Now home to more than a quarter of the world’s billionaires, family offices are gaining popularity in Asia. The 2016 EY Family Office Guide estimated there were at least 10,000 single family offices globally, at least half of which have been established in the last 15 years. With the rapid growth of private wealth in Asian countries, especially in Mainland China, wealthy families show increasing interests in setting up family office to professionalize their family structure and governance framework.
Why family office?
Depending on the specific family needs, the role and purpose of a family office may differ. It is important to balance between business growth and family legacy.
Primarily, a family office focuses on the management of family assets and personal financial matters. It also serves as a touchstone for family’s collective goals, interests, values and heritage. In addition, a family office can facilitate family business succession across four key dimensions:
- Legacy and value
- Transition of wealth
Apart from facilitating a smooth intergenerational transfer of wealth and reducing intrafamily disputes, there are other advantages of setting up a family office (see table below):
|Privacy and confidentiality||?Family office is the sole entity that keeps all the information for all family members, covering the entire portfolio of assets, activities, tax and general personal information.|
|Governance and management structure||Family office enables transparent handling of family affairs, ownership and investments.|
|Alignment of interests||Family office aligns interests between the business, advisors and the family.|
|Potential higher returns||Family office enables centralized and professional asset management. This can result in higher returns or reduced risk from investment activities.|
|Separation of family enterprise and family assets||Family office enables clear distinction between the underlying business and the family’s assets or other holdings.|
|Risk management||Family office enables decisions that are better aligned with the family’s objectives and values.|
|Centralization of services||Family office allows coordinated professional services to the family and its members.|
|Focal point for the family||Family office helps align the family members around areas of common interest, such as philanthropic activities or jointly held assets of the family.|
Evolution and form of the family office
Family office can be characterized as a family-owned organization that manages private wealth and other family affairs. As family wealth increases and business needs get more complex, the family office may evolve from a simple founder’s office into a complex, full-service company; the office could reverse over time as assets change or the family splits.
Family office’s leading services
Although at the heart of any family office is investment management, a fully developed family office can provide a number of other services, ranging from training and education to ensuring that best practice is followed in family governance.
The below diagram illustrates a full range of services of a mature family office in four categories and 12 types of services:
Outsourcing certain services can be beneficial from a cost efficient and know-how perspective. However, certain key services are usually kept in-house for confidentiality and independence of family. Although the make-or-buy decision is subject to the specific setup of the family office, the best practice is based on the objectives of obtaining the most effective services in an efficient way and avoiding potential operational risks. It is crucial to obtain the right balance between in-house and outsourcing services to meet the family expectations.
Why setting up a family office in Hong Kong
Hong Kong has the main attributes to serve as an effective hub for family offices in Asia. These advantages include:
- Hong Kong was ranked the second largest IPO market globally in 2020. Financial markets in Hong Kong are well established and sophisticated, offering a broad spectrum of financial instruments and products to accommodate the investment needs of family offices. The new regime on limited partnership fund and the tax incentive for carried interest would further promote the financial services sector in Hong Kong.
- The proximity of Hong Kong with the Mainland provides an investment gateway into and out of the mainland China. As China continues to move ahead with financial deregulation and opens its capital account, leading to diversification of wealth which potentially offers lucrative opportunities for the wealth management industry in Hong Kong.
- In 2019, 23% of Ultra-High-Net-Worth families in China were based in the Greater Bay Area (“GBA”)1. Among the GBA initiatives, the launch of Wealth Management Connect (i.e. a cross-boundary wealth management connect pilot scheme to promote the development and cross-boundary sales of wealth management products through banks in the region) is expected to further establish Hong Kong as a prominent offshore renminbi centre and create more investment opportunities for family offices in Hong Kong.
- There are highly skilled professionals in different sectors, such as legal, accounting, treasury, and asset management. Bilingual and multicultural environment helps to attract talents from across the world to support family ofﬁce operations.
- Hong Kong has a stable legal system with all the fundamental strengths such as independent judiciary, the rule of law and free flow of information and capital that strengthens Hong Kong’s position as a business destination and enhances its attractiveness of operating family office businesses.
- Hong Kong has no specific licensing regime for family offices unless it carries on a business in a regulated activity. In general, a single family office will not be required to obtain a license because it will only be providing asset management services to related entities and therefore qualifying the intra group carve out licensing exemption.
In September 2020, the Securities and Futures Commission of Hong Kong (“SFC”) issued the licensing guidelines for family offices:
1. A genuine single family office arrangement, established to serve the investment needs of members of a single family, which is not receiving any income or does not have a profit making objective, should not be considered as carrying on a business from a licensing perspective;
2. The sharing of office premises and administrative infrastructure by two or more family offices would not by itself automatically trigger a licensing obligation for such single family offices.
3. However, if two or more single family offices make arrangements for the sharing of human resources involved in investment related matters, research or the investment process, this may be regarded as a multi-family office structure, thus increasing the likelihood of a licensing obligation.
- The Hong Kong SAR government is supportive the establishment of family offices. In the 2021/22 Budget, the Financial Secretary announced that InvestHK2 and regulators will offer one-stop support services to family offices interested in establishing a presence in Hong Kong. The government is also committed to reviewing the relevant tax arrangements to enhance Hong Kong’s attractiveness as a hub for family offices.
- Under Hong Kong’s simple tax system, our taxation is based on a source concept. The profits tax rate is 16.5% for corporations while the two-tiered profits tax rates regime reduces the profits tax rate to 8.25% for the first $2 million assessable profits. Hong Kong has no GST, no tax on capital gains and dividend income. Besides, recent changes to tax legislations on the Unified Fund Exemption regime and carried interest tax concessions provide a more tax friendly framework for the funds and asset management industry in Hong Kong, and also help promote Hong Kong as an attractive platform for family offices.
Today, private family capital is estimated to be larger than private equity and venture capital combined. This concentration of family wealth is fueling the growth of family offices across Asia and just as Hong Kong athletes made history at the recent Tokyo Olympic Games, Hong Kong is well positioned to be a ‘gold’ standard hub for family offices.
Disclaimer: The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.
1 FOTILE-Hurun Wealth Report 2020