices became popular in Europe, the United States and Australia as wealthy families emerged everywhere. In the 40 years to date, family offices have grown tremendously.

At the BEYOND Virtual Technology Impact Summit, four experienced family office investors and experts from the U.S., Europe and Asian countries connected to discuss hot topics in family offices.

Q1. Every family office is different, based on its continuous development in the global market over the past 10 years, how do you see the development trend of the family office industry?

John Davidson Rockefeller pioneered the family office in the United States in 1882, and what people call family offices today began there, but 68% of family offices were established after 2000, half of which were established since the recession. So it's a very new thing that most people don't yet understand.

Ronald Diamond, founder and chairman of Diamond Wealth, said that the average family office is decentralized, inefficient and isolated, with only 25% of family offices able to grow to the second generation, 10% to the third generation, and 5% to the fourth generation. So, the current model doesn't work, and if it continues, family offices will face an inflection point – people will raise more money and build more family offices than the entire private equity fund and venture capital markets combined.

Ronald predicts that in the next step, family offices will begin to cooperate, more efficiently, more institutionally, and able to directly participate in competition with the world-renowned Apollo, Blackstone, and Carlisle companies.

As a great model, private equity and venture capital disrupted the U.S. public markets in the early 80s, and Ronald believes that family offices in the limelight will eventually disrupt private equity and venture capital markets as they become asset management games. "The capital of the family office model is very patient, at least in my opinion, it is usually a better model, providing a better place for entrepreneurs to practice and collaborate."

Haider Akmal, portfolio manager at Vaal Investment Partners, agrees that family offices are more experienced than they were 10 years ago, and that trust is an important part of their thinking; in addition, family offices are becoming more confident, and the number of direct transactions they are willing to participate in has multiplied, including public markets or cryptocurrencies. Both trends are driving the creation of more and more risk-oriented family offices. In the case of market correction, all performance is cyclical. In New York, family offices will invest heavily in 5 to 10 years from now.

Due to the tax system and easy access to wealth management, Hong Kong is one of the most mature and professional family office hubs in Asia, and many families prefer to set up offices here and employ professionals to manage them. Julius Chin, general manager of cachet group, pointed out that the history of Asian wealth lags behind that of the Western world, and almost all the wealth seen in Asia today has been accumulated in the past 30 years. So compared to Rockefeller's agency, funding for family offices in Asia is really new.

The last 10 years have been a period of formation and accumulation, as most of the wealth remains in the first generation, and most family offices have only been established for three or four years. Cachet, a multi-family office based in Hong Kong, is an early, relatively established company. With the understanding of customers, based on the family situation, the overall economic situation and the evolution of the banking investment industry, Cachet's service content is also richer.

In the past, family offices generally referred to funds, cooperative F&O, investments, fundraising, and co-investments. That pattern has changed over the past two or three years. In the past, no investor wanted to be more proactive in the family office, which was partly related to the flow of talent.

Julius argues that the family office cake is actually getting bigger, more structured, more organized, more practiced, Asia has been the world's manufacturing plant for decades, and the terms of family offices will be many different, not just financial issues. As such, a family office is a powerful institution that protects family wealth, family harmony, and heritage and value.

Q2. In addition to these wonderful developments, the family office community has also encountered some challenges in the United States, Europe and Asia, what are the problems facing family offices now?

The Asian market is still relatively young, and most of the wealth is still stuck in the first generation or 1.5 generation. Julius believes that the problem of family offices in Asia is highlighted by the following four points: first, how to manage all the assets formed by the first generation of wealth, or to serve future generations; second, how to distribute these assets and wealth equally. Third, how can family leaders manage their businesses appropriately while expanding their businesses; and finally, how can they give back to society? For many people, this is the most valuable, creative, influential, and meaningful way to give back to others, which is much better than just spending money in the face of problems.

Ronald points out that which type of asset to invest in is not the first choice for families who own liquid assets, they should first set up an appropriate asset structure with a estate planning lawyer, and then hand it over to the family office for asset management and income generation. "Management and skill are important matters in the restructuring of family offices, and although family offices are experts in investment, family asset owners must first lay a good foundation, and investment is the direction we will strive for after this."

Ronald has found that the industry is at a turning point, with more and more families realizing the importance of estate planning over finding quality real estate or private equity investment projects.

For today's family offices, the environment in which we live today is more fluid than ever, so the primary challenge for family offices, whether they are just established or have been running for a long time, is access to information. Haider breaks down this challenge into the following two areas.

One is that it's hard to get high-quality deals because the way private equity acquires funds — from venture capital to buyouts or hired capital — is moving faster than ever, and investing earlier tends to be larger.

Second, it is difficult to find high-level fund managers at the fund level, because they have become the primary reason for the constraint of ability. Funds are raised from existing LPS every one or two years, rather than the traditional three- to four-year cycle.

"So even if you have a good management mechanism in place and solve the operational problems, if the family office itself does not have a market advantage, it is likely that they may not be able to find a good fund or a good deal."

Q3. Recent family office surveys have shown that companies like Goldman Sachs can raise excess money for other investments through a centralized distribution of family office assets. On average, a total of 45% of a family office's portfolio involves the allocation of private equity, real estate, private corporate, private credit and hedge funds. Different family offices also allocate different proportions of assets, some only in venture capital and private equity, and some only in a hedge fund. So, how do family offices typically allocate domestic and international assets, and how do they use quotes to design portfolio structures?

Haider believes that the two starting points of portfolio construction are to focus on cost input and consider tax efficiency, Haider's family office Vaal Investment Partners is more focused on private equity than public market investment, and there is a strong focus on venture capital in private equity, while public equity has shifted from a relationship-driven hedge fund investment model to a decomposition model of excess return strategy and market return strategy in the past 10 to 15 years. It's now about market-neutral funds with excess returns and related cheap index funds to outperform the market and target the best hedge fund managers in the industry.

Julius works at Cachet focusing on three things: the client's risk profile; opportunities such as single investment, opportunity liquidity or liquidity aggressiveness; and the investment environment, which determine how Cachet structures its portfolio or how it looks for investment opportunities. Cachet's investments are extensive, using a barbell approach for early-stage investments, pre-IPO rounds of investments, and corresponding hedge funds and credit. At present, Cachet is also looking for cheaper Chinese stocks, more private credit opportunities, and the pricing of structured products, bills, and tickets to customers, which are basically cash, cash management or cash appreciation, with room for growth. But based on preference, Cachet also finds investments that are a bit middle-of-the-road.

Ronald says he ran a hedge fund in the '90s, when generating excess returns in the public markets wasn't so complicated, whereas it's really hard to generate excess returns in the public markets today. Ronald's personal funds are invested in ETFs (Exchange Traded Fund), exchange-traded indices) rather than the public markets. The data shows that about 24% of family offices are currently invested in private equity and 22% of their funds are invested in real estate, both of which are expected to rise, while hedge funds, about 4.5%, have been on a downward trend.

Diamond Wealth, where Ronald works, has created an ecosystem of familiar customer preferences and wants to find experts who make money in specific verticals and help lead investments to continue investing; diamond Wealth is also far from the public market, which Ronald believes is the only way to create real excess returns.

Q4. In the turbulent economic landscape and the game in international relations, what are the main concerns of family offices in relation to global asset distribution? How do you view cross-border investment opportunities outside the comfort zone of U.S. investments in Europe or Asia?

Haider's Vaal Investment Partners actively invests in Asia, Western Europe and North America because private equity is more managed to facilitate interviews with target companies; Vaal Investment Partners' investment in China is to find like-minded family offices, which are currently closely related to a family office in Shanghai. In addition, Vaal Investment Partners is happy to invest outside the U.S. and wants to work with trusted partners who are on local field trips.

Julius' Cachet spends most of its time and energy on its Asian home, investing primarily in Hong Kong or the U.S., mainly because of Hong Kong's high tax efficiency and lack of capital gains tax, Cachet has established a regional network of access to the company's management to understand future investment transactions; due to current travel restrictions, it is difficult to do a very in-depth investigation of investment in the United States. Investing in China is more attractive than U.S. inflation and high prices, and China has a very good portfolio of blue chips. For the foreseeable future, Cachet's focus and focus will be in China.

Ronald's view is slightly different because Diamond Wealth doesn't run a single family office. Diamond Wealth only invests in the U.S. and Canada, with some strategic partners in Asia.

Ronald says the family offices they work with often want to know first and foremost whether the people they work with are trustworthy themselves, followed by their track record. But this is actually biased, if you look at it from the perspective of an institution or fund, it will look at the performance record of 5-10 years to measure the largest shrinkage. These family offices value the consistency of interests more than the success of the transaction, which is also the minimum standard for family-run companies in the United States.

Haider also agrees that trust is the driving force behind investment, and Vaal Investment Partners has an informal network of contacts and similar asset management-level like-minded families and sub-level families to observe their investment intentions and examine their areas of expertise. Funds and foundations, on the other hand, invest more on performance records, followed by performance metrics, before starting to consider whether to invest.

Q5. Influence and ESG are increasingly becoming one of the top concerns for many family offices, and looking ahead, the Biden administration has pledged to halve U.S. carbon emissions by 2030; the European Union has pledged to achieve net zero emissions by 2050; and China has pledged to be carbon neutral by 2065. In this context, how do you view the development trend of family offices in implementing impact investing and sustainable investment? Will ESG be included in the strategic direction or taken into account when evaluating investments?

Julius responded that most of the Chinese funds Cachet encountered did have environmental interests. Over the past 12 months, Cachet has been actively working with companies committed to sustainability and ESG, and customers are willing to help and participate in socially responsible actions. ESG is a very new concept for the West. Recently, many of Cachet's family office clients have been focusing on energy in China: China is looking for alternatives to traditional economic energy sources.

The data shows that about a third of family offices now have an investment impact, and Ronald predicts that number will grow to 50% in the next three to five years. This was not possible 20 years ago, but now things have changed. Ronald believes that it is mainly the post-00s who are driven by influence, not the second generation of the rich, who have made great changes.

"Four months ago, we held the Stanford Family Office Conference, and Fusan generation is very passionate about climate, education, and other projects that make the world a better place. These tangible investments will grow exponentially because these young people want to make a difference. ”

Haider admits that Vaal Investment Partners considers ESG when investing, but does not include it in the program list. Conceptually, Vaal Investment Partners is very supportive of ESG.

Regarding investments in the post-pandemic era, Vaal Investment Partners said it would not deploy more money in an infrastructure-oriented manner. In the wake of the pandemic, Vaal Investment Partners expects to invest more in healthcare, as healthcare has now become a more mainstream investment. Vaal Investment Partners will work with other family offices to venture into the initial biotech. "We believe that in the next cycle, given current innovations in science and medicine, investing in biotechnology in healthcare in a broad sense will be an important value driver."