This article first appeared in Forum, The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

In the 21st century, global wealth has experienced remarkable growth, fuelled by an extended period of historically low interest rates across major economies. From the period of 2008 to 2022, the world enjoyed continued growth in private wealth. According to the UBS Global Wealth Report 2023, only last year did global household wealth mark a decline, at a rate of 2.4% to US$454.4 trillion. This was mostly due to the fall in financial asset valuation, some of which was due to the negative impact the strong US dollar had on non-dollar wealth owners.

However, because wealth loss also hits the rich more, inequality moderated somewhat in 2022, with the global top 1% share of total wealth normalising to pre-­pandemic levels of around 44.5%. Overall, global wealth inequality has decreased this century due to the rise of the emerging economies, but within each country, inequality has tended to deteriorate.

UBS wealth managers still expect wealth growth to continue. By 2027, the number of individuals with wealth exceeding US$50 million (RM238 million) is projected to reach 372,000, representing a 50% increase over a five-year period. Asia, particularly China, will contribute significantly to this growth, surpassing the number of ultra-wealthy individuals in the whole of Europe.

One fascinating trend to emerge from this is the rise of family offices, wealth management vehicles dedicated to the financial affairs of affluent families. PwC identified 6,288 family offices operating in 2022, of which 60% were only established from 2000 onwards. Family offices exist to safeguard multigenerational wealth, with the oldest family office still around today tracing its founding to 1865. The median assets under management (AUM) ranges from US$200 million to US$2.1 billion, with Asia-Pacific offices on the high end of that scale, whereas family offices in the Americas had median assets of US$1.3 billion.

Family offices have also evolved from being financial arms of traditional family businesses to handling increasingly complex services demanded by high-net-worth persons. The largest fund managers and banking groups have had to expand their offerings to family offices, advising them on issues of family governance, legacy planning, philanthropy and bespoke investment capabilities. Family offices are big attractions for governments too, with Hong Kong introducing a bevy of policies to entice family offices to domicile there, by combining investment migration schemes with tax concessions and dedicated art storage facilities. That led to Singapore, long a hub for family offices, tweaking its tax offerings in July this year.

Modern family offices are making their presence felt in financial markets too. A Goldman Sachs survey of selected family offices suggested that more than half have hired in-house investment teams, while another 39% had a hybrid model using a combination of external and internal experts. The advantages are obvious. Small in-house teams are lean, making it easy to “cut the red tape” when it comes to making investments. This means that many can make quick decisions on investment deals in private equity or alternative assets.

Another structural advantage of family offices is that many founders come from industrial, tech or real estate sectors where they have considerable domain expertise. Their presence will also help the consolidation of industries and supply chains because the founders have more experience than many investment bankers in these fields. Thus, Goldman Sachs had noted that family offices had interest in acquiring operating businesses. The long-term outlook associated with family offices may make them welcome investors in many regards, no less for viable family businesses run by ageing patriarchs without clear succession that are common in Asia. Family offices also form collaborative and trusted networks for sourcing investment opportunities. Club deals allow family offices to pool expertise, infrastructure and capital.

Under threat from increased geopolitical risks and uncertainties, it will be the domain specialists who combine market understanding and local government relations to survive the decoupling of global supply chains. With larger pools of capital concentrated in family offices, these can represent a major change in the institutional structure of global markets. While the true asset size of all family offices is not reliably known, we can venture the sum linked to the sum of the wealth of billionaires worldwide, which various estimates have indicated to be between US$12 trillion and US$80 trillion, depending on the value of their ownership of hard assets as well as financial assets. At US$12 trillion, family offices would have the same clout in public markets as global sovereign wealth funds and hold assets comparable to about one quarter of those owned by global central banks.

Because family offices are willing to hold a long investment horizon and seek alpha (extraordinary high returns, with also high risks), it is likely that their knowledge of markets and politics will serve them well.

So far, surveys of family offices ranked inflation, interest rates and US and China relations as their top short-term concerns. However, it is striking that they also appeared unanimously optimistic, with over half of respondents expecting annualised returns of over 10% and negligible negative returns over the forecast period up until June 2024. That contrasts with large fund managers who are more pessimistic over the short term.

Finally, family offices are in a prized position to influence the direction of markets, public and private. Thus, it matters a lot to follow not just what global fund managers like BlackRock are doing, but watching how family offices manage their portfolio to obtain clues as to where the “smart money” is going. In a world of grave uncertainty, they may help shed some light on the risks.

Tan Sri Andrew Sheng writes on global issues that affect investors. Tan Yi Kai is a Malaysian multi-asset trader based in Hong Kong.

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