This year has been a tough economic one for the Asia-Pacific (APAC) region, joining other top global economies like the European Union (EU) and the United States (US) in struggling due to multiple problems worldwide. According to a survey covered by DealStreetAsia, APAC family offices are not confident that the 2023 economy trends will be positive, with 88% of respondents identifying inflation as a threat to their potential investment returns.
Unlike venture capital (VC) companies, family offices are private wealth management firms serving families and people with high net worth. These offices provide affluent families with a full selection of personalised services, including investing, tax and estate management, wealth management, financial planning, philanthropic contributions, and more.
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There are about 382 family offices worldwide, with APAC having around 76. APAC’s family offices hold USD 94 billion in wealth, which makes up about 13.4% of the estimated total wealth of global family offices. Assets Under Management (AUM) for family offices in APAC stand at USD 45 billion, compared to USD 390 billion for those in other regions combined.
Even though VC firms have been fundraising in preparation for next year, the VC trends APAC is expected to experience in 2023 could be grim. They face supply chain issues, geopolitical challenges, wars, the re-emergence of COVID-19 variants, high-interest rates, and other global problems. Family offices may find opportunities during this period, but they must diversify their portfolios to thrive.
Key findings from the APAC Family Offices Survey
According to the Asia-Pacific Family Office Report 2022 by Campden Wealth and Raffles Family Office, a majority of family offices, at 42%, are adopting a more balanced investment strategy to deal with the global issues previously mentioned and a looming recession. It is a shift from last year’s growth investment attitude, with only 30% of the family offices maintaining this method. The remaining 28% have a wealth-preservation outlook, which is 10% higher than the global average on this approach.
Dr Rebecca Gooch, Campden Wealth’s senior director of research, said the family offices’ highest returns had come from adventurous private equity (PE) and VC investments. Furthermore, they needed to diversify and de-risk their portfolios, search for new deal opportunities, and maintain some growth-oriented assets.
The report found that the three key issues posing a risk to financial markets next year were inflation at 88%, rising interest rates at 72%, and geopolitical risks at 58%. Respondents believed inflation was the main issue, increasing by 19% from 69% in the 2021 Asia-Pacific Family Office Report.
As such, family offices have taken several steps to mitigate inflation. For one, 52% have invested in real estate, 50% in equities, and 29% in commodities. Second, 34% have reduced the duration of their bond portfolios. Third, 54% searched for fresh investment opportunities, whereas 42% sought alternative investments.
Other segments have also received family office investments, with 38% in healthcare, 52% in digitisation, 44% in artificial intelligence (AI), and 42% in biotech. Digital assets remain popular, with 52% of investors holding on to their holdings despite market volatility. As an example, about 1 in 5 people invest in the metaverse.
Climate change concerns have led 42% of family offices to engage in sustainable investing, with 29% of portfolios dedicated to sustainable investments. There has been an increased focus by family offices on GreenTech, with 62% already invested.
Focus on PE and VC investments
DealStreetAsia’s commentary on the report highlighted that APAC family offices reaped fewer returns than their European and American counterparts in 2021. Outperformance for PE funds was much lower than in other regions, at 17%. Direct active investments outperformed at 50% because the APAC family offices provide mentorship and access to their business networks.
Several families were not keen on PE investments because they needed more certainty about when to expect returns. There was also an alternative to making money in public markets. Furthermore, one head of an Australian family office said PE funds would work if the interest rates were meagre, enabling investors to make good investment returns.
Regardless, 83% of family offices have invested in PE, up from 80% last year, making PE the second largest asset class in their portfolios at 23% of their AUM. The offices seeking to improve their PE investments were 57% of the respondents, whereas those who wanted to boost their VC investments were 50%.
What to expect in 2023?
Even though APAC family offices see inflation as a threat to their revenues, stakeholders and leaders need to keep a level head and not overreact to changing circumstances. The 2023 economic trends show there will be a lot of market turbulence due to the many global challenges governments and companies will have to overcome. With a bit of luck, the positive VC trends APAC hopes for will materialise and allow businesses to thrive.