Establishing a Family Office in Singapore as a Variable Capital Company
Families often consider the prospect of creating a family office for their financial and non-financial needs. Compared to their capacity as an individual, they enjoy a higher return on their assets derived from preferential rates for investment instruments, access to private deals, and tax exemptions as a corporate entity.
A family office dedicated to serving the needs of a single family only, generally makes economic sense when there is at least $100 million in investible assets. As single-family offices often cost more than $1.5 million per year to maintain, multi-family office structures have become popular alternatives. These asset managers consolidate many of the core competencies of single-family offices for multiple families to achieve cost savings. With management fees of 1 to 2% per year, multi-family offices can provide both non-financial services and professional financial services, to clients with a minimum account size of $5 million, by taking advantage of economies of scale.
While it is not always economically feasible to maintain a standalone family office, the multi-family office model may not be suitable for all investors. By choosing to park their assets within a multi-family office structure, families sometimes overlook the potential growth opportunities available to single-family offices. Perhaps the most pertinent of these is the possibility to manage third-party capital or funds from other families. As institutional investors, larger family offices can extend their suite of financial and non-financial benefits to other principals or investors close to the family by converting to a licensed fund manager. This allows them to scale up more quickly and absorb the management costs that might otherwise be charged by multi-family office providers.
Setting up a family office as a sub-fund of a variable capital company carries the financial benefits and cost savings of a multi-family office while providing families with the growth opportunities of a single-family office. As anchor investors, the principal or family has discretion on the asset allocation and management of a sub-fund. The principal or family can raise external capital to scale up and absorb the fees from the management of third-party funds, i.e. similar to an exempted single-family office that converts to a licensed fund manager.
Variable capital companies are required by the Monetary Authority of Singapore to be managed by a licensed fund manager and therefore are subject to more stringent regulatory requirements than exempted single-family offices. This ensures that fund managers are operated properly, compliant with the Securities and Futures Act, and subject to regular audit. As a result, investors using variable capital companies as a family office enjoy favourable tax incentives, greater flexibility in project or venture financing, and a regulatory framework augmenting asset allocation strategies.
This guide will cover a brief summary of the following:
1. Key quantitative factors in setting up a single-family office
2. Multi-family offices as cost-competitive alternatives to single-family offices
3. Qualitative advantages of setting up a family office as a variable capital company
Key quantitative factors in setting up a single-family office
Cost plays a large role in the decision-making process to create a family office. While single-family offices enjoy preferable tax exemptions in Singapore, operating expenses can still be significant. Such costs are largely driven by the extent to which certain functions are outsourced, the size of the family, the number of legal entities, and the complexity of investments.
Figure 1 illustrates four basic cost models commonly used by family offices around the world.
Operating expenses in Singapore are typically lower than in other domiciles. The cost models above generally comprise of salaries plus 30% benefits and taxes. Overhead expenses are added at roughly 50% of total compensation. Third-party professional services – legal, accounting, tax, and investment management fees – are excluded, as they are often already incurred by the family. These estimates account for internal operating costs – staff and overheads etc. only.
Principals will often ask if spending at least $1 million to create a family office is necessary. Outsourcing and technology solutions are driving down the cost of operating a family office. By combining in-house and external resources, family offices can achieve more modest outlays. At least one-third of a family office’s annual cost is maintaining investment staff.
In Singapore, principals may be able to set up and operate a single-family office for less than the global average, from $500,000 to $1.5 million per year as illustrated below:
1. Internal operating costs $300,000 – $750,000 per year
a. Salaries & employment benefits
2. Direct family expenses Variable
b. Art or other collections
d. Personal consumption
3. External professional service fees $100,000 – $350,000 per year
4. Investment advisory fees > 1% per year
a. Manager fees
d. Aggregated reporting
The number of employees is determined by the number of tasks and complexity of functions required by the family office. The genesis of the hiring process typically begins with the employment of legal or accounting staff, already engaged through family-owned businesses or trusted service providers. Bill payment, tax matters, and family logistics – e.g., travel, administrative tasks, and the management of residences – are often the core functions. Figure 2 represents the projected staffing patterns required to handle core and subsidiary functions in-house.
Over time, multiple legal entities are formed for tax and ownership purposes. As the number of entities grows, so do the costs of maintaining those entities through accounting, legal, and compliance fees.
Family office personnel
The ability to attract, retain, and motivate the best talent is one of the most important factors in running a successful family office. Many families begin with a trusted employee to set the tone and standards for those who follow, typically from the family business.
Key personnel, such as the Chief Executive Officer, Chief Financial Officer, and Chief Investment Officer can also be sourced from high-level executives of law, accounting, or investment advisory firms. Even though it is likely that they will receive a much lower compensation, senior executives are often incentivised to join a family office for the opportunity to work closely with key family members, travel less, have a better work-life balance, and prestige. Some compensation estimates can be found in Figure 3.
Multi-family offices as cost-competitive alternatives to single-family offices
The objective of a family office
Multi-family offices offer a range of bespoke services while being competitive on cost compared to single-family offices. Given the unique requirements of each family, multi-family offices may endeavour to tailor their services accordingly but are still limited by their capacity to serve multiple clients.
Core competencies of setting up a family office
1. Security and confidentiality: A dedicated team ensures that security and privacy concerns will be addressed. Access to private information, wealth management, and advisory services can be centralised and limited to active advisors.
2. Alignment of interests and goals: With the centralisation of information, family offices are equipped to work with all family members to avoid conflict and align the long-term interests of the family.
3. Greater transparency: More complex issues derived from the management of the family’s wealth can be handled and distributed accordingly to all family members to avoid potential misunderstandings and disputes.
4. Higher returns: Family offices typically achieve a more substantial return on investments due to the consolidation of costs and increased access to private opportunities.
5. Process alignment: Aggregating the handling of tax, professional services, philanthropy, and other expenses can contribute significantly to achieving the family’s targeted returns and ensuring an alignment of goals.
Multi-family office structure
In general, multi-family offices tend to be much larger than single-family offices due to the volume of clients. Inevitably, families may receive a less dedicated service than if they were to set up a standalone office. At a fraction of the operating cost and investment amount required for a single-family office, many families with less stringent requirements are willing to compromise on truly bespoke solutions.
Qualitative advantages of setting up a family office as a variable capital company
As both single-family offices and multi-family offices benefit from preferred rates, more generous tax incentives, and lower professional fees, many principals consider the shift to a fund management structure to extend their perks to external investors for a management fee. Structuring a family office as a sub-fund or segregated portfolio of a fund vehicle provides principals with the capacity to raise capital from other investors and to share in the fees earned from the funds that they help to raise.
Introduced in January 2020, the variable capital company (VCC) is a new legal entity form/structure for investment funds. Like segregated portfolio companies in the Cayman Islands, VCCs are comprised of sub-funds that each account for their assets and liabilities independently. VCCs therefore benefit from improved operational and tax efficiency, non-public financial statements, and the segregation of risk between each sub-fund.
Tax benefits and exemptions
Like other family office structures, VCCs are eligible for both the Onshore Fund Tax Incentive Scheme (Section 13R) and the Enhanced-Tier Fund Tax Incentive Scheme (Section 13X). The latter has fewer limitations plus access to the Singapore Double Tax Treaty network but requires a minimum fund size of $37.5 million (at 1.33 SGD/USD).
Oversight on how assets are managed
Unlike a multi-family office, where the family’s funds are managed at the discretion of the fund manager, a VCC sub-fund functions in the same manner as a single-family office. The client will have majority control of the sub-fund’s investment committee to enable them to have oversight on how their funds are managed and make decisions on which investments to pursue.
Project and venture financing
A family office structured as a sub-fund of a VCC would provide the principal with the facility to finance their projects and initiatives. As anchor investors and investment committee members of the sub-fund, the principal will be able to suggest potential investments and allocations that the fund manager can manage and raise additional capital for.
A family office structured as a sub-fund of a VCC would allow the principal to raise external capital to be managed by the fund manager and share in the fees earned from the management of new funds.
Figure 4 demonstrates the estimated costs of single/multi-family office structures and the indicative earnings from a VCC sub-fund for an anchor investor or family.
Successful family offices share the same values as successful businesses. Many high-net-worth individuals built their businesses from the ground up. Their experiences gained as an entrepreneur often translate to their preferences as a principal: to invest directly and maximise genuine cash-on cash value rather than indulge in short-term rates of return. In a family office environment, these ideals enable principals to attract capital from like-minded investors.
Families have choices and flexibility when setting up a family office. Like successful businesses, there are no one-size-fits-all models, only breadth of experience and sound practices to build upon. In assessing the possibility of establishing a family office, these structural insights outlined here will serve as a helpful starting point. Many families have walked similar paths; it is prudent to learn from their experience when looking to secure a future for the next generation.