How APAC family offices are thinking about PE in 2023

Private equity appetites among Asia-Pacific’s burgeoning family office base don’t seem to be dented by rising macroeconomic uncertainty.

According to the Asia-Pacific Family Office Report 2022 from Campden Wealth and Raffles Family Office, 57 percent of the region’s families are planning to increase their allocations to PE, higher than the global average of 47 percent. Many view the asset class as an appealing investment to preserve and grow their wealth, while hedging against inflation risks and volatility.

That said, multifamily offices in the region – which invest on behalf of, or advise, single family office clients – told Private Equity International that 2023 will require a measured approach to investing; liquidity requirements and selectivity will be a key consideration of any decisions this year.

“We continue to ramp up our PE allocation,” Jiahao He, chief investment officer of multifamily office 3 Capital Partners, told Private Equity International, noting that it has a 25-30 percent long-term allocation target for the asset class. “For us, disciplined deployment, very thoughtful construction and then manager selection are important.”

3 Capital isn’t alone. “We’re a bit more active this year compared to last year in terms of investment,” said Jo Huang, head of private equity of Raffles Family Office. “We seek quality deals with good valuation; we will not slow down this year, but we will not be ultra-aggressive.”

3 Capital, ALPS Advisory and Raffles Family Office did not disclose their current allocations.

To each their own

Family offices’ flexibility relative to institutions such as public pensions mean appetites for private equity can be significant. “Clients with better holding power have more buffer and their mandate can have up to 30-40 percent in private equity,” said Vincent Au, chief investment officer at Hong Kong-based multifamily office ALPS Advisory.

Unlike institutional investors, family office mandates are typically bespoke and can vary based on each family’s asset management goals and entrepreneurial backgrounds. Direct investments tend to be most popular among this base, with many preferring to deal more closely with company founders in familiar sectors.

It’s no coincidence, then, that co-investments are becoming more popular among family offices in the region. As PEI reported in March, such opportunities are an important consideration for family offices when selecting GPs. Families find it particularly beneficial to collaborate with managers and share the due diligence workload, especially in markets or sectors where the family may be less familiar.

Tech is a particular favourite of family offices, with many having made their wealth in this sector. Campden Wealth’s report shows that the five most popular sectors for investment are healthcare, green tech, artificial intelligence, fintech and biotech. Despite a market downturn in the space, family investors are still positive that tech commitments can be beneficial to the portfolio in the long term, provided they are selective.

“We want to find a good technology company that would be a good investment target regardless of the geographic markets they are at, that’s why we look global and even started to explore Israel because the electronic vehicle supply chain and R&D are quite strong there,” said Huang. She added that electronic vehicles, health tech, digitalisation trends and artificial intelligence are top investment sectors in their portfolio.

“Tech can be as broad as a company embracing technology to increase their efficiency,” added He. Healthcare services, industrial sectors and consumer retail, for example, are heavy users of technology.

When it comes to strategy, investment appetites can differ greatly. For 3 Capital, buyouts remains a core element in their mandates. CIO He says the strategy offers high consistency and visibility of return, especially if it is a larger deal where the business is mature and ready for expansion.

Venture, meanwhile, may see greater caution in the near term. “I think venture can be more challenging and we’re trying to be more selective for the time being, mainly because when you think about venture, you need a better market environment to support what they’re doing,” said Au. “They might have a fantastic idea but they still need a generally good economy to support the growth.”

Given the challenging market environment, Au sees opportunities in private debt. “If something happens to the company, you have the first claim on the asset,” he noted. “Private debts are floating rate instruments, which means that if inflation goes higher, you’re actually protected by that.”

Familiar territory

Geographically speaking, APAC-based families still lean towards developed regions such as the Europe and US markets. Au said the appeal, relative to APAC, is partly because Europe and the US are more unified in terms of regulations. “We prefer the developed world, meaning the US, Europe. Asia has improved a lot in terms of transparency and corporate governance over the years, but it can still be a little bit fragmented; you have the Philippines, Malaysia, Hong Kong, Singapore – they all come with different rules and different currency policies,” he said.

Another reason for investing outside of APAC is diversification. Many families have core businesses based in the region and, though they can have the advantage of being more familiar with these markets, this carries with it concentration risk.

Regulatory risk also plays a role in these appetites, with China’s 2021 crackdown on particular sectors prompting investors to tread more carefully. “We stayed out of China tech since 2021; at that time regulations started to change, there were too many changes, we know we have to take at least three years’ view on the regulation and so we’ve been focusing on global deals and Southeast Asia,” Huang said. “However, given valuation has normalized in 2023, we won’t give up such a big market and are still looking at China PE opportunities with near-term exit, very attractive valuation or downside protection terms.”

For China-based offices, however, investing in western markets can get tricky due to simmering China-US tensions.

“If you’re a Chinese family office and the source of capital is purely from China, what you could face down the line is that any potential investments into US opportunities may be subjected to further regulatory oversight and scrutiny, such as CFIUS, which means you could be disqualified from coming into these transactions or funds,” said Vincent Ng, a partner at Atlantic-Pacific Capital. Instead of investing as a single-family office, Ng said investors may seek professional advisers or other investors to structure themselves as a multifamily office and “dilute the sensitivity”.

Cherry-picking

As their participation in the asset class rises, family investors are getting better informed and more professional. What’s more, a challenging fundraising environment means that they now have more bargaining power with GPs and, crucially, buys more time to perform due diligence on potential opportunities; previously, a lack of resources relative to their more institutionalised peers made this process tricky.

“We have a lot more time now to get to know managers, due diligence them and grow that relationship,” said Audrey The, managing director at LP advisory Cambridge Associates.

Families are now taking a deep dive into managers’ employment profiles before committing to a relationship. “Track record is important but not necessarily from the [current] fund managers [that employ them],” added Au. “Instead, they need to be able to demonstrate that they have done something similar before.”

The advantage of additional time extends to direct dealmaking: back when dealmaking was more frenetic, investors may have ended up overpaying for assets if they did not have time to fully digest a deal.

This more thoughtful investment environment could yield positive results for returns, said Cambridge’s The. “I think investors being much more cautious in terms of their liquidity needs and managers having a much more extended time to fundraise and decide where they should be deploying that capital into does all bode well for a much more sensible vintage year.”