Asia’s $22 Trillion problem

Asia will see the fastest billionaire population growth in the world over the next few years, this will create its own set of problems

A recent report released by Knight Frank LLP showed that the number of billionaires in Asia will rise by 27% between 2018-2023 to 1,003, making up a third of the world’s billionaire population. We will also see a significant increase in the number of Ultra-High Net Worth Individuals (UHNWIs).

This is obviously good news and shows that despite slowdowns elsewhere in the world and continued global uncertainty, there is still growth and prosperity to be had in Asia. However, this new cohort of billionaires and UHNWIs should look back at the previous generation of wealthy individuals and families and try to avoid the mistakes that they have made, particularly when it comes to succession planning.

Over the past few years we have seen some of Asia’s wealthiest families start to confront the challenges of succession. Many of the Asian enterprises that you read about every day, whose logos are imprinted on the side of the tallest buildings, were founded and built many years ago. Those founders are beginning to look towards retirement and are only beginning to understand the complexities of handing over the reins of their vast empires.

Asian wealth is highly concentrated, often amongst a small group of dynastic families who themselves are connected by marriage or business relationships. Furthermore, the wealth is usually built around real assets such as real estate, construction and infrastructure.

Over the next two decades we shall start to see significant inter-generational wealth transfers as responsibility for managing the business and wealth moves to the children and grand children of the original entrepreneur.

Yet it is not as simple as asking the son to take over, the complexities involved in this process are immense. For example, the founder may well have multiple wives who each have a competing right to part of the wealth. The extended family may stretch to dozens of members or more, some of whom are actively involved in the family business and others less so.

The tradition has always been to hand over leadership to the eldest son, though he may not be the most capable person to run the business. Additionally, business and personal relationships are often interwoven, and are still rooted to ancient business customs like Guanxi, where personal relationships trump legal contracts. Deals are done on a handshake, nothing is written down.

As of last year, it is estimated that total wealth in Asia has reached about $22 trillion, yet only 39% of family offices in Asia-Pacific have a succession plan in place. There are a number of reasons for this, death is still a taboo subject and it can be hard for family members to discuss such matters when the patriarch is still alive. Additionally, many families simply think they can do it themselves and don’t trust outside experts.

The dangers of not taking succession planning seriously – having no plan, or an inadequate plan in place – are significant and can result in the loss of wealth, control or more.

For example, not long ago we were in discussions with a client in a North Asian country. After a number of meetings in which we discussed their need for intergenerational wealth transfers and how to structure it, we submitted our proposal. After numerous back and forths the patriarch decided against engaging with us. The reason was price, which he believed to be too high.

The family decided to keep a simple offshore company with the Personal Assistant of the patriarch acting as the Director and his brother in law being the nominee shareholder. This arrangement was cheaper. Regrettably for the family, one year later the tax law in the said country changed and the family was caught with this offshore structure which resulted in them being fined tens of millions of dollars

In order to avoid the myriad of ways in which family wealth can be lost, succession plans need to be put in place at the earliest possible opportunity. The upsides of doing this are the preservation of wealth, stability and longevity. As we start to see a new generation of UHNWIs, it is worth instilling this discipline of long-term planning.