Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the Emerging Markets Spotlight, a podcast series from HSBC.
Speaker: The emerging markets landscape is more complex than ever at a time of divergent monetary policy, high commodity prices, supply chain disruptions, and geopolitical tensions.
Speaker: Join us as we speak with world's leading institutional investors, experts, policymakers, and thought leaders to explore the challenges and opportunities.
Speaker: Make sure you subscribe to HSBC Global Viewpoint and stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Hi.
Speaker: And welcome to Rise of the Family Office.
Speaker: I'm Catherine Quinn, Global Head of MSS Platforms for Wealth and Platform Client Strategy.
Speaker: And I'm delighted to be joined by my esteemed colleagues to discuss trends impacting the fascinating and fast growing family office industry.
Speaker: We have Caroline Katidis, Head of Ultra High Net Worth Clients for EMEA and the US.
Speaker: Caroline is responsible for developing HSBC private bank strategy and delivering the global wealth management offering to this client base.
Speaker: We have Jeremy Franks, also from HSBC Private Bank.
Speaker: Jeremy is Head of Wealth Planning and Advisory, EMEA, and he guides our clients through a wide range of considerations, from financial planning to philanthropy to family office structuring and governance.
Speaker: Lastly, we are joined by Patrick Bulmaham,
Speaker: Global Head of Wealth Sales for HSBC Markets and Security Services.
Speaker: Patrick leads our cross-asset institutional sales teams that service HSBC's wealth franchise and third-party wealth clients, from wealth managers to private banks to institutional family offices.
Speaker: Our panel will discuss a number of trends impacting family offices.
Speaker: With the rise in wealth both globally and in emerging markets, we are seeing exponential growth in Singapore and Hong Kong, with Hong Kong poised to become the world's largest centre for cross-border assets, a shift of historic proportions.
Speaker: As you may expect, the fastest region for growth and family office setup is Asia and me.
Speaker: Whilst Asia currently lags the US and Europe in family office assets, it's the fastest growing region with an expected 6% growth per annum.
Speaker: So why might a family consider setting up a family office?
Speaker: What are the key considerations?
Speaker: And what do we mean when we talk about the institutionalization of the family office, both from a structuring governance angle and investment considerations?
Speaker: I hope that today we can shine a light on a very private but fast growing section of the wealth industry.
Speaker: I will start with Caroline.
Speaker: Thank you, Caroline, for joining us today.
Speaker: Thank you, Catherine.
Speaker: Could I ask you to maybe set the stage and explain what a family office is and why someone would consider setting one up?
Speaker: Simply put, a family office is an organizational structure that manages the money, typically of one beneficial owner or the primary founder of the wealth.
Speaker: These are called single family offices.
Speaker: And I would say these are probably the more frequent types of family offices we tend to deal with.
Speaker: There are multifamily offices as well that tend to manage many, many families under one umbrella.
Speaker: But given our client base, we tend to focus on single family and single family wealth.
Speaker: So family offices are set up to manage the money on behalf of the family, as the name describes.
Speaker: But these wealth pools tend to be very large.
Speaker: What you tend to see happening is
Speaker: is family offices develop because an individual has grown a large pool of wealth and that wealth pool becomes so large that they go from having individual needs to more institutional-like needs.
Speaker: Now, depending on the size and needs of these families, the structure and setup will vary.
Speaker: But just to give you a sense, a family office tends to have a formal structure.
Speaker: They tend to have a governance structure.
Speaker: framework, but there's a constitution, there are guiding principles, there's a formal structure with entities, etc.
Speaker: But there's a governance framework that sets out
Speaker: all those sort of guiding principles of how the family wants to conduct this pool of wealth.
Speaker: Family offices could be single or multi-jurisdictional.
Speaker: So they could be located and set up in Hong Kong solely or Hong Kong, London, New York.
Speaker: Many of our clients have multi-jurisdictional setups.
Speaker: And again, that depends on where the family is, where they want to manage the wealth and where the expertise is.
Speaker: They tend to have a team of experts.
Speaker: This can range from one to 10 professionals.
Speaker: They can be investment specialists, accountants, lawyers, a COO, etc.
Speaker: Some of our families that are very, very large in terms of the wealth pool that they're managing could have over 100 employees in the family office.
Speaker: This isn't as frequent, but we have seen very, very large families set up, very sophisticated family offices.
Speaker: Now, to give you a sense of the size of these wealth pools,
Speaker: Typically, a family office will structure itself when they're about three to four hundred million in terms of capital that tends to go up to a billion.
Speaker: And many family offices that we work with have north of a billion in assets.
Speaker: But what is really interesting, I think, about the sub segment of ultra high net worth clients is that although these are large sums and they're being managed and allocated like an institution, the pool of capital is private capital.
Speaker: it's unconstrained capital.
Speaker: So there's typically no outside investors to report to other than the family and the members of the board.
Speaker: If there's a board, there are a few limitations set by their own guiding laws.
Speaker: And so if there is restrictions in the investments, again, it's set up internally.
Speaker: So they have the ability to take fast decisions, quick decisions, and move capital across the globe efficiently.
Speaker: There is no institutional
Speaker: hurdles that sometimes big money managers have to adhere to.
Speaker: And they can look at a wide array of investments.
Speaker: Many family offices invest in private equity, private assets.
Speaker: They're global in nature.
Speaker: And so the restrictions there don't exist as much as maybe a bigger institution would.
Speaker: What trends are you seeing impacting family offices at the moment?
Speaker: And maybe in reference to emerging markets, do you see regional and cultural nuances depending on where the family is coming from?
Speaker: Firstly, there's not one size that fits all.
Speaker: And we use the terminology that family offices are like snowflakes.
Speaker: No two are the same.
Speaker: They're really tailored to the beneficial owner and the family needs.
Speaker: So if you've seen one family office, you've seen one family office.
Speaker: Now, what we see about the trends of family offices globally is one, it's the fastest growing wealth segment.
Speaker: Okay.
Speaker: As a sub-segment of ultra high net worth, it's the fastest growing.
Speaker: Four out of 10 family offices globally have been created in the last decade, and this is growing at a 6% per annum.
Speaker: But if we compare East versus West, or let's say West being U.S. and Europe and East being the Middle East and Asia, the U.S. and Europe in terms of the West has a larger proportion of family offices.
Speaker: There's roughly 7,000 family offices.
Speaker: It is a more institutionalized market.
Speaker: Wealth has been created and passed down for generations and organizations are more institutionalized or sophisticated.
Speaker: If you look at the East, we're definitely seeing this trend increase.
Speaker: We're seeing this part of the market grow faster at about 8% per annum above the West.
Speaker: We have 1,600 family offices in the East today.
Speaker: So even though it's a smaller part of the overall family office universe, the trend is definitely increasing.
Speaker: Jeremy, given your role of really hand-holding clients through this, anything you would like to add on the trends that you're seeing now?
Speaker: So I think growth in satellite offices, an increasing focus on what I call legacy.
Speaker: So family offices are very much looking at what's the purpose of the wealth and that transition to the wealth, to the next generation and beyond.
Speaker: But there's definitely a focus around purpose, meaning, value and responsibility that comes with significant wealth and structuring to protect the family,
Speaker: from themselves and the wealth and making sure that the wealth is a force for good rather than the corrosive influence, particularly on the next gen.
Speaker: That's very interesting, Jeremy.
Speaker: Thank you.
Speaker: And it's interesting because sometimes we think about things from a market's point of view, but we don't think about the emotional attachment to the money, the legacy.
Speaker: And yeah, there's this idea that the families want to protect the future generations as well.
Speaker: Very often we see family run businesses, enterprises, et cetera, that then take a step to develop their own family office.
Speaker: And this is maybe a natural evolution of a very successful large corporate or large enterprise.
Speaker: So in your experience, how do you normally see that evolution happening?
Speaker: Yeah, this, I would say, is quite a theme in the Middle Eastern Asia.
Speaker: You have a lot of welfare.
Speaker: You have families who are really running those businesses from the patriarch or matriarchs perspective.
Speaker: And what we've seen, especially with the larger families, is they are slowly starting to separate the corporate sort of wealth and the family wealth into two separate buckets.
Speaker: It is a slow process.
Speaker: I think, as Jeremy mentioned, it's an emotional one because it's very much a business or a set of businesses that the family has created and the patriarch or matric have created.
Speaker: And so the reins are still very tight.
Speaker: But what's really important is that we are starting to see that transition happen.
Speaker: We're starting to see these structures being set up and we're starting to see these reins being given to the next gen,
Speaker: whether it's next gen because they're part of the business or they're running a portfolio of companies or a combination of family office experts with the next gen.
Speaker: So it's definitely a development.
Speaker: But what's really key is setting up these structures for succession planning is so important to remove any ambiguity and to sort of minimize the emotion that comes around some of these challenges.
Speaker: And it's interesting because we've heard the phrase institutionalization a few times.
Speaker: That does seem to be the key word associated when we talk about family office trends right now.
Speaker: Jeremy, what does this actually mean?
Speaker: Great question.
Speaker: It's a process.
Speaker: It's a transition of...
Speaker: moving from, let's say, a family business, which also deals with the broader family's wealth, to a more professional setup.
Speaker: It's that transition, that journey to making it more formal, where there's more professional modus operandi, whereby almost approaching the wealth and the family's wealth and the family's affairs from a highly professional perspective.
Speaker: Now, that comes with
Speaker: Significant challenge, I would say, because obviously, there's significant cost involved.
Speaker: And also, probably the biggest challenge I would suggest, certainly with a lot of the clients I've worked with over the years, has been the impact on how they operate day to day.
Speaker: When there's more formality and more rules and checks and balances in place,
Speaker: it's not always palatable to all key stakeholders and decision makers.
Speaker: Often one of the reasons why a significant factor in the wealth generation and accumulation has been the entrepreneurial flair of the matriarch, the patriarch,
Speaker: And when they start to get tied up in lots of formal governance and policies and procedures, that can be a challenge, not an insurmountable challenge, but can be a challenge.
Speaker: And what we try and do is work with our clients along that journey so that it is as smooth as possible whilst focusing on the key objectives.
Speaker: These families run a
Speaker: potentially run incredibly successful businesses.
Speaker: Do they have the time actually to sit and consider everything and structure this?
Speaker: One of the biggest factors is getting the right team around the family.
Speaker: Because to your point, yes, they may be cash rich, asset rich, but time poor.
Speaker: And that actually is the biggest challenge.
Speaker: One of the positives from the challenging two or three years we've had with the pandemic has been actually that in some instances, and not in all instances, but in some instances, it has provided an opportunity for many wealth creators to take a step back for a moment and think, well, actually, I'll ask themselves a number of questions.
Speaker: What happens if I'm no longer around temporarily or permanently?
Speaker: What happens
Speaker: if the business is blown off course by an unforeseen event.
Speaker: So to protect the family going forward.
Speaker: So that has been a big driver.
Speaker: And so we work very closely with our trust companies across the globe.
Speaker: And we've certainly seen a significant increase in demand for structures that facilitate that separation.
Speaker: And I think that's a really key point.
Speaker: It can take away anything from today.
Speaker: I'd say that's probably one of the key points that the need to separate out the family silver from the family business to avoid that contagion risk.
Speaker: And I'm going to we are going to talk about the institutionalization of the portfolio.
Speaker: But Patrick, from a market point of view, you know, what are you saying with that flexible capital that really needs to diversify away from having all its eggs in one basket, so to speak, with the family business?
Speaker: Thanks, Catherine.
Speaker: Wealth is growing at a really fast pace and particularly in emerging markets.
Speaker: Naturally, the needs of the clients within that segment are also growing at a fast pace and specifically family offices.
Speaker: They are becoming more sophisticated and institutionalized.
Speaker: The first part is for us to partner up and to work with the colleagues on the private banking side but also on the corporate side to provide those customized services.
Speaker: within the markets and security services platform when it comes to more sophisticated trading and execution.
Speaker: Those needs will range from a variety of services and products.
Speaker: So they might come to us just for simple market color or guidance on institutional flows.
Speaker: They might come to us with requests around more high-touch algorithmic or electronic execution solutions for the securities business.
Speaker: They might come to us for market access solutions, financing or repo products.
Speaker: They can also have, when they start looking at their portfolios that are evolving and that become more sophisticated, they also start thinking about integrating hedging solutions and potentially also shorting solutions in certain markets to offset some of the risks.
Speaker: And some of them are running in-house trading strategies and they come to us and they require access to our prime services platforms, very similar to what a hedge fund would require.
Speaker: They can also come to us to access some of the unique risk transformation opportunities that arise from our business.
Speaker: This is also something unique that we can provide to this client segment.
Speaker: Thank you, Patrick.
Speaker: From a geographical standpoint, would a family office normally start in their own country?
Speaker: What are they thinking about in that aspect?
Speaker: There's a whole host of factors which vary in importance depending upon their particular objectives, but it ranges from the regulatory environment, political and economic stability, tax regime, immigration, lifestyle.
Speaker: So lifestyle, great example of why a lot of family offices are setting up in London, particularly with next gens who want to
Speaker: perhaps send their children to school in the UK.
Speaker: We've seen that more and more.
Speaker: Tax regime, I think that's one of the reasons why, and political and economic stability, I think that's one of the reasons why Singapore's done particularly well.
Speaker: And what the objectives may have been at the outset may have evolved significantly, particularly as the decision makers change.
Speaker: I would just add two things to what Chameza.
Speaker: Depending on the setup of the family office, the need for talent might sit in London, it might sit in Geneva, it might sit in New York, etc., Singapore, Hong Kong, or where have you.
Speaker: The second is, depending on the style of investment of the family office, the needs to have someone sitting in the UK to trade European and Asian market hours
Speaker: or someone sitting in New York to trade the US market hours, certainly comes up.
Speaker: So depending on the style of which the family is driving the investment portfolio will depend on where they might have people sit and expertise sit in order to manage those types of investments.
Speaker: I would say we probably, I probably haven't seen in quite some time, a family office set up where there's only one location.
Speaker: Most family offices
Speaker: either have multiple locations and or we say family offices that transition.
Speaker: Thank you.
Speaker: That's really helpful.
Speaker: Now, how have geopolitical events affected family offices, whether it's been COVID or Brexit, the war in the Ukraine or China-US relations?
Speaker: How can your team or how can we help families mitigate this geopolitical risk that they face?
Speaker: We've had clients who all of a sudden their revenue has gone from
Speaker: several hundred million to zero overnight.
Speaker: And so it very much challenged people's assumptions.
Speaker: And many of our clients have used that positively to revisit their structures, their approach, what they want out of life.
Speaker: I mean, we spend an awful lot of time, rightly so, on finances, but actually just some of the softer issues.
Speaker: What's the purpose of the wealth?
Speaker: What are they trying to achieve?
Speaker: What do they want their legacy to be?
Speaker: And so
Speaker: To your point, what we try and do is we work with our clients, try and see where they need help.
Speaker: No one size fits all.
Speaker: There's no family offices the same.
Speaker: There's always different family dynamics.
Speaker: But there are certain themes.
Speaker: There's predictable confidence.
Speaker: Is there a change in investment intention or dynamic or the type of investments the next gen are looking at?
Speaker: You know, this idea that we're getting a younger generation starting to come up to run family office money, etc.
Speaker: How has that maybe changed?
Speaker: The next generation is quite hands-on when it comes to the family office and when it comes to investments.
Speaker: And they very often traveled and done studies in finance.
Speaker: They very much understand the investment world.
Speaker: And when they come back, they don't necessarily want to go back to that family business.
Speaker: There has been a shift.
Speaker: From the credit side towards cash, that was a result of the China property meltdown.
Speaker: And there is very much a logic of preservation.
Speaker: And clients have been on the sidelines watching a bit the cycle.
Speaker: Obviously, we've been hit by inflation and rates going up.
Speaker: Typically, very much looking for cash enhancement solutions or yield enhancement solutions.
Speaker: So we've been able to trade very recently what we call a TRS-backed
Speaker: where we basically look to provide off-balance sheet financing to a financial sponsor on one hand, and where we repackage a note that is secured by an asset to a family office investor on the other hand.
Speaker: And obviously, that investment offers a yield pay.
Speaker: up compared to an HSBC senior unsecured debt.
Speaker: And that very much answers and takes the box of family offices that are looking for yield enhancement opportunities as of today.
Speaker: When do we get to the stage where your client base then needs to access markets?
Speaker: So they want to try to find ways to pick up or to get higher yield on their investment versus what they're seeing in the broader market.
Speaker: So the team comes up with a solution.
Speaker: As we work with family offices, it's not as though you walk into Tesco and you pick a bottle of milk off of the shelf and you just deliver it over.
Speaker: I mean, it's very much a customized solution.
Speaker: and ideas that we're working on that are bespoke.
Speaker: We really try to deliver all of HSBC to our clients.
Speaker: And I know that might seem, okay, a bit kitschy, but what I mean by that is, you know, we're really one bank.
Speaker: We're a big bank that has lots of positives.
Speaker: But I think what really makes that sort of uniqueness key is that we have very specific teams set up across the globe within global markets and banking, within the private bank,
Speaker: With the sophistication of our clients, and you've talked about some interesting ideas that we have worked with family office clients on, the next generation really cares.
Speaker: They're looking towards social impact investing.
Speaker: They're looking towards ESG products, etc.
Speaker: Is that also something that you are connected with clients on?
Speaker: What can we do in that area?
Speaker: We can do quite a bit in that area and we're connected obviously with the wealth segment, with different products and solutions that can be simple solutions on the credit side, on the loan side that we can potentially offer to some of those clients when it comes to also offering some quantitative investment strategies that reference
Speaker: ESG or that have an ESG tail.
Speaker: This is also quite something that family offices are very much keen to look at.
Speaker: In our structured solutions business, we have green structured products wrapper that we can offer to clients and where the proceeds are actually leveraged for impact projects following very specific investment guidelines.
Speaker: At a group level, this is clearly something that is extremely relevant and will continue to be very relevant.
Speaker: for clients globally, but we're seeing that that trend also accelerates substantially in Asia and where particularly family offices, we mentioned philanthropy earlier,
Speaker: We have various customized portfolios, so we can offer a range of solutions, whether it's on the public market side in terms of equity portfolios built around proper ESG approach or on the private investment side.
Speaker: So I guess it's a combination of both.
Speaker: I think we have the ability and the range of offering publicly, privately, and then obviously in terms of markets and trading.
Speaker: Thank you, Carolyn.
Speaker: How are family offices considering digital assets?
Speaker: And what about trends and tokenization?
Speaker: Maybe I'll kick off very briefly.
Speaker: Obviously, digital assets have been forefront of the investment scene over the last two years.
Speaker: And clearly, family offices are asking themselves about how to build an allocation when it comes to digital assets.
Speaker: How also to build an allocation when it comes to the digital assets in environment and also some of the aspects around digital assets and not necessarily only digital assets.
Speaker: Clearly, we're looking to support clients in that journey.
Speaker: Obviously, we need to operate also within HSBC's risk appetite and guidelines.
Speaker: Yeah, I would say, look, it's a trend that we're seeing.
Speaker: I wouldn't say that it's the number one on the list, but it's definitely an area that people want to learn more about.
Speaker: They want to understand what they can be doing in this space.
Speaker: I think that you have
Speaker: less regulation around these types of products today.
Speaker: And so I think as you see more regulation come into play, I think you'll start to see investors a bit more comfortable stepping in.
Speaker: But we definitely have seen clients inquiring and putting more brainpower around that.
Speaker: Which jurisdictions do you believe are family office friendly and will be in the long term?
Speaker: Depends on what the objectives are, as I mentioned earlier, but I certainly think Singapore has made a very significant effort.
Speaker: to attract family offices and with some significant success in recent years.
Speaker: I think there's, as I mentioned, a very stable political and economic environment.
Speaker: There's a top rate of tax, I believe, at 22%, corporation tax, I think 17%.
Speaker: And there's also significant talent in the region.
Speaker: I think Singapore certainly won, London's another, New York.
Speaker: As Caroline mentioned before, I think what we're seeing is many...
Speaker: Many of the family offices we're working with in more than one jurisdiction.
Speaker: I also expect the Middle East, in particular the IFC, to make more of a play in this area.
Speaker: I know there was an announcement recently where they're trying to attract effectively ultra high net worth families.
Speaker: Where do you see family office industry evolving in emerging markets?
Speaker: Any big trends on the horizon in the next 10 years?
Speaker: But from an investment perspective, family offices now want to separate the silver, as mentioned earlier, from the business, but they also want to make sure that they diversify their investments and their portfolios, right?
Speaker: And which means they will very much diversify their investments across the different regions in the world and ensure that they have a more balanced approach towards investments in portfolios and not very much skewed towards one investment type.
Speaker: That's clearly one of the trends that we will be seeing.
Speaker: Off the back of that, it's expanding that investment exposure.
Speaker: And so kind of not being so dedicated to the region, but making sure there's a well-rounded global element to the investment style.
Speaker: As we can see, depending on the market, we have lots of issues with inflation and interest rates.
Speaker: What tools and platforms are available for family offices at HHSBC?
Speaker: The first is a whole group of experts, family office specialists, solutions group specialists, investment specialists, and relationship managers.
Speaker: And all of those people are really, we call sort of the SWOT team, as one would say.
Speaker: say, around the family.
Speaker: And it's really to give the family all the access they need, which is number one.
Speaker: The second one is from an investment perspective, we have tools, analytical tools, risk management tools that we provide clients to look at their portfolio, risk assess their portfolio, do shock analysis and lots of fun things, but to really try to give them those tools to manage.
Speaker: And then the third, depending on
Speaker: client needs is we have a pretty developed global custody business.
Speaker: And so we're able to then provide reporting and really roll that all up into one nice package for a client.
Speaker: The global custody is one of the services that we offer.
Speaker: But again, the more they become sophisticated, the more the investment needs a growth, the more they will require access to our electronic platforms, our electronic execution platforms towards our prime services platforms, if they're running in-house trading strategies, all the tools that are available to
Speaker: institutional client may become relevant to family offices depending on what type of strategies those family offices are running and in which direction they want to head towards.
Speaker: Thank you, Patrick.
Speaker: And thank you to my panelists for sharing your expertise and time.
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
Speaker: We hope you enjoy the discussion.
Speaker: HSBC is uniquely positioned to connect investors and corporates internationally.
Speaker: To learn more about anything you heard today, visit gbm.hsbc.com or contact your HSBC representative.
Speaker: Make sure you subscribe to HSBC Global Viewpoint and stay up to date with new episodes.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
