Family Offices are Into Cryptocurrencies, Should Yours Be As Well?
Remy didn’t notice the thick, plush carpet (Iranian no less) under the soles of his US$2,000 bespoke John Lobb shoes in the cool marble of the waiting room. Like most Thais, Remy only goes by a first name, typically a nickname and short for their full Thai name which is far longer and more complicated. Remy didn’t notice the leased Renoir hanging on the Statuario marble wall either, carefully honed from a single block of stone so as not to reveal any gaps or imperfections, or the US$4,500 Vitra Eames lounge chair that he was sitting in while waiting for his manager to attend to him. But no, Remy was not in some high end club, rather the modern and luxurious waiting area of the office in downtown Singapore was tastefully appointed by his sister, that arbiter of refinement to decorate their family office, the one responsible for managing their family’s sizeable fortune. Remy’s is a story familiar for many rising Southeast Asian families. Decades of peace and economic opportunity have unleashed an unprecedented rise in prosperity and with it, a demand for the level of sophistication and aristocracy in wealth management, more familiar to Bern than Bangkok. But a rising class of bankers and asset managers, lured to the warmer climate of the tropics have set up shop, predominantly in financial capitals like Singapore to serve the new wealthy families of the region. Like Remy’s family, most of their fortunes were made by an earlier generation, toiling in the fields to become agricultural conglomerates and re-investing in Southeast Asia’s rise in property value. But Remy’s generation — Millennials with a penchant for tasteful decadence — are looking beyond the tried and tested formulas of their parents, investing in art, collectibles, startups and cryptocurrencies.
From glassy private offices in Paolo Alto to Singapore, family offices are locating near the epicenters of innovation, to gain access to the most exclusive deals and to continue to build on their family’s substantial holdings. With many asset managers underperforming since 2008 and the high fees, family offices were seen as a way to cut out the middlemen and are believed to manage as much as US$4 trillion worth of assets today, almost double the amount managed by hedge funds. But thanks to their discretion, it is hard to pinpoint the exact number of family offices in operation today with estimates between 5,000 and 10,000 so wide as to not be meaningful. And family offices can also differ greatly in scale, with some operating with hundreds of staff and others with less than 20 and in case you’re wondering, yes, some do also cater to the whims of the pampered second or third-generation scions, acting as highly-paid butlers, nannies and chauffeurs. The rise of family offices has also been due in large part to the aftermath of the Great Financial Crisis, where a loss of faith in external money managers as well as the glitzy Wall Street names led clients to reconsider how best to preserve and grow their hard-wrought fortunes for subsequent generations. Examining the high fees of private banks, murky incentives and at times contradictory interests of bankers and clients meant that rich clients had to start looking elsewhere.
Millennial Masters are Into Cryptocurrencies
But more interesting to note is that the younger generations, in some cases helping to manage their family’s substantial fortune, have demonstrated higher risk appetites than perhaps their parents’ generations. From whisky to wine collection, while their parents may have put everything into property, these scions are looking to generate their own alpha and make their mark on for their families. According to one family office manager who declined to be named,
“Some of them got into cryptocurrencies when they heard about it from their friends and they made money in the early days. They are keen adopters of technology and they believe in the story so the broader market conditions don’t really affect them all that much.”
According to one manager from a European family office,
“For many of our clients, cryptocurrencies form just a sliver of their entire holdings. Barely even cracking 1%, so they can afford to take on some degree of speculative risk.”
Most of the family offices which do help their clients deal in cryptocurrencies however do not actively trade in the digital assets, instead adopting a more medium to long term approach, holding the assets for a period and selling them later after making gains. Or in some cases, where the purchase price of the cryptocurrencies were high, they hold them for far longer and according to one manager from an Asian office,
“They can afford to hold it (Bitcoin) and the price doesn’t bother them. As far as they’re concerned, in a worse-case scenario, they write it off, but if it booms, they want to be the ones to tell their parents that they spotted the trend.”
And it’s this concern among managers as well for not having pointed their clients to cryptocurrencies that allows for some speculative breath of discretion. But it’s not just cryptocurrencies, family offices are also pouring money into startups, with many of them blockchain or cryptocurrency-related startups as well. And because family offices typically have zero gearing or close to zero (according to one estimate, family offices have a net debt equivalent to 17% of assets) their funds when deployed, are typically deployed for decades, making them far less vulnerable to the panic withdrawals of other financial institutions which are subject to quarterly earnings calls.
Another reason why family offices are drawn to cryptocurrencies — capital flight. Thanks to the pseudonymous nature of cryptocurrencies — fund flows are more difficult for governments to track. And considering that Asia is the rising source for so much new wealth, with capital controls galore, it’s small wonder that family offices are looking to digital assets as the lubricant to fuel their global expansion and investments. But those transactions where cryptocurrencies are merely used as a vehicles for value transfer tend to be short-lived, with minimal impact on overall cryptocurrency prices. Cryptocurrencies also tend to be opaque, allowing family offices to leverage privileged access to information while still maintaining sufficient arms-length distance for the purposes of plausible deniability. According to some managers, even though the initial coin offering (ICO) market may be “dead” in public markets, there still seems to be appetite in private markets with family offices taking considerable stakes in upcoming blockchain and cryptocurrency companies, both digital tokens as well as equity stakes.
The Bottom Line
While the many stories of ordinary families being plunged into debt by literally betting the farm on cryptocurrencies make for good tabloid news, the reality is that the world’s wealthiest families are far more astute when it comes to managing their wealth. Cryptocurrencies represent an unparalleled innovation both in terms of their scope and potential for disruption and while there is always the possibility that they may not live up to their hyped potential, that they will have a long-lasting impact on economic life is undeniable. To that end, this is where family offices shine in that they are able to leverage their substantial assets to allocate a small but significant portion to cryptocurrencies and more importantly, that they are able to make such allocations for the long term.
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