The Growthof the
Global PrivateWealth Sector
IFOAInternational Family Office Association
“Riches…very seldom remain long in the same family.”- Adam Smith
IFOAInternational Family Office Association 3The Growth of the Global Private Wealth Sector
When does an ultra high net worth (UHNW) individual become a Family Office?
What is a Family Office?
How many millionaires are there in the world? How many billionaires?
Where do they reside?
With no apparent central or regional source of such information, where do
potential family office stakeholders, advisers, asset consultants and investment
professionals turn? What do they need to know about this sector? How do they
benchmark or rely on word of mouth information? How do wealthy individuals
access independent advice on Family Office establishment and management?
To whom can such people turn to with conviction in Australasia or globally?
How do Family Office advisors differentiate themselves? What is the future for this
sector? How do investment professionals learn what their clients require of them?
We think the answer lies in the formation of the not-for-profit International
Family Office Association – IFOA Ltd.
We will come back to this thought, however, let us start at the beginning and
discuss the overview of global wealth, the current state of play of this sector
and define what the Family Office aims to be and from where this term derives.
The issue today is that the number of millionaires is growing so rapidly that
soon a million will not be the traditional hurdle of wealth assessment it once was.
For example, from 1983 – 2004 the population in USA grew by 30% however
those with net worth of USD$1m grew 168%, those with USD$5m net worth
grew 353% and those with net worth above USD$10m grew 410%.i
The concept of the Family Office began a long time ago. Below is an extract from the
Wharton Global Family Office Alliance – ‘Single Family Offices: Private Wealth Management in the Family Context’ – which provides some valuable background.
IFOAInternational Family Office Association 4
The single family office (SFO) has a deep rooted history, beginning in ancient Rome, spreading steadily across continents and over many centuries. The role of the SFO arose early in the form of the administrator of a wealthy single family household, the major ‘domus’, in ancient Rome (head of the house), later known as the ‘major-domo’ (chief steward) during the Middle Ages. While the exact structure of the SFO and its particular practices continues to evolve over theyears, it is clear that the need for the SFO - for managing wealth, the family business and internal family matters simultaneously - is even more prudent in today’s complex world than it was, say, in the mid 18th century when European families handed their wealth down to future generations by way of the ‘fideicomiss’, which essentially prevented the sale or division of a family’s core assets over the generations and was abolished throughout Europe during the first quarter of the 20th century. These same benefits were granted in England and Wales through the use of trusts.
With the spread of the European private bank model to the New World in the 18th century, the evolution of the modern SFO began to take shape. According to Gray (2005), “In 1853, the first trust company was formed to help entrepreneurs execute financial transactions and manage their wealth. To this point, the only trustees had been individuals. Creating a financial institution to handle trust and banking functions for the early business barons was an innovative, prescient idea.” The need for the preservation of wealth remained.
With the Industrial Revolution came the expansion of the role of the bank trust officer. He became increasingly entrusted with the responsibilities of protecting the assets of certain wealthy, nuclear families. Until this point, the SFO had remained basic, serving the financial needs of only one generation. But the Industrial Revolution marked the beginning of the truly individualized and separate SFO as ever-increasing wealth levels signaled a need for wealth preservation across multiple generations - essentially outgrowing the current managementstructure of the time. Trust duties had become just one aspect of managing the wealth of the operating business as well as the family’s personal and financial dealings.
At the start of the 20th century entrepreneurs suddenly found themselves in executive positions of budding corporations, spawned from the Industrial Revolution. Entrepreneurs were managing their growing businesses and, at the same time, starting new businesses and investing in different businesses altogether. This trend enabled entrepreneurs to diversify their holdings, creating liquidity in the burgeoning market (Gray 2005). Now, entrepreneurs were burdened with the difficult task of operating their businesses while concurrently managing their mounting wealth. Complicating matters even further, entrepreneurs´ children were now entering adulthood. As inheritors of their parents´ wealth, it was now their duty to grow the family’s wealth and maintain business endeavors. Responsibilities began to multiply as the family wealth began to encompass more relatives and an ever-expanding desire for more sophisticated wealth management and even concierge services.
The evolution of the family office;
The Growth of the Global Private Wealth Sector
7
8
9
10
10
28
25
24
22
22
Turkey
Hong Kong SAR, China
Canada
Japan
Indonesia
Worldwide top 10 Nations of Billionaires
1
2
3
4
5
6
403
128
69
62
53
29
Rank Nation Number of billionaires
United States
China
India
Russia
Germany
United Kingdom
Asia Nations
1
4
3
9
5
18
11
Rank Nation Number of billionaires
1
2
3
4
5
6
18
Taiwan
South Korea
Malaysia
Philippines
Singapore
Thailand
Pakistan
IFOAInternational Family Office Association 5
Where are Global Billionairesii
The Growth of the Global Private Wealth Sector
“May all your children have wealthy parents.”- Irish Proverb
Where are Global Billionaires cont.
Oceana Nations
1
2
11
3
Rank Nation Number of billionaires
Australia
New Zealand
IFOAInternational Family Office Association 6The Growth of the Global Private Wealth Sector
The World Wealth Report is a report on individuals with a net worth of at least
$1.0 million in all assets except their primary residence.
World Wealth Report 2010 - The 14th annual World Wealth Report from Merrill
Lynch/Capgemini finds the World’s High Net Worth (HNW) population growing to 10
million with their assets rising to $39.0 trillion.
Number of millionaires and ultra-millionaires (more than USD$30M)
MIllionaires
Number of Millionaires in the Worldiii
IFOAInternational Family Office Association 7The Growth of the Global Private Wealth Sector
HNWIs (more than USD $1.0 million)
0.15%
0.62%
0.41%
0.10%
0.06%
0.07%
0.01%
Region Number (2009) % of regional population (2006)
Global
North America
Europe
Middle East
Asia-Pacific
Latin America
Africa
10,000,000
3,100,000
2,900,000
400,000
3,000,000
400,000
100,000
Roughly 1.0% of high net worth individuals (HNWIs) can also correctly be identified
as ultra-high-net-worth individuals (ultra-HNWIs), those who reside in households
with a net worth or wealth of USD $30 million or more.
There are approximately 95,000 ultra-HNWIs in the world with 61,600 or 64.8%
residing in the United States and Europe.
Millionaires cont.
UHNWIs (more than USD$30 million)
0.001%
0.007%
0.003%
0.005%
0.0004%
0.002%
0.00002
0.01%%
Global
North America
Europe
Middle East
Asia-Pacific
Latin America
Africa
93,100
36,300
20,700
3,600
19,600
10,700
2,000
IFOAInternational Family Office Association 8The Growth of the Global Private Wealth Sector
Region Number (2009) % of regional population (2006)
Number of millionaires and ultra-millionaires (more than USD$30M) cont.
The S&P 500 stock index has lost over half its value since the stock market peaked in
October 2007, wiping billions from savings, while wealthy households also saw declines
in the value of other assets such as property.
From the housing market peak in the second quarter of 2006, home prices have
plummeted 26.7 % through December, according to Standard & Poor's/Case-Shiller
home price index.
The number of U.S. households with a net worth over $5 million, again not including
first homes, fell by 28 % to 840,000.
According to the World Wealth Report 2010, the number of millionaires in Asia Pacific
(Asia minus the Middle East) surpassed Europe’s for the first time in 2009.
Millionaires cont.
-
1
2
3
4
5
6
7
8
9
10
11
12
13
10,000,000
2,886,200
1,650,000
861,500
477,400
448,100
383,000
251,300
222,000
179,000
173,600
146,700
143,000
139,835
Rank Nation Number of millionaires
World
United States
Japan
Germany
China
UK
France
Canada
Switzerland
Italy
Australia
Brazil
Spain
India
IFOAInternational Family Office Association 9The Growth of the Global Private Wealth Sector
Number of millionaires by Nation
Millionaires cont.
Number of millionaires by Nation cont.
IFOAInternational Family Office Association 10The Growth of the Global Private Wealth Sector
• The Asia-Pacific HNWI population rose 25.8% overall to 3.0 million, catching up
with Europe for the first time.
• The Asia-Pacific region was home to eight of the world's ten fastest-growing HNWI
populations, led by Hong Kong (104.4%) and India (50.9%).
• Asia-Pacific HNWI wealth surged 30.9% to $9.7 trillion, more than erasing 2008
losses and surpassing the $9.5 trillion in wealth held by Europe's HNWIs in 2009.
• HNWIs in Asia-Pacific excluding Japan have the world's highest allocation to real
estate investment overall, and to residential real estate in particular (60% of all
real-estate investments).
• In China, real GDP growth slowed somewhat in 2009, but was still robust at 8.7%,
down from 9.6% in 2008.
• In India, real GDP growth increased to 6.8% in 2009 from 6.1% in 2008.
• Market capitalization in India and China almost doubled in 2009 (growing 102.9%
and 100.9% respectively), heavily boosting the size and wealth of the HNWI
population in the region.
Extracts from a recent online article by Travis Teo on Channel NewsAsia, sums up the
likely rapid rate of growth in wealth in Asiaiv -
“Personal wealth in Asia Pacific has grown at a much faster rate compared to the global average. Wealth in the region grew between 100 and 400 % in the last 10 years, compared to the average global rate of 42 %, according to the first Global Wealth Report by the Credit Suisse Research Institute, released October 2010. The Credit Suisse report aims to provide insight for investors going into different markets, using a methodology which calculates total
IFOAInternational Family Office Association 11The Growth of the Global Private Wealth Sector
Millionaires cont.
Number of millionaires by Nation cont.
wealth by looking at fixed assets and bankable assets, including properties, equities and cash.
Asia Pacific markets have been bullish since recovering from the recent financial crisis. And Credit Suisse says the region's strong economy has led to rising income levels, which means a wealthier population.
Joseph Tan, director and Asian chief economist, Credit Suisse, said:
China is one of the countries with the fastest growth in personal wealth. Credit Suisse expects the country to double its current household wealth of US$16.5 trillion by 2015, surpassing Japan's household wealth.
Wealth in India and the Asia-Pacific region is growing faster than that of developedeconomies in line with their higher growth rates.
According to the Global Wealth Report, India's total wealth tripled to $3.5 trillion over the last decade against the global growth rate of 72 % at $195 trillion.
India, however, has a long way to go as its total wealth is far behind that of the US ($54.6 trillion), Japan ($21.0 trillion) and China ($16.5 trillion).
However, while several Indians may top the world's rich list, wealth in India is distributed very disproportionately and only 0.4 % of the total adult population owns more than $100,000 on an average, the report said.
Going forward, total global wealth is projectedto grow by 61 % to hit an accumulated US$315 trillion by 2015.
Within Asia Pacific, Australians are the richest - with an average wealth per individual of nearly US$321,000. This is followed by Singaporeans, with some US$255,000 in individual wealth. These are the only two Asia Pacific countries that made it to the top 10 list in the study”.
"On a much longer-term structural basis, one key reason why Asian growth ... (is) leading to Asian wealth accumulation is because the demographics are highly favourable for Asia - we have a lot more younger people out here in Asia."
IFOAInternational Family Office Association 12The Growth of the Global Private Wealth Sector
State of World’s Wealth
The world’s population of high net worth individuals (HNWIs) grew 17.1% to
10.0 million in 2009.
The world’s population of high net worth individuals (HNWIs) returned to 10 million
in 2009, increasing by 17.1% over 2008. HNWI financial wealth increased 18.9%
from 2008 levels to $39 trillion.
After losing 24.0% in 2008, Ultra-HNWIs saw wealth rebound 21.5% in 2009.
Ultra-HNWIs increased their wealth by 21.5% in 2009.
In terms of the total Global HNWI population remains highly concentrated with the
U.S., Japan and Germany accounting for 53.5% of the world’s HNWI population,
down slightly from 2008.
In regional and country trends:
• After losing the least in 2008, Latin America HNWI wealth surpassed the
2007 levels.
• Countries from Asia-Pacific region have higher growth rates than other regions.
• HNWI population in Hong Kong and India increased significantly in 2009, after
witnessing the largest drops in HNWI population during the financial crisis.
• Australia moved back up to 10th position by overtaking Brazil in HNWI
population country ranking.
State of World’s Wealth cont.
IFOAInternational Family Office Association 13The Growth of the Global Private Wealth Sector
HNWI Population, 2006 - 2009 (by Region)N
umbe
r of
HN
WIs
Wor
ldw
ide
(in m
illio
n)
CAGR 2006 - 2008 Annual Growth 2008 - 2009 17.1%-5.0%
% Change Total HNWI Population 2008 - 2009
Africa
Middle East
Latin America
Asia-Pacific
Europe
North America
13.2%
7.1%
8.3%
25.8%
12.5%
16.6%
(Million)
2.4
2.6
2.7
2.8
3.1
3.3
3.0
3.0
3.1
2.6
3.0
3.2
0.10.40.50.1
0.40.4
0.10.40.4
0.10.30.4
10
8
6
4
2
02006 2007 2008 2009
Note: Chart numbers may not add up due to rounding.Source: Capgemini Lorenz surve analysis, 2010
IFOAInternational Family Office Association 14The Growth of the Global Private Wealth Sector
“The best way to own common stock is through an index fund.”- Warren Buffet
As fears of the financial crisis eased, HNWI investors favoured predictable returns and
cash flow, as evidenced by the rise in HNWI allocations to fixed-income instruments, to
31% from 29%. Equity holdings also rose to 29% from 25%, as the world’s stock markets
recovered. Cash holdings declined slightly. HNWIs from Latin America and Japan remained
the most conservative, with HWNIs in each region holding 52% of their aggregate
portfolios in either cash/deposits or fixed-income, despite surging equities prices.
Residential real estate investments regained appeal in 2009 as HNWIs showed a
preference for tangible assets and sought to capture some bargains as real estate
prices slumped. The Report shows the share dedicated to residential real estate
rose to 48% from 45% as prices recovered across the globe. Commercial real
estate holdings fell slightly to 27% from 28% as the sector experienced falling
rental incomes, weak demand and increased supply.
Overall, HNWIs had proportionally more invested outside their home regions by the
end of 2009 than they had in 2008. This shift countered a widespread trend toward
asset repatriation to home regions during the crisis. The decline in home-region
investments was most marked in Europe, where such holdings dropped to 59% of
overall portfolios from 65% in 2008. Among Latin American HNWIs, by contrast,
home-region allocations were up 3% to 47%. Generally, HNWIs’ allocations to
emerging markets rose overall, and to Asia-Pacific in particular, as investments flowed
to regions and markets expected to have the most growth in the coming years.
“You need to be in the Top 10% of hedge funds to succeed.”- David Swensen, CIO Yale University Endowment
Asset Allocation of High Net Worth individuals - (HNWI)
IFOAInternational Family Office Association 15The Growth of the Global Private Wealth Sector
Breakdown of HNWI Financial Assets, 2006 - 2011F
Asset Allocation of High Net Worth individuals - (HNWI) cont.
(%)
Alternative Investmentsa
Real Estateb
Cash / Deposits
Fixed Income
Equities
21%
31%
10%
24%
14%
100
75
50
25
02006 2007 2008 2009 2011F
a Includes Structured products, hedge funds, derivative, foreign currency, commmodities, private equity, venture capital.b Comprises commercial real estate, real estate investment trusts (REITs), residential real estate (excluding primary residences), undeveloped property, farmland and other.Source: Capgemini Merril Lynch Finiancial Advisor Surveys 2007, 2008, 2009, 2010
8%
14%
13%
31%
35%
6%
18%
17%
29%
25%
7%
18%
21%
31%
29%
27%
33%
9%
14%
17%
IFOAInternational Family Office Association 16The Growth of the Global Private Wealth Sector
Family Offices and the Future
“Govern a family as you would cook a small fish – very gently.”- Chinese Proverb
A Single Family Office (SFO) is a professional organisation, owned and controlled
by a single wealthy family, dedicated to managing the personal and financial
affairs of family members.
In addition to investment management services, SFOs’ activities often include a
range of financial, accounting, legal, educational and personal services which are
dedicated and tailored to the exclusive needs of family members. SFOs vary substantially
in the scope of activities, in the Assets Under Management (AUM), in the activities
that are carried out in-house versus those that are outsourced and in other aspects.
Given the highly confidential, private nature of SFOs, there has not been a reliable
and robust source of information that relates SFO performance to a broad range
of SFO practices including governance, documentation, investment management
processes, communication, human resources issues, education, succession
planning and technology.
Currently the Family Office sector does not have consistent services or standards
among advisory firms nor is there much in the way of centralized information on
the topic. This is why we are establishing the International Family Office Association
– IFOA – an online global resource.
This information and collaboration hub will have online Q&A-style blogs for members
to communicate with each other. As the association grows content and webinars
hosted by sponsors and targeted for the Family Office sector, it will provide a
central location for information and knowledge on this area to be shared, globally.
We are keen to draw together all groups that demonstrate an interest in this growing
sector and to consolidate thinking and research on this topic.
We also will provide access to professionals who really understand the issues of
running a family office; not only the investments but also the needs of the family;
IFOAInternational Family Office Association 17The Growth of the Global Private Wealth Sector
The International Family Office Association (IFOA) is a not for profit organisation that provides objective information and collaboration for the needs and interests of family members and those establishing; managing or servicing the family office sector globally.
We envisage this will lead to multi-lingual web sites with content under discussion
encompassing investment and asset allocation and risk management issues
– without the bias of one provider or manager dominating the argument.
Potentially, members will learn from members.
We aspire to open honest dialogue. The founding members of the association are
members of the internationally recognised professional organisations ensuring we
understand the importance of ethics, fair dealing and of being of good fame
and character.
The founding members of IFOA are investment professionals and graduate
members of Australian Institute of Company Directors; Chartered Financial
Analysts, CFA Institute, Sydney; Investment Management Consultants Association,
USA; International Family Office Association; Royal Institute of Chartered
Surveyors; Financial Services Institute of Australasia and CPA Australia Ltd.
We adhere to the ethics and standards of all these organisations.
The IFOA Mission Statement is -
Family Offices and the Future cont.
Family Offices and the Future cont.
IFOAInternational Family Office Association 18The Growth of the Global Private Wealth Sector
philanthropy and other important issues and needs.
To do this we will provide accreditation to service members so that family businesses
seeking advice can approach an expert in any of the required services we have
accredited with the knowledge that the firm or individual is registered and has
demonstrated expertise; knowledge; credentials and has provided the Association
with references to enable confidence and standards of information and advice to
be the very highest in the industry, globally.
The founding sponsors will benefit from being early adopters and supporting this
Association as they will contribute to its content and direction.
The publicity gained from targeting their skills in family office matters will provide
huge benefits to these firms.
Highgate Publishing has estimated that 6000 family offices exist – and globally
we estimate that there are an additional 850 multi-family office advisory firms.
By looking at the growth rates of individual wealth globally and specifically in the
Asia region we perceive that this sector will continue to grow strongly and that by
the end of the 2012 many more people will understand what is meant by the term
‘Family Office’– and we therefore suggest that this sector will be keen to impact
on the exponential growth in private wealth that is occurring globally.
Scott A J MacDonald – is an investment professional and managing director of VanMac Group and founder of the International Family Office Association Ltd. – a not for profit organisation. Contact: [email protected]; [email protected]
IFOAInternational Family Office Association 19The Growth of the Global Private Wealth Sector
End Notes
i Jim Taylor, Doug Harrison, Stephen Kraus; The New Elite – Inside the minds
of the Truly Wealthy – American Management Association, 2009 Harrison
Group – www.amacombooks.org
i i All tables (extracts) taken from Wikipedia, March 2011 - ‘List of countries by
the number of US dollar billionaires’ - Source, Forbes publishing group.
i i i World Wealth Report 2010 - "The 14th annual World Wealth Report from
Merrill Lynch/Capgemini – www.capgemini.com
i v Extract - ‘Personal wealth in Asia Pacific region grows much faster than
global average’ Channel NewsAsia ^ | 10/08/2010 | Travis Teo. Posted
on Saturday, October 09, 2010 5:03:12 AM by WebFocus
v Amit, Raphael & Liechtenstein Heinrich; Report Highlights for “Benchmarking
the Single Family Office: Identifying the Performance Drivers” Wharton global
Family Office Alliance; Wharton University & IESE Business School; 2009.
End Notes
Copyright, March 2011 IFOA Ltd. All Rights Reserved. www.ifoa.asiaCopyright, April 2011 IFOA Ltd. All Rights Reserved. www.ifoa.asia
IFOAInternational Family Office Association