As published on: themalaysianreserve.com, Tuesday 27 June, 2023.
Family offices have the potential to become a focal point of Malaysia’s financial landscape as the government, led by Prime Minister Datuk Seri Anwar Ibrahim, explores policies to attract these private wealth management advisory firms.
The Finance Ministry (MoF) and securities regulator Securities Commission (SC) are actively working to facilitate the establishment of family offices, aiming to drive greater domestic direct investments (DDI) and capital ventures.
With their expertise in managing and preserving wealth across generations, families or individuals, offering a range of customised services such as investment management, financial planning,
tax and estate planning, and philanthropy.
The family office market in Malaysia is considered still in its nascent stages and relatively small compared to more established markets such as the US, Europe and Singapore. However, it has been experiencing growth and gaining popularity in recent years.
The exact size of the family office market in Malaysia is challenging to quantify due to the private and confidential nature of family offices and the lack of comprehensive data available. They are typically discreet and operate with a high degree of privacy, making it difficult to obtain accurate figures on the number and assets under management of family offices in the country.
However, with the Malaysian government’s initiatives to attract family offices, coupled with the country’s favourable business environment, political stability and robust financial sector, there is potential for the family office market to expand further in Malaysia.
Singapore has seen a sprouting of family offices. The neighbouring republic is now home to about 700 family offices, up from 400 in end-2020 and up seven-fold from 2017, according to government estimates, reported CNA. They are driven by government initiatives, regulatory reforms and the country’s focus on developing its financial industry.
Malayan Banking Bhd (Maybank) group CEO for global banking Muzaffar Hisham told a Singaporean newspaper that Singapore has attracted substantial wealth over the past few years, making it an appealing destination for families seeking to establish family office structures.
Aside from assisting wealthy families in Malaysia seeking to set up family office structures here, he was reported to have said that Maybank is “leveraging our network across Asean to bring ideas and investment opportunities from the region to also help clients here grow their wealth”.
The recently released UBS Group AG’s “Global Family Office Report 2023” sheds light on the changing investment landscape for family offices worldwide.
With the era of low or negative nominal interest rates and abundant liquidity coming to an end, family offices are gearing up for significant shifts in their strategic asset allocations.
The report reveals their plans to adjust investment portfolios, with an emphasis on diversification, protection, yield and capital appreciation.
“This year’s report comes at a defining moment in time. It’s the end of an era for low or negative nominal interest rates and the ample liquidity that followed the global financial crisis. Against that backdrop, our research shows that family offices are making major changes to ensure they’re positioned for growth and success,” said UBS head for global family and institutional wealth George Athanasopoulos.
“While current market and geopolitical trends have prompted a shift to liquid, short-dated fixed income, 66% of family offices still believe that illiquidity boosts returns in the long term and they’re looking to further increase allocations to alternatives like hedge funds, private equity funds and private debt to further diversify their private markets allocations,” he said in the report.
In response to evolving market conditions, the report said family offices are strategically modifying their asset allocations.
While allocations to develop market equities remain relatively stable, there is a notable intention to increase investments in emerging market equities, it said. This shift comes as family offices perceive a peak in the US dollar and anticipate China’s reopening to present new opportunities.
Looking beyond 2023, the report said that family offices anticipate making further adjustments to their strategic asset allocations.
Developed market fixed-income investments are expected to experience a significant or moderate increase, signalling a reversal of the trend observed over the past three years.
Risk assets, such as developed market equities and emerging market equities, are expected to receive greater allocations, it said.
While family offices remain interested in private equity, the report however noted that the level of bullishness appears to be more subdued compared to previous years.
Nonetheless, a significant proportion (41%) plan to increase direct investments, while 35% are considering investments in funds or funds of funds (an investment vehicle that invests in mutual funds, exchange-traded funds or even hedge funds).
Real estate allocations, although cautious in the short term, are projected to rise over the next five years, indicating optimism in the asset class as interest rates stabilise and valuations become more favourable.
Compared to global peers, family offices in Asia Pacific have the highest allocation to equities (37%), and 46% use hedge funds as a portfolio diversifier.
Of those with private equity investments, they also make direct investments more than other regions (31%) and 77% of their private equity investments are invested in technology. From an investment theme perspective, medical devices and health technology resonates best (76%). Family offices in Asia Pacific have a home bias, with 51% of assets invested in the region, including Greater China.
Considering Family Offices in Malaysia
Family offices in Malaysia face considerations and challenges that require careful evaluation and planning. Following the government’s announcement of policies to attract family offices, families contemplating the establishment of such entities should undertake thorough assessments to determine their needs and gauge the long-term viability and benefits of such a structure.
One crucial aspect to consider is Malaysia’s complex regulatory environment, which encompasses various laws and regulations governing financial services, taxation and business operations. Complying with these regulations often necessitates specialised knowledge and expertise, making the process time-consuming and resource intensive.
In comparison to other global financial centres, Malaysia may have a relatively smaller pool of experienced professionals with expertise in family office operations, wealth management and specialised financial services.
This could present challenges in recruiting and retaining top talent, particularly when specific requirements or demands need to be met by the family office.
Although Malaysia offers diverse investment opportunities, its market size is smaller compared to some major global economies. This may limit the scale of investment options available, particularly for families seeking significant diversification or exposure to specific sectors or asset classes.
Operating a family office in Malaysia also exposes families to currency risk, as fluctuations in exchange rates can impact the value of investments and wealth held in different currencies. Consequently, managing currency risk becomes a critical consideration, especially for families with international exposure.
However, Malaysia’s strategic initiatives and commitment to attracting global talent can help mitigate this challenge, as collaborations with international experts can bridge the gap and offer broader investment perspectives.
As the country continues to make strides in this direction, it is expected to attract and nurture family offices that will play a crucial role in the growth and success of Malaysia’s private wealth management sector.