Family offices spar with VCs for Hong Kong's promising startups

One family office has devoted 15% of US$70m capital into tech investments.

With a large chunk of the nearly US$500b in assets managed by the Hong Kong private wealth industry now made up by family offices, the territory is looking to sustain the interest and even potentially challenge rival Singapore in this space. This trend in the venture capital space is partly driven by an uptick in rich startup founders following the region's IPO spree and the emergence of multi-generation scions that want to diversify their investment portfolios. 

Many Hong Kong -based family offices are either setting up their own fund or are partnering with VC funds to co-invest in potential startups, noted Lap Man, co-founder and managing partner of Hong Kong-based VC fund Beyond Ventures, in a trend that supports the growing transition of wealth to the tech-savvy young generation. For example, Union Capital, a family office and institutional investor entered the Hong Kong market in late 2018 as it seeks to work with local partners to spot opportunities.

Peter Stein, managing director of the Hong Kong Private Wealth Management Association, told CityWireAsia in October 2018 that close to half of the US$1t assets managed by the private wealth industry stems from corporate and institutional professional investors. “We believe much of this figure is made up of family offices in various forms, from single family offices to family offices embedded within family businesses." 

Also read: Asia's ultra wealthy stoke Hong Kong and Singapore's family office boom

The private equity (direct and fund investing) asset class currently accounts for a 22% share of the average family office portfolio, up 3.8 percentage points from 2017, according to a report from UBS and Campden. Matthew Tai, CEO of JM Enigma Capital Group, has placed roughly 15% of his family office’s US$70 million capital in technology investments, according to Bloomberg News. "My family's traditional business was about development of land," Tai was quoted as saying in the Bloomberg News report. "But that's history. The new world is the cyber world."

In order to boost Hong Kong's attractiveness to family offices, the PWMA has recommended tax-related incentives such as expanding asset coverage of offshore funds exemptions and revamping trust taxation, among others, as it aims to implement changes that would enable the SAR to match some of the tax perks that have made Singapore a favoured destination among family offices.

Usually shrouded in secrecy due to the publicity-shy nature of their clients and complex business structures, there are an estimated 500 family offices in Asia that manage a family’s private wealth affairs including investment, philanthropy and taxation, according to a Reuters report. 

The family office trend is partly driven by a recent surge of newly minted millionaire and billionaire startup cofounders following a surge in IPOs last year as the number of first-time share sales in the Hong Kong Stock Exchange hit a new record in 2018, capping off a very positive year for exits in the region, according to KPMG’s latest quarterly Venture Pulse report.

“You don’t see an immediate impact on the local venture community, but in terms of creating avenues for IPOs, I think it has become more interesting for venture-backed companies,” said Tse.

Also read: Hong Kong is home to seven in 50 of Asia's multi-millionaires

Despite these supportive factors, the heightened market uncertainty, especially in late 2018, has pushed investors, including VC funds, to place a higher premium on quality when evaluating potential targets. “The overall backdrop is that there is a flight towards quality because as you can see in the public market, investors are getting more discerning about company growth potential. They are really looking at an individual company’s capability and quality, rather than just a generalized approach that you have seen in the past two years,” said Tse.

In the fourth quarter of 2018, VC investment in Asia reached a "solid" $15b across 262 deals, but fundraising in the region fell in the full-year 2018 to $9.2b from $9.8b in 2017, according to KPMG. Still, corporate participation in Asia still hovered at near 30%, and the region dominated the top 10 VC financings for the fourth quarter, suggesting a still-strong appetite for promising investments in the region.

"Asia-based VC investment is expected to start off on a somewhat cautious note in 2019 given the global volatility in the public markets seen globally at the end of 2018," the KPMG report said. "Whilst some VC investors may be more cautious, particularly in the first quarter of 2019, strategic corporate investors are expected to remain active.”

Industries such as healthcare, life sciences, and education in addition to technologies like artificial intelligence and "other highly innovative technologies with broad applicability" will draw in significant funding in the near term despite geopolitical and macroeconomic uncertainties.

With the economy becoming more uncertain, Tse said there will likely be “some crunching” on valuation on VC fundraising, although it remains to be seen whether that will lead to a withdrawal of VC activity by less experienced players that were attracted to the sector. “Good managers continue to be strong in fundraising but you can see that the less proven managers would have a hard time raising capital.”