The Continuing Evolution of the Family Office: 2023/24 Trends and Tips

September 2023

Partner Patricia Woo discusses a number of trends that have been observed in the sector. This article was originally published in IFC Review on July 13, 2023 and is reposted with permission.

The family office sector continues to trend upward as substantive growth in both the number of establishments and the assets under management has been recorded. Publicly available statistics and reports might not, however, have captured the more personal and private activities and the rationale behind the growth. Though less quantifiable and perhaps less formal, these family office activities are as valuable - if not more so - to the families themselves and others.

A Better World: Expanded ESG Investments

This trend is hardly new, but the expansion in the breadth and depth of ESG investing is worth reporting. Extreme climates and other environmental issues have become key concerns for younger generations of wealthy families whose philosophy and purpose are aligned with ecosystem and collective well-being.

They are increasingly conscious of the impact the financial and human capital they can mobilise could have on society and the environment. While knowing how they can contribute, they are equally aware of the value and potential upsides of ESG-aligned and sustainability investments.

Sustainability value has been unlocked by family offices in different ways. Some incorporate social and environmental impacts into the family’s core values and therefore investment strategies. They set out clear, measurable objectives and criteria for sustainability investments. The key to success is to involve family members who are personally passionate about this area and build a specialist team to support due diligence on, implementation and project management of direct investments.

For family offices that are not ready for direct ESG investing in-house, a feasible alternative is to invest through sustainability-themed funds. The success factor is not only to identify a fund whose investment philosophy and strategies align with the family’s belief, but also a manager who is personally and financially committed, with a solid track record under his or her belt, and access to industry leaders and up-and-coming innovators.

ESG-themed investing covers a diverse range of initiatives, from innovation-driven projects to produce and store sustainable and renewable energy resources, promote more efficient use of energy, enhance and improve agriculture technologies, food production, transportation and consumption, to partnerships with the government to provide affordable housing.

Affordable housing is more than just making accommodation available to those in need at a price they can afford. Investing in affordable housing means revitalising local areas while providing economic stimulation to the community, and benefitting livelihoods, family stability and the community’s collective well-being.

Some families embrace ESG through initiatives within the family business. Resources are allocated to put in place or rethink business and production processes that meet ESG requirements, such as using environmentally friendly materials, and reducing and filtering waste that would otherwise pollute the environment. Some family businesses adopt internal policies to procure from socio-economically disadvantaged communities. Those taking things to the next level have dedicated projects within the family business to encourage, empower and finance next-generation employees to propose and carry out their own ESG projects. Beyond investing, some families see the broader, perhaps even more fundamental need to provide education to increase awareness of ESG topics.

Biodiversity is one of those subjects. While many environmental projects focus on protecting a certain type of living species (such as endangered animals) or reducing negative human impact in nature (such as carbon emissions), biodiversity encompasses a wider concept, depicting the multitude of living things that make up life on the planet (from plants and animals to fungi) and the ecosystems that house them (including mountains and ocean). Learning opportunities are given through charitable projects funded by the family, and collaboration with corporate players and research institutes.

Why Not? Setting Up In Both Hong Kong And Singapore

In recent years, families are more prepared to set up family offices in multiple location, meaning they want to have a family office on more than one continent. For instance, an Asian family would establish the first family office in Hong Kong or Singapore, with a second family office in London or New York. A European family office might wish to have a second team in the Middle East and a third team in Asia, depending on the locations of the family assets, family businesses, family members and the specific team they want to work with.

Lately, more of them are prepared to set up single family offices in both Hong Kong and Singapore, or if they already have family offices in either location, set up an additional office in the other location, making the best uses of the tax exemption regimes now available in both jurisdictions.

Key features of the Hong Kong and Singapore regimes are not significantly different, with only a few variations in implementation and operation. For instance, in Singapore, single family offices have to apply to the Monetary Authority of Singapore (MAS) for tax exemption status, while in Hong Kong, no formal application and approval are required. In Hong Kong, only profit tax generated from 'qualification transactions' are exempted. The Singapore list of 'designated investments' includes certain loans, emission derivatives and liquidation claims, in addition to those captured by 'qualified transactions' in Hong Kong.

The availability of tax savings in both locations has now proved that both places, rather than just one single location, can be attractive within Asia. Is tax incentive the best reason to set up a family office? Perhaps not, but it is certainly a good enough reason to institutionalise family investments and gradually systematise other areas once the family offices are in place.

In the long run, this is going to be beneficial to the family. Time will tell whether and how Hong Kong and Singapore might compete. Sooner or later, either of them could introduce newer policies to stand out. MAS is anticipated to announce a new incentive scheme for single family offices in Singapore including tax savings, incentives or grants for contribution to charity, provision of capital to blended finances, and investing in mitigation of climate change globally.