As Asia’s family offices increasingly shift trust and responsibility to professional managers and younger family members, private equity has helped them branch out beyond their core business experience. But this effect has its limits.

According to the Association of Family Offices in Asia (AFO), family offices in the region allocated 21% to private equity in 2020 versus a range around 10-15% only a few years ago, eroding the longstanding dominance of real estate to 24%. Sectoral diversification, however, has not developed as quickly. This is a key vulnerability given directs represent 39% of the average portfolio.

“The next generations are getting more decision-making power and they’re more active than the patriarchs in technology, new-economy trends and areas like impact and ESG that are driven by a lot of PR and media attention. But they are still staying fairly aligned with their core family businesses,” explains Eva Law, founder of AFO.

“While we’re seeing higher allocations to private equity, which helps diversify family office portfolios, most of the capital is going into minority investments. Direct deals continue to be more about familiar projects and running businesses, rather than managing a portfolio.”

The Family Office Association of Hong Kong (FOAHK) concurs with this assessment. More than half of family office private equity investments in its purview are thought to target technology. Directs by contrast continue to reflect the investors’ traditional focus industries – most typically real estate and manufacturing – for logical reasons around sourcing deals, identifying winners, and adding value.

Collective wisdom?

The emergence of multi-family offices could bring diversity, especially since many of the newer family offices participating in the trend claim roots in a wider range of industrial fields. If this does lead to a pooling of ideas and opportunities from different sectors at the multi-family office level, participants are advised to be mindful of a tradeoff where improved wealth preservation can bring lower-than-expected returns.

Jim Kwok, co-founder of Topaz Family Office Services and a member of the FOAHK board, adds that as the pace of decoupling and re-coupling of certain assets has increased, it can affect the purpose of a family office having a portfolio with low correlation between assets. “A more complex portfolio requires more time and effort from the appointed family member who is responsible for the strategy,” Kwok says. “Increasing family communication frequency on the strategy will help avoid any family disputes and misconceptions of how the strategy is performing.”

The question of internal communication and power-sharing is arguably of outsized importance in Asia, where family offices are often characterized as principal-driven organizations. But even among professionally managed global family offices, the role of personality psychology on investment strategy looms large.

The Dietrich Foundation, a US-based family office set up in the 1990s that morphed into a charitable institution following the death of its founder in 2011, offers an interesting case in point. In a reversal of the tendency to stick to familiar territory, steel industrialist Bill Dietrich wanted his investment legacy to be well removed from steel and heavy industries – which led to a strong focus on less tangible technologies. The Dietrich Foundation now has $1.3 billion in assets under management, 90% of which is in PE and VC, with 45% allocated to innovation in developing Asia.

Edward Grefenstette, president, CEO and CIO of the foundation, told the Hong Kong Venture Capital & Private Equity Association’s (HKVCA) Asia forum that when Bill Dietrich hired him in 2010, he revealed a top-down philosophy about governance. This has remained a part of the foundation’s DNA throughout a decade of expansion and beyond the lifetime of Dietrich himself.

“He looked me straight in the eye and said, ‘I’m on six different investment committees around Pittsburgh, and I hate investment committees. All they do is dilute the boldness of decision making required for outperformance. I think investment committees should always be an odd number of people, and three is too big,’” Grefenstette said.

“I can sit across from GPs, and I can sit across from founders, and say, ‘You are talking to the sole decision maker.’ We can move quickly. There’s no committee to deal with. That’s a massive competitive advantage, and Bill understood that. But obviously, that’s not for every organization.”

Outside the box

The idea that a principal-driven or otherwise highly streamlined approach can lead family offices to diversified direct investment portfolios comes with risks of its own, however.

For example, Mueller Group, the family office of German dairy entrepreneur Theo Mueller, sticks close to consumer-oriented plays and technologies that complement the dairy and agriculture domains it knows best. Understandably, when Mueller proposed a 4G telecom adventure in Africa alongside one of his personal contacts, his investment committee rejected the idea twice. The boss pushed it through anyway, and it became one of the family office’s rare busts.

“You’ve got a person who started more or less from zero, all the way to now – it’s not so easy for him to let go. He must have made the right decisions in his life to be a multibillionaire. So how can he be wrong? And how should he not be involved in even a small ticket size of $3 million? He should be involved., and he should know what’s best because he has a track record that we don’t have,” said Alexander Pestalozzi, a managing director at Mueller Asia.

Mueller inherited his namesake dairy company in the 1970s when it had four employees and built it into one of the largest private operations of its kind in Europe, with $6 billion in annual sales. The family office still owns the operating business.

“I think the key thing there is the principal needs to find something outside the business that he has passion for and that’s going to take most of his time,” Pestalozzi added. “Because other than that, you don’t have this opportunity to create a sophisticated family office that is completely independent.”