Asia Pacific and the Implications for Cross Border Transactions and Investment Flows

Global Growth of High Net Worth Individuals

Despite the ongoing global economic uncertainty and financial crisis in Europe, growth amongst high net worth (‘HNW’) private clients continued in 2011. While the HNW populations across all regions are back above the pre-crisis highs of 2007, the Asia Pacific population has grown the most.

It is estimated that in 2011 and 2012, China and India will contribute to over 40 per cent of global growth in private clients. According to a recent study by Julius Baer Group and CLSA Asia Pacific Markets, China’s millionaires will account for about half of Asia’s rich and hold more than half of the region’s wealth by 2015.

The number of Asia’s millionaires is expected to double to 2.8m by 2015 with 1.4m HNWI in China, equating to approximately US$ 8.76 trillion of the regions US$15.81 trillion wealth. India will be the second biggest market in Asia by 2015 with 403,000 millionaires followed by South Korea, which will be ranked third. Indonesia stands out with the highest growth rate in terms of number of HNWIs over the period to 2015 with 25 per cent, rising to 99,000 and accumulated wealth of US$487billion.

Globalisation of individuals, families and their assets, along with the trend toward greater transparency, has altered the scope, depth and sustainability of offerings required from intermediaries and service providers.

Specific Solutions

Asia is the largest user of special purpose vehicles globally, and the trust industry is expected to grow significantly in the coming years. Various studies show that the market capitalisation of Asian family businesses has grown tremendously over the last 10 years. For example more than 50 per cent of the listed companies in Singapore are traditional family businesses, which can be considered the backbone of the booming economy. Even through two disastrous stock exchange crashes in the last decade, these businesses have weathered the crises very well and even outperformed the local benchmark. The sustainability is partly linked to the fact that the family owners are strongly committed to their businesses which have been built up over generations.

However the 21st century presents family businesses with a unique situation, complicated by both the diversity and rate of change. Asian families have always needed to find ways to preserve their traditional identities and values while allowing the current generation to pursue its own direction.These traditional identities and family bonds of Asian families are interwoven with family business and wealth interests and are now being impacted by cultural, generational, technological and economic developments.

Multi-generational families need a sound family succession plan to address current developments and this plan should focus on three aspects: governance, management of wealth and administration.

One of the most successful structures which can help to administer these plans is the ‘Singapore Family Investment Holding Company’ (in spite of its unfortunate acronym – the FIC). The FIC is the only company in the world through which clients can conduct a diversified range of investment activities and benefit from an extensive range of tax treaties as well as tax exemption.

Only licensed Singapore trustees may incorporate and maintain a FIC company.

Trusts and foundations are used in combination with Family Investment Holding companies for purposes of asset protection and estate planning. There are a wide variety of jurisdictions and corresponding types of trusts and foundations available, each with different characteristics. A selection can be made depending on the specific situation of a family and the location of the beneficiaries or second generation inheriting the business.

Other Growth Areas

Chinese and other Asian entrepreneurs are expanding their businesses at a fast pace. They are on the lookout for market expansion as well as investment into other fast growing economies and investments into resources. China is now becoming the number one source of foreign direct investment into a multitude of Latin American countries.

With this new dynamic, traditional fiduciary service providers will need to expand the scope of their services to include additional services besides company management, which ensure that a family business is assisted on the corporate side with a variety of tools required to facilitate this expansion.

International Trade Structures

Many Chinese and other Asian businesses are expanding out into the rest of the world, securing places higher up the supply chain to final customers of their manufactured products. It is becoming a necessary requirement for these firms to set up cross border trade and finance structures. Incorporating and managing such trade vehicles has always been a key aspect of the service provision of fiduciary providers. Assistance is provided from free trade zones close to the target markets. These zones provide fiscal advantages, as well as logistical and inventory advantages, allowing products to be stored in close vicinity to the target market, ensuring faster delivery geared to market demand, from a secure and low cost location. In turn this allows manufacturers to market their products to these target markets more effectively, receiving clients to inspect products, view new models etc, in a location closer to their home markets, decreasing travel, and allowing them to purchase in locations where their own language is spoken. A good example of such a Free Zone is the Curaçao Free Zone, which is used by aircraft parts manufacturers, the new energy industry and many more manufacturers of high value products / industrial products, to store their inventory and receive (potential) customers.

Merger and Acquisitions Services

As stated earlier, entrepreneurs from Asia are looking for business expansion, and are searching for investment opportunities in these regions. The traditional fiduciary providers assist in setting up tax efficient investment structures for greenfield operations, or holding companies that hold target companies or assets that are acquired.

Shared Investment Vehicles (Funds)

Structuring investments through an investment fund can have several advantages for both the investor and the target company. The target company has as a shareholder and investment fund as a shareholder, which increases its status to other investors, and the investor can remain confidential. For an investor from certain regions, foreign direct investment can have a negative political or stakeholder impact, and using an investment fund can shield such foreign investor from these impacts.

Securities Exchange

Another option for fiduciary providers is to become a listing advisor and broker on a securities exchange. This supports structuring of such cross border investments And there can be several advantages to having this done through an exchange, namely:

• Many Latin American countries have lowered interest withholding rates on bonds issued by local companies on a foreign securities exchange.
• Investments can be listed on an exchange, making them more easily transferable, and making the investment more transparent in terms of pricing.
• Structuring the investment through an exchange can keep the investor confidential, as shares are held in the name of the broker / custodian.
• The investments can be custodied by banks and wealth managers, which enable them to keep the assets under management, even if the investment is made into an operational company.

In summary, high net worth clients are on the rise, and in Asia often manage an expanding and growing family business.