A Glance Behind The Scenes Of A Chinese Multi-Family Office - An Interview With Derek Li
Updated: Dec 7, 2019
Derek, you run a Chinese Multi-Family Office. Why do you do this in New York City, why not in China?
As a culturally vibrant, diverse gateway, and a financial center, NYC provides us with direct access to unique and exclusive deal flows. New York is a hub where it’s more efficient and easier to build relationships with all key stakeholders across sectors and industries in order to acquire operational experiences, and to gain insights and new global perspectives.
Moreover, as our family office’s investment thesis has evolved, many family offices like ours feel establishing a local presence in US is the prerequisite to achieving targeted returns in our private investment portfolios through diversification of investing in US-based opportunities and meeting our client’s liquidity needs at times of special situations.
Besides, my clients are used to a well-established stable legal and regulatory environment here in NYC, which gives them a sense of control and safety with regards to their investments. After all, the core mission of our family office is to preserve the family’s wealth.
So, in a nutshell, we feel the best way to help preserve and grow our families’ wealth through private investments in US is to develop and maintain an extensive network of local connections and maintain deep-rooted local presence.
But why do Chinese families feel the need to leave China?
Often times, patriarchs and matriarchs of a family still work and operate their family businesses out of China. However, for the sake of protecting and growing their wealth in a relative safe way, through capital allocation in US-based assets, they set up their own family offices overseas or invest in oversea assets through third-party wealth managers and other MFOs. Even if they do decide to uproot and move to US permanently, most of the time, they do so for their children’s education and future and the US is still regarded as a top destination for immigration by Chinese. In other words, Chinese families like to see part of their wealth getting invested outside of China for the purposes of diversification, inflation-hedging, and a need for liquidity. More and more of them realize their wealth’s continued growth is tied to overseas investment in developed economies.
So what speaks for the US and what speaks against Europe when choosing an overseas HQ?
It has more to do with the fact that we know more about the U.S. market. We understand US laws, regulations and corporate governance. We strongly perceive that the U.S. has highly developed, liquid and efficient financial markets that enable us to diversify our investment holdings better, especially when returns in U.S. financial markets have relatively little correlations with returns in Chinese financial markets.
Then, Europe is fragmented in terms of investments, internal processes and ways of doing business across different countries. It’s not a straightforward exercise to exit one investment in France today and make another investment in UK the next day whereas it’s easily done in the U.S. across states.
And China has one special linkage with the America. The U.S. is still the preferred destination to study abroad for wealthy Chinese next gens. Naturally, you prefer to invest in countries that you know and understand, where you speak the language, where your kids went to university and where you perhaps lived yourself.
In addition, with what’s happening with Brexit or the yellow vest movement in France, we see many challenges or developments in Europe that are rather difficult to predict and our families don’t like it if they don’t understand what might happen down the line in the short term.
What are Chinese particularities in terms of investments and MFO services that they require?
Many Chinese families want to preserve their wealth for the next generation. So, not only do they need help to manage their family fortune, but they also need help passing wealth down to their children. Although this is mostly the case with Western families, too, there is a also huge demand for comprehensive offshore wealth planning, family emigration, education of their children and succession planning.
As the wealth of most Chinese families is tied directly to their family business, they need to diversify their investments through private investments as well. Real estate and private equity remain a preferred choice. With a growing preference to invest directly and take operational control in their investments, many Chinese investors need people who can help them gain operational expertise and experience.
Let’s talk about China vs. Europe/US. What is it you think Chinese families or UHNWIs do better than their Western Counterparts and where could they learn from Americans or Europeans?
Chinese wealthy families tend to be very pragmatic since the first-generation wealth creators are mostly entrepreneurs. They don’t cherry pick in a handful of strategic industries.
Although they place a particular focus on real estate, technology, they like to have exposure to attractive investment opportunities across sectors and asset classes.
One thing they can learn from Western counterparts is their desire to entrust investment decisions to investment experts, and the desire to expand outside their established networks. Chinese families can be too tight-knit at times and they are limiting themselves in terms of what they can do with their investable capital. On top of that, it’s time consuming to build trusting relationships with them.
You mentioned succession planning a lot and that concerns obviously also the next gens - what are the typical challenges that Chinese next gens face?
Preserving the family’s wealth and legacy while creating their own identity remains one of the biggest and typical challenges that Chinese next gens face today.
Across the board, many Chinese current gens think the generational transition is one of the biggest challenges they have to deal with. Equally it’s also one of the biggest challenges Chinese next gens face. They are two sides of the same coin.
As first-generation wealth creators come to retirement age, they want to pass the family business to the next generations who, often times, don’t necessarily want to take over the family business, or simply are not ready in terms of expertise and experience required to run the family business. More often than not, the next generation wants to create their own identity and they don’t want to simply follow into their parents’ footsteps. But, in Chinese culture, family cohesion and obligation to the family are some of the values that are highly treasured. In other words, the next generation can’t just follow their hearts when their parents expect so much of them. On top of that, the next gens are challenged by the stereotypes and social stigma that result from general misconceptions. Every step they take is under the scrutiny of their family and general public. So, how to achieve the balance between meeting parents’ expectations and fulfilling their own ambitions remains as challenging as ever.
In addition, the next gens need to gain experience and skills to manage the family’s wealth. It’s easier said than done, especially in today’s increasing complex financial environments. Not only do they need to be open-minded, to broaden their horizon, to stay at the forefront of innovations and trends, they also need to work with others to fully leverage resources to hopefully accumulate more wealth. Luckily, many next gens that are educated overseas and have exposure to different investment/growth philosophies and fully embrace their roles so they are prepared to take on these challenges.
What defines the families that you represent and work with?
I represent and work mostly with first generation wealth creators. Naturally, they care deeply about confidentiality, and want to stay anonymous. It can be challenging depending on certain investment structures. However, they are willing to listen and if they think it’s in their best interests, they will do what it takes to work with you and find the best solution to their needs.
Since they already have their own family business to run back in Asia, their overseas investment revolves around capital preservation. At the same time, being entrepreneurs themselves, they like a hands-on approach. Thus, they prefer direct investments. And although not fond of working with investment professionals they are very eager to learn.
Which challenges are particular to Chinese clients and how do you handle them?
Getting first-generation Chinese entrepreneurs acquainted with Western wealth management practices and family office governance models takes patience and persistency as they are so used to calling the shots on every financial decision they make and they don’t exactly like to delegate that to non-family professionals. One way to ease their concerns and ensure that everyone is on the same page is full transparency – an absolute necessity in my opinion. It’s paramount for us to inform our clients on each of the decisions we take, concerning each of their investments. In-depth monthly briefings and quarterly reporting allows our clients to know if the asset allocation in their portfolio meets their investment criteria.
Further, succession planning has become more and more urgent and important in the overall wealth management strategy. This is a complex issue that includes business, investments and family relationships. It’s not easy to get it right, and we consider it a crucial part of a broader process of preparing the next generation to take control. Therefore, we think it’s paramount to work with highly qualified wealth planning experts to fully customize our client’s succession planning approach to take their unique circumstance into consideration. In our case, we outsource such important aspects of family office services to our strategic partners who have the proven track record and renowned expertise to create lasting value for our family office and private clients.
If Europe were interested to attract more private Chinese capital - how should they do that? And where in Europe?
Bear in mind that economies, technological advancements and institutional frameworks vary across Europe. Countries such as Germany, UK and France are already attracting significant capital inflows from China.
However, given the overall pivot in Europe to more populist sentiments, many private Chinese investors feel now is the not the right time to make investments in Europe since regional and bilateral relations with individual countries in Europe always play a role in perpetuating the notion some countries might not be a preferred place for long term investments. The shift in attitude towards Chinese investments in parts of Europe and policy changes further shape the longer term investment outlook in the eyes of private Chinese investors.
Strictly speaking a from private investment perspective, there has to be more open dialogue and collaborations between family offices/asset managers in Europe and their counterparts in China. Private Chinese investors always look for direct access to top-tired portfolio managers/asset managers who have the in-depth experience and local resources to generate attractive returns for their private investment holdings.
I had a client asking me for access to investment opportunities in Europe, and he knows my family office doesn’t necessarily have a strong presence there. It just shows how the market is underdeveloped as to the fact that he could get pitched by 5 different parties about US investments per month, but he barely gets approached by anyone about investments in Europe. Keep in mind, that many private Chinese investors do get offered investment opportunities in Europe, but, mostly they are real estate deals in Cyprus.
What these investors need is the intuitional level of investment opportunities in Europe, and opportunities to work with top-tiered experts in various industries. Those who strive to stay in the front of the pack and put in time and effort establishing presence, building relationships will gain an advantage in this highly competitive environment.