Riding on its sound systems and tax concessions, Hong Kong is set to take up a leading role for supporting family offices in the Guangdong-Hong Kong-Macao Greater Bay Area (Greater Bay Area). How can these strengths help Hong Kong capitalize on the vast opportunities in this aspect?
Christopher Hui: Hong Kong is the Prime Choice for Setting up Family Offices
According to Christopher Hui, Secretary for Financial Services and the Treasury, global financial assets, elite talents, and professional services are all converged in Hong Kong. In addition to being a connector for the Mainland and the world, Hong Kong has a wide array of investment opportunities to offer, thanks to its highly open and internationalized market, time-tested regulatory system, legal structure and the free flow of information and capital. It is the prime choice for family offices looking to achieve long-term investment goals.
“We envision to elevate Hong Kong’s position as an integrated financial center and help the industry to capture new business opportunities. Growing Hong Kong into a hub for family offices is a critical growth direction.” Hui reckons the initiative could generate new demands for the traditional asset and wealth management sector and related services. Furthermore, the enormous asset managed by family offices would also be diverted towards various investment projects. In the long term, the capital flow would be favorable for fostering the development of various financial ecologies, which would benefit the Hong Kong economy at large.
Putting Hong Kong’s diverse strengths to work
Hui explained the three steps set out by the HKSAR government for consolidating Hong Kong’s edge in asset and wealth management. The first is to introduce new fund structures for private equity funds to set up as Limited Partnership Funds in Hong Kong. The second is to provide tax concessions for carried interest issued by private equity funds operating in Hong Kong. The third is to formulate a mechanism for foreign funds to relocate in Hong Kong so that it becomes more convenient and more appealing for various funds to set up and operate in Hong Kong.
According to Hui, the aforementioned initiatives would position Hong Kong as an ideal base for family offices to launch their operation. The role of Hong Kong as a bi-directional connector between the Mainland and the international market can also be fully utilized. Hong Kong can capitalize on the development of the Greater Bay Area and the business opportunities brought about by the “Belt and Road” initiative.
An ideal option for Greater Bay Area entrepreneurs
Hui further discussed Hong Kong’s distinctive advantages comparing with other locations. “In 2020, Hong Kong was the world’s largest offshore RMB hub and Asia’s second largest private equity fund center. It has also been the world’s top listing platform, ranking number one for seven times over the past 12 years in terms of the funds raised from IPOs. It is an offshore financing center for Mainland enterprises, as much as it is a major channel for international funds to enter the Mainland market.”
Hui added that Hong Kong is also the destination of choice for many ultra-high net worth (UHNW) individuals from the Mainland, especially entrepreneurs based in the Greater Bay Area, for setting up their family offices. “Many of these entrepreneurs have plants or businesses in the Greater Bay Area, and some of them have their enterprises listed in Hong Kong. Naturally, Hong Kong is their preferred base for managing their wealth and for succession planning.”
Conducive business environment supported by multi-pronged approach
To facilitate the development of Hong Kong’s family office industry, the government has been adopting a multi-pronged approach to create a conducive business environment for family offices operating in Hong Kong. For example, InvestHK, the Hong Kong Monetary Authority, the Financial Services Development Council and the Securities and Futures Commission, etc are supporting family offices that are interested in operating in Hong Kong.
Funded by the Financial Services and the Treasury Bureau, InvestHK has set up a task force to promote locally, in the Mainland and in the major overseas markets about the advantages of running family offices in Hong Kong. The task force also coordinates the communication amongst family offices and relevant regulatory organizations, government authorities and other stakeholders, so as to gather the latest market insights and views regarding the related matters of family offices. As announced in the Budget, the Bureau will review relevant taxation arrangements so that Hong Kong’s appeal as a hub for family offices can be further elevated.
Dixon Wong: Harnessing Hong Kong’s Strengths to Build a Family Office hub in Asia Pacific
Dixon Wong, Head of Financial Services and Global Head of Family Office at Invest Hong Kong, described the continued development of the family office business as an extension of the mature and sound development of Hong Kong’s international financial and economic system. “The Government is determined to capitalize on the opportunity to develop Hong Kong into the Asia-Pacific region’s family office hub to consolidate Hong Kong’s long-term financial development, attract more foreign capital, and provide more jobs for the industry.”
Two new measures introduced to enhance strengths of private equity market
In the area of family office development, Wong noted that Hong Kong has many unique and inherent strengths. Hong Kong now has over 600 private equity funds and HKD29 trillion of assets under management, which is equivalent to ten times Hong Kong’s GDP. With such sound foundation of its asset and wealth management industry, Hong Kong can be an important investment platform for family offices and super wealthy individuals.
““To make Hong Kong more attractive to family offices, the HKSAR Government introduced a Limited Partnership Regime for Funds (LPF) last August, with over 200 funds registered currently.” Wong said that the Government has also recently passed the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021, which gives profits tax and salaries tax concessions to eligible private equity funds in relation to carried interest distributed by them. These two measures will help enhance the strengths of Hong Kong’s private equity market to attract more super wealthy individuals to use Hong Kong as the headquarters for coordinating investment activities in the region.
Greater Bay Area is of vital importance for high-end wealth management
Invest Hong Kong is always in close liaison with family offices and the industry on the front line. Internally, it reflects the industry’s views to the Government. Externally, it guides family offices to adopt appropriate direction and management to solve problems, while harnessing its global network to promote Hong Kong’s strengths to be the headquarters of family offices in Asia.
In addition, the Greater Bay Area is of vital importance for the global high-end wealth management industry. Wong said that Hong Kong is an important stepping-stone for fully capitalizing on this huge market. “According to further details announced recently on the forthcoming Wealth Management Connect for the Greater Bay Area, movements of funds must not exceed RMB150 billion and the individual investment quota is set at RMB1 million initially under the pilot scheme. This will help improve the quality, depth and breadth of interconnection between the Mainland and Hong Kong. It will then enable global asset management firms, family offices and super wealthy individuals to leverage Hong Kong as an open platform to invest in the Mainland’s different treasury products, while the Mainland’s asset management firms and wealthy individuals can also access Hong Kong’s treasury market through this channel, bringing Hong Kong unique advantages that are unmatched by other regions.”
A new team set up to help family offices settle in Hong Kong
Wong revealed that a dedicated team is currently being formed and will likely become operational in the second half of the year. Besides holding seminars to broadly showcase Hong Kong’s strengths in family offices, it will provide customer services and meet with family offices or ultra-high-net-worth individuals (UHNWIs) who are interested in developing in Asia to set up in Hong Kong and provide them with appropriate one-stop assistance.
Looking ahead to future trends, Wong believes that every business family has its own priorities and the level of complexity is also different when planning the actual transition of the business, family, and wealth. To cater to the wealth management and succession needs of international families, a comprehensive grasp of the regional differences in the form and function of the global family office is a key element. “Indeed, the steady development of family offices must withstand the test of time and adversity, which is very much in line with Hong Kong’s DNA and traits as an international financial centre. It is evident that Hong Kong is absolutely qualified to be the preferred location for family offices around the world.”
Ng Aik-ping: The Role of a Family Office in Intergenerational Wealth Transfer: Greater Bay Area Opportunities
In recent years, the number of UHNW individuals and the scale and complexity of their assets have witnessed tremendous growth. Coupled with the launch of the cross-boundary wealth management connect pilot scheme (Wealth Management Connect) in the Guangdong-Hong Kong-Macao Greater Bay Area, there are immense opportunities for the Greater Bay Area family office industry in the future. In a recent interview with Ng Aik-ping, Co-Head of Family Office Advisory Asia Pacific, HSBC Private Banking, he noted that according to latest estimates, the size of the Greater Bay Area economy is now equivalent to the 12th largest economy in the world in terms of economic aggregates. The size is estimated to grow to USD4.6 trillion by 2030, and the population would reach 140 million by 2050. Clearly, the opportunities in private wealth management and family office is set to grow significantly.
Immense potential in the Greater Bay Area market
“According to the latest government estimates, there are some 80,000 UHNW families in the Greater China region, and over 20% of them are based in the Greater Bay Area.” Ng pointed out that in the next 10 years, more than USD15 trillion worth of wealth will be passed to the next generation globally, and USD1.9 trillion is in Asia. “My work and time in the Mainland has allowed me to witness the accelerated growth of its family office industry over the past few years.”
The latest Hurun report estimates that 1 in every 2 newly minted dollar billionaires were from China. The exponential growth in wealth has prompted more wealthy families to consider setting up family offices. However, Ng stressed that setting up family offices may not be suitable for every family. “Wealthy families utilize different tools to plan for intergenerational wealth transfer to meet their unique needs, including trust setup. writing of wills etc. Some families are keen to set up family offices to professionally manage their own family wealth, but they need to be aware of the costs involved. Usually, we would suggest a minimum USD 100m assets of management to achieve proper economies of scale.”
The rise of virtual family offices
Currently, there are many family office service providers based in the Greater Bay Area. The question is, how should families choose from these providers? Ng said, “In fact, intergenerational wealth transfer requires proper planning, and most families would adopt a phased approach. Some begin with establishing individual family offices to manage assets, while others start off setting up a virtual family office by outsourcing different services to various providers.”
Ng emphasized that, for families looking to diversify their portfolio globally, they would consider Hong Kong or offshore service providers, family office service providers from Hong Kong or overseas should have a competitive edge. “In fact, certain family clients would consider setting up their own physical family office once their assets or family have grown to a certain size. Services previously outsourced would then be conducted in-house. Therefore, service providers are no longer competitors, but are now part of the family office.”
Cementing the hub advantage of Hong Kong
Ng believes that for Hong Kong to cement their competitive advantage in the family office sector, first and foremost is for regulators and government bodies to jointly formulate policies and actions to promote Hong Kong as a family office hub, which would act as an important pillar for the industry’s development. Secondly, business organizations, family offices and industry players must represent the industry holistically as a voice to be heard. The Association of Family Offices in Hong Kong was founded last year is an example for doing so. The final step is to groom professional talents. Hong Kong professional training institutions and higher schools of learning (eg. universities) can provide professional training and accreditation schemes in areas that are related to family offices services. These could help future enhance the professional standards of the entire industry.
Ng stressed that if regulatory organizations, industry players, and educational institutions could work together to set the stage for the development of the family office ecosystem in Hong Kong, where Hong Kong’s family office practitioners could build a solid foundation and raise their professional knowledge and technical know-how, it would be beneficial to capture the tremendous growth of the family office industry in the Greater Bay Area.
Sylvene Fong: Multiple Approaches Shall be Adopted to Capture the Promising Growth in Family Offices and to Expand Greater Bay Area Customer Base
The number of UHNW individuals in the Chinese Mainland and Hong Kong has been soaring in recent years. Their needs for wealth management have driven a demand for family offices. KPMG is an organization that provides tailored family office service solutions to UHNW individuals and family enterprises around the world.
Sylvene Fong, Partner & Head of Private and Family Enterprise Hong Kong at KPMG China pointed out, “We differentiate ourselves from other private wealth management companies with our independent and customized advisory services, which could help clients understand the picture of their asset allocation more holistically.”
Family offices are conducive for passing on enterprises and wealth
Fong shared that KPMG has been constantly providing family office advisory services for traditional family enterprises in Hong Kong over the past few decades. Over the course, the company has helped many family enterprises on passing down to the second and third generations.
“We provide dedicated and comprehensive family office services to protect and pass on the wealth of families. We assess and update the internal systems for finance, infrastructure and information technology for family offices. We also support family governance and philanthropic strategies, so as to achieve the goals of wealth preservation and value addition,” said Fong.
Increase in UHNW population sparked wealth management demand
Once a privilege to the traditionally prestigious families, family offices have become more approachable in recent years. Fong mentioned that, since personal wealth is accumulating at a remarkable speed, UHNW individuals’ demand for wealth management has been on the rise. Setting up a family office is the most effective way to manage and pass on a family’s wealth.
Over the six years from 2013 to 2019, the private wealth of Chinese Mainland billionaires has registered a cumulative growth of 166%1. Fong added, “A research from 2018 indicates that Hong Kong is a place with the highest concentration of UHNW individuals amongst all countries and areas. Hong Kong also ranks second in terms of the number of UHNW individuals in a city2. As of July 2019, there are about 7,300 single family offices globally, and the number is rapidly increasing. Amongst them, the number of Asian family offices has increased by 44%, much higher than other areas in the world.3 ”
Fong quoted additional findings from the study, highlighting that many respondents who are members of the Private Wealth Management Association (PWMA) agree that “further expanding the Chinese Mainland market” present a future opportunity4. As such, the continuous development of the Greater Bay Area is a critical factor for the growth of Hong Kong’s family office market.
Capitalizing on Greater Bay Area’s family office opportunities
Financial authorities and institutions in Guangdong, Hong Kong and Macao are all rolling out cross-border financial and money management measures and products for the Greater Bay Area. Fong reckoned that these initiatives are beneficial for the Hong Kong family office market. “Northbound and Southbound turnovers under Shenzhen-Hong Kong Stock Connect further fostered the interaction of the two capital markets and the flow of capital. The investment scope and scale in the interconnected equity markets in the Mainland and Hong Kong are expanded.” She added that the relevant policies support Hong Kong’s private equity funds to take part in the innovative enterprise financing in the Guangdong-Hong Kong-Macao Greater Bay Area, which in turn encourages eligible innovative enterprises to venture into financing and getting listed in Hong Kong. Capital flow from the Chinese Mainland to Hong Kong will be further promoted, and more mainland family enterprises will be drawn to set up and operate their family offices in Hong Kong.
On top of the encouragement and support offered by Greater Bay Area policies, it was also announced in the 2020 Budget that InvestHK will set up a taskforce to provide one-stop support to family offices that are interested to operate in Hong Kong. The initiative will consolidate Hong Kong’s position as an international financial center. Fong believed that the strong support of the HKSAR government alongside the complementary development of the Greater Bay Area will both equip Hong Kong with the potentials to become the world’s largest hub for family offices.