the growth global private wealth sector - about...

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


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


Australia

New Zealand


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


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


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


Number of millionaires by Nation

Millionaires cont.

Number of millionaires by Nation cont.


• 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


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."


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.


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


“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)


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%


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;


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.


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]


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.

the growth global private wealth sector - about...

Documents