Thought leadership from our experts

Asian family enterprises – beyond three generations

, EY, Hong Kong

Shirt sleeves to shirt sleeves in three generations

It is often cited that 70% of wealthy families typically lose their wealth by the second generation, and 90% by the third[1], and this is seen across different societies.

In comparison, the average age of an S&P 500 company today is under 20 years, down from 60 years in the 1950s, according to Credit Suisse. And this trend is anticipated to continue. As per growth strategy consulting firm Innosight, it is anticipated that about 50% of the S&P 500 will be replaced over the next 10 years.

The above reflects the need for companies, multinational corporations (MNCs) or family enterprises alike, to reinvent themselves and stay relevant, as disruptions from globalisation, technology and most recently, the 2020 COVID-19 pandemic has changed the market environment dramatically, forcing businesses to evolve faster than ever before.

Peeling through the layers

Traditionally, for many family enterprises, there is often a desire to keep the family business and management within the family, rather than relying on external talent who sometimes may otherwise be better qualified or suited for the job. With this expectation placed on the next generation, some of them in the past may also feel the pressure or a personal duty to join the family business even though they may not be interested in running the business.

The tenure of the management in a family enterprise is typically longer, compared to say CEOs of a publicly owned company. While this is good for the family enterprises as decisions can be made for the medium to long-term interest of the family and the business, the trade-off is that without an infusion of new blood and fresh ideas, the business risk stagnation may happen over time when they do not reinvent themselves.

Lastly, in the past, it was not uncommon for family members to join family enterprises straight from school. This meant that they may not have gained broad experiences from working outside the family enterprise. This may explain why some family enterprises may find it challenging to identify or respond to shifts in technology, business models and consumer behaviour.

Moving up the economic ladder

Families in Asia are moving up the economic ladder and, building their businesses and wealth. This can be attributed to the rise of wealth creation in Asia in the past three decades .

  • The opening up of China and the phenomenal growth of China's economy to become the world's second largest economy, not only created opportunities for exports of Chinese-made goods but also the export of services. This has also fuelled the China market's domestic consumption which contributed further to its growth given the size of its domestic population.
  • The emergence of new businesses and business models from the Fourth Industrial revolution, saw some Asian groups grown to be industry leaders. This created new wealth within Asia, which led to other knock-on successions as many of these successful entrepreneurs continued to further invest into other successful ventures.
  • The above, along with globalisation and broader-based growth of affluence in Asia, contributed to the growth of Asian family enterprises, and a number have gone on to be listed in local and overseas stock exchanges.

Digital transformation

In these current times of unprecedented business disruptions, businesses are no longer undergoing an evolution. Rather, we are seeing a revolution where many business models are being transformed or overhauled in order to stay relevant in a new economy, catering to the new generation of consumers who are increasingly born during and post internet era.

Centre to the above is digitalisation. Digital transformation is a journey and often taking the first step is difficult. With many of the next generation born in an internet age, they are digital natives comfortable with the new economy, the technologies and opportunities presented.

Where the next generation is involved in the business, this has helped many family enterprises to adapt and digitally transform, especially during the COVID-19 pandemic which hastened the digital journey if the businesses are to survive in a post-COVID-19 world.

Handing over of the reins

In the past couple of years, we are seeing more next generation starting to take a more active role in the family enterprise and investing the family's wealth often in a more institutionalised manner, probably due to a convergence of factors:

  • The patriarchs and matriarchs are advancing in age
  • There is a return of the next generation to the family enterprises, after working outside and having gained expertise and experiences
  • The network that the next generation has built socially and professionally is starting to take root.
  • Emergence of the new economy, where the next generation often relate better to and have an interest in.

We are also seeing the transition occur earlier. In the past, the handing over the reins may take place upon certain events such as the passing of the patriarch or matriarch. There is now an increasing trend where the next generation is taking over while the patriarch or matriarch is still capable and can tap on their deep experiences to provide the guidance and stewardship as needed.

Well thought out wealth transition plan

With globalisation, families are increasingly holding investments and assets outside their home jurisdiction. Coupled with increased mobility of the business owners and their family members, complexities such as inheritance tax issues can arise due to estate duty and inheritance tax rules in different countries. These may apply on different types of assets ranging from shares in companies to immovable property. For example, estate duty may be imposed when an individual is not resident in a particular jurisdiction but holds moveable property such as shares, artwork or fine wine within that jurisdiction.

With broader experiences and networks, families are increasingly more aware of the need for proper succession and estate planning to facilitate a successful transfer of their wealth and business to the next generation. These include:

  • Putting in place a family governance framework, where there is a family constitution for family members to abide by. This also aligns with the family and family enterprise's values and vision for the future.
  • Timely implementation of arrangements and structures to address estate duty and inheritance tax implications from assets held domestically and overseas by the family.
  • Having a framework that nurture and reward next generation for their entrepreneurial and innovative efforts in the face of globalisation and disruption. This involves attracting, motivating and retaining the next generation to be involved in the family enterprise.

Single family offices – a choice that is now feasible

Wealth transition and succession planning is a journey and require different tools, such as trusts, family holding companies, family constitution, etc.. The single family office is an additional tool that is used for wealth transition, and often used in conjunction with trusts and family holding vehicles. It provides more structure and rigour as Asian families' needs become more complex, more sophisticated solutions are demanded.

With the development of single family offices, retaining ownership of the family enterprise no longer necessarily means having the next generation to run the family enterprises. For example, professional management teams may be brought in to run the family enterprises day- to-day operations, while the next generation can work in the family office to manage the investment portfolio, as well as provide strategic oversight on the family enterprises. This also allows for external expertise to be brought in to run the family enterprise, while according strategic oversight to the family to meet the long-term goals of the family and the business.

Even with COVID-19 pandemic in 2020, we anticipate this trend of single family offices to continue because: -

  1. Families look towards seizing the window for investments during this period, due to:
    • Portfolio rebalancing
    • Making opportunistic investments
    The nimbleness of a single family office to switch between investment focus and asset classes is a key advantage. This is due to the wide and flexible mandate of a single family office, as well as the flatter organisation that also means decisions can be made much quicker.
  2. Single family offices manage "patient" capital and this meant that they can afford to wait before deploying its assets under management (AUM) to make investments. They can also have a much longer investment horizon than many financial institutions and investment funds. This allows family offices to take contrarian investment positions and invest in times when others are exiting.
  3. Many investment vehicles of family offices often enjoy tax exemption on qualifying income. For example, as Singapore's tax exemption covers interest income, Singapore- based family offices are able to provide the needed financing or acquire distressed debts and enjoy tax-free returns on interest income earned.
  4. Where overseas families are seeking diversification through immigration overseas, single family offices have been instrumental as they are able to accord the family members this opportunity through employment passes, permanent residence and even citizenship.

While the COVID-19 crisis has introduced some headwinds in operationalising family offices, due to the above, we are seeing families continue to press forward on their family office plans.

For over 30 years, EY Entrepreneur of The Year® celebrates the achievements of exceptional entrepreneurs in over 60 jurisdictions for their bold thinking and drive in the creation of products and services that shape how we live, work and play. This is just one part of a long, distinctive history of EY supporting the world's most successful entrepreneurs while serving 80% of the world's top 500 family enterprises.[2] With the above trends observed, and as we continue to work with family enterprises in Asia, we are hopeful that the current "next generation" will move the needle and that we see more Asian family enterprises succeed well beyond the third generation.

Tracy HO
EY Asia-Pacific Business Tax Services Leader

Desmond TEO
EY Asia-Pacific Family Enterprise Leader / EY ASEAN Private Tax Leader

  1. “The Asian Family Office - Key to Intergenerational Planning” publication
  2. Source: 2019 EY and the University of St Gallen Global Family Business Index