Challenges for family offices in emerging markets

Added on 23/10/2015

Leading family offices in Latin America and the Caribbean are going through a transitional period, says Steven Cantor, managing partner of Cantor & Webb, a Miami-based law firm, reports the Financial Times.

“As the world moves to tax transparency, with a crackdown on undisclosed tax savings in Swiss bank accounts, Fatca [the US Foreign Account Tax Compliance Act] and common reporting standards, these are the glory days for tax attorneys in the US.”

The tendency of families with assets of more than US$50m to set up their own family offices is increasing, he says. Disappointed by wealth managers in the region scaling back their private client business, “sophisticated families are setting up their own trust companies and taking a much more active role in-house with regards to succession planning”, Cantor says.

More and more wealthy families from developing economies are realising that the complexity of their financial issues requires some degree of bespoke planning, he says. “It is not just about pulling a trust document off the shelf in a preprinted format.”

For most wealthy Latin American families, the issue of ensuring personal safety is just as important as diversification of assets, he says.

“Since I started in this business in the mid to late ’70s, there has been a significant amount of political change across Latin America,” Cantor says.

“But if you had told me then that Caracas would become the most dangerous city and Bogotá one of the safest, I would have thought you were crazy, as it was just the opposite.”

This changing nature of the landscape is key to his clients’ needs. “We have lived through several kidnappings of our clients in Mexico and seen first-hand in pre-residency tax planning for Venezuelans and other wealthy Latins how important a role their political and economic situations plays.”

Single family offices have proliferated in Latin America over the past 25 years as very rich families sold parts of their businesses and, taking their cue from US and European structures, set up their own investment operations, says Gerard Aquilina, an independent family office adviser, previously a senior executive at several leading global banks.

Recently, multi-family offices have “mushroomed throughout the region as disgruntled and entrepreneurial ex-private bankers and asset managers left their former institutions”, he says, setting up “gatekeeper” firms to offer neutral advice to wealthy families.

Many Latin American banks have not been equipped to provide the succession planning, account reporting, concierge services and private equity investments these families need, Aquilina says. However, the likes of BTG Pactual and Itaú are beginning to respond to this wave of potential business, he adds.

Top of families’ investment wish list is access to private equity opportunities. “If anything, single family offices will view local political upheavals and fraud issues such as Petrobras as excellent opportunities to invest in assets when other investors are fleeing,” says Aquilina.

This desire to invest in unquoted companies is just as prevalent across Asia as it is in Latin America.

“Family offices across Asia are setting up trusted and dedicated private client investment teams. These are more interested in private equity than companies listed on financial markets,” says Michael Benz, global head of private banking at Standard Chartered, the bank. “One can observe this trend over the past two to three years, as it has become more and more difficult to earn a decent yield from financial markets in a low interest rate environment.”

Asian families are increasing foreign allocations.

“Most recently there has been much interest in European investments,” Benz says. Asian investors are attracted by European economies lagging behind the US, coupled with the lure of a cheap euro.

But any suggestion that Asian family offices were turning their backs on home markets because of fears of a Chinese implosion would be short-sighted, he suggests. “It is clear that Chinese growth is slowing down, but not many people in Asia are expecting it to stop.”

Most of StanChart’s Asian family clients are sophisticated investors, experienced when it comes to diversifying internationally and holding property not only in the UK, but often in the US and Australia.

They are less advanced in the area of estate planning, says Benz.

“A lot of wealth in emerging markets is being created by entrepreneurs and companies in full swing, still in the hands of the first generation,” he says. “The biggest step is to take it from the first to the second one.”

Many of the most successful family businesses bear the scars of internal disputes, stemming from a lack of good governance or disruptive fall-outs between clashing generations, says Bernard Rennell, global head of family governance and family enterprise succession at HSBC Private Bank.

“While Asian family leaders think about their businesses and investments strategically, when it comes to transferring wealth from one generation to another, the same commitment of time and effort to planning is often missing,” he says, drawing attention to the Chinese saying that “wealth does not last three generations”.

Splitting assets between siblings after the death of a patriarch or matriarch seldom makes sense, Rennell believes. “A key area of focus needs to be how families make decisions as a group after the controlling member moves on.”

Asian family offices face very different challenges than those in the US and Europe, adds Bernard Fung, head of family office services for Asia-Pacific at Credit Suisse.

“The Asian wealth here is younger, closer to the original business, so more often than not the family or business leader is still the same person,” he says.

A generation of ageing Asian tycoons reluctant to let go of the reins hinders younger family members from developing expertise in either business or investments, he says. This can result in investment strategies with a time horizon suited to the founders, but not their children.

Advisers who help family offices structure investments can end up dealing with physical as well as financial assets, says Lisa Vizia, head of the family office team at Saffery Champness, the accountancy firm, in Guernsey.

“We have devised structures for planes, boats, yachts, helicopters and residential developments worth up to £300m [for wealthy families]. We recently fitted out our second 747,” says Vizia, who works with clients in emerging markets. “We are even tracking carbon emissions. We are running their service almost like a commercial airline.”