Investment Perspectives: An Asian Time-Out

In Indonesia, the recent presidential election by the Prabowo-Gibran team promises a continuation of the country's investment in key initiatives like capital relocation and the transition to carbon neutrality. In the Philippines, a significant easing of foreign investment restrictions in sectors such as retail and public services has captivated the interest of foreign investors. This strategic move, coupled with the country's focus on renewable energy and the relaxation of investment barriers in this domain, is seen as part of the broader regional pivot towards sustainable development and economic diversification.

In Japan, efforts to attract foreign investments are paying off. There is a particular focus on promoting investments into digital transformation, green transformation, and promising start-ups, together with efforts to improve the living environment for foreign nationals in Japan. We see steps being taken to prepare model-form contracts that embrace global standards and standard investment contracts, efforts to enhance support for international companies entering the Japanese market, and a wide array of subsidies and foundation grants in strategic areas such as semi-conductors, data centres, next-generation telecommunication technologies, and green innovations. The converse is also happening - Japanese companies are also looking to expand overseas.

In Singapore, the government's keen sense in maintaining an innovative and pro-business ecosystem continues to draw foreign investments. Singapore saw a dramatic influx of private capital amidst an estimated two-fold increase in the number of single-family offices (SFO) setting up in the jurisdiction[1], signifying wealthy families' confidence in Singapore's political stability, friendly international relations and favourable tax regimes. The growth of the asset management space in Singapore has been noteworthy: the advent of the Variable Capital Company (VCC) structure in January 2020 has played a part in sparking this growth as fund managers and family offices are drawn to the flexibility and functionality offered by the VCC structure. Separately, in order to streamline the regulatory framework for fund managers, we are expected to see the repealing of the registered fund management company regime in favour of a single capital markets services licence framework.

Family Offices And Impact Investing

The flow of private capital into Asia is undeniable. Beyond South-East Asia, representing an untapped reservoir of investment opportunities in emerging economies like Indonesia, the Philippines, and Vietnam, this trend is partly driven by the strategic foresight of Asia’s entrepreneurial giants, who, after decades of contributing to impressive economic growth, now have to contemplate the transfer of their amassed fortunes to the next generation.

With an estimated US$2.5 trillion expected to transition across generations by 2030 in Asia alone[2], wealthy families have turned to setting up family offices in their succession plans, not just for wealth preservation but also as platforms to educate their younger generation on responsible wealth management.

Socially and environmentally responsible investing is likely to be a major theme for these future generations of wealthy investors. It has been noted that about two-thirds of millennial and Gen Z investors said they were very concerned about ESG issues such as carbon emissions goals, workplace diversity, and board independence. This stands in contrast to the approximately one third of investors aged 58 and older who felt the same[3]. In Singapore, initiatives such as the Singapore-Asia Taxonomy for Sustainable Finance, and the establishment of the Singapore Sustainable Finance Association, provide helpful frameworks for sustainable and transition financing. These developments are pivotal for fund managers looking to help environmentally conscious clients capitalise on emerging opportunities in, amongst other sectors, green infrastructure, renewable energy, and sustainable agriculture.[4]

The role legal and financial advisers play in helping family offices succeed is crucial in navigating the complex web of regulations and opportunities, and in surfacing and resolving intricate, often sensitive issues in establishing robust structures to safeguard their assets, while allowing the next generation to experiment, learn, grow, and ultimately thrive. Wealthy families across Asia are now seeking out full-service advisors who can help them with a full suite of services such as immigration, tax, business operation planning (including aspects such as employment and intellectual property protection), legal support in executing investments, and purchasing of both commercial and residential real estate.

In response to the influx of private capital and SFOs into Singapore, we witnessed various developments on the regulatory front:

• Tighter economic requirements for SFOs: Investment entities managed by a SFO in Singapore will now have to meet higher economic substance requirements in several respects before qualifying for the section 13O or 13U fund tax incentive schemes, including: (i) section 13O entities will have to maintain a minimum S$20 million in assets under management (AUM); (ii) SFOs will have to maintain at least two or three qualifying investment professionals at all times, of which at least one must be a non-family member; (iii) SFOs will have to incur higher minimum local business expenditure (tiered according to AUM); and (iv) investment entities will have to deploy a minimum portion of capital towards certain investments that primarily benefit Singapore or are qualifying climate-related investments.   
• Increased AML/CFT screening for applicants for section 13O/U tax incentives: To further safeguard against money laundering risks arising from SFO structures, it is anticipated that more rigorous screening checks on section 13O or 13U applicants by the Monetary Authority of Singapore (MAS) will be implemented.
• Structure-agnostic licencing exemption framework for SFOs: At present, SFOs can be exempt from licencing as fund managers if they manage funds of ‘related corporations’, or on an ad hoc case-by-case basis if they otherwise manage moneys for a single family only. The MAS has consulted on a new framework that will be structure-agnostic, and strengthen Singapore's surveillance and defence against potential money laundering risks posed by family offices. This new framework has not been finalised at the time of writing.
• Introduction of the Philanthropy Tax Incentive Scheme for family offices: To encourage and support the desire of families to contribute to philanthropic causes beyond Singapore's shores, a new tax incentive was announced in July 2023 so that qualifying donors (which may be individuals or entities that are associated with a qualifying SFO set-up) can enjoy 100 per cent tax deduction on their overseas donations made through qualifying local intermediaries.

Alternative Investments

Against the backdrop of a high interest rate environment, geopolitical crises, and several extreme weather events and climate-related disasters, alternative investments continued to find favour with asset managers as a means to diversify and enhance returns, when the saturated and highly competitive public markets have made finding attractive returns increasingly difficult.

Recent years have underscored the resilience of the global alternatives sector, despite broader market volatilities. The MAS highlighted this resilience at the recent Alternative Investment Management Association Singapore Annual Forum 2024, pointing out that hedge funds' AUM managed out of Singapore soared to a record high of approximately US$4.4 trillion by Q3 2023, marking a 4.6 per cent increase from 2022[5]. This surge in AUM was propelled by robust asset performance and optimistic returns, fuelled by declining inflation rates and a positive outlook for mergers and acquisitions.

In the first three quarters of 2023, we observed slowing growth in the Asian loan markets attributable to the high interest rate environment and more conservative lending policies of traditional bank players (largely caused by stricter capital controls). Since Q4 2023, however, the tide is slowly turning and we are now seeing increased deal flow in the loan markets, aided in part by the increased volume of deals coming from private credit players. Private credit players are stepping up like never before, and in many cases taking lead roles traditionally offered by banks in arranging leveraged loans that underpin the M&A markets.

In particular, private credit saw strong growth in 2023, raising about US$151.9 billion as at the end of Q3 2023, with the number of private credit funds in the market increasing by 19 per cent from 2022 to October 2023, marking a record high[6]. This underscores investors' pursuit of higher returns and lower volatility in a challenging and uncertain macroeconomic environment, where public debt markets are distorted by central bank interventions, fiscal stimulus, and geopolitical risks. Will investor sentiment surrounding private credit cool off? It was recently reported that policymakers and market participants were increasingly concerned about the significant challenges faced in assessing risks in the private credit market and the increased scrutiny that private credit firms are now facing over loan valuations and recoveries after defaults, arguably more acute than those of bank-led syndicated lenders[7].

As market observers predict falling interest rates, the surplus ‘dry powder’ in the market, coupled with the emergence of private credit to provide necessary leverage to supplement such capital, should resurrect transaction deal flow in Asia.

In the venture capital space, after enduring a prolonged ‘funding winter’ in 2023, characterised by startups shuttering and layoffs, there is now a cautious optimism that the worst may be over. Venture debt providers have entered the high-yield venture debt market in Asia to offer greater financing options to cash-strapped startups, most of whom have put equity fund raises on hold. The adjustment towards profitability by tech giants like Sea, Grab, and the GoTo Group, also indicate a potential turnaround in industry health. Challenges remain, however, particularly in securing exits and navigating stringent public listing regulations.

While venture capital investments are expected to remain sluggish in the first half of 2024, the high level of undeployed capital belies the reality that while the path ahead is fraught with challenges, there remains a significant potential for growth and innovation when the time is right.

[1] From the end of 2021 to the end of 2023, there was a twofold increase in the number of SFOs awarded tax incentives in Singapore, a rise from 700 to 1,400 (https://www.mas.gov.sg/news/parliamentary-replies/2024/written-reply-to-parliamentary-question-on-family-offices; https://www.straitstimes.com/opinion/st-editorial/family-offices-bring-credit-to-singapore)

[2] https://go.wealthx.com/download-preservation-and-succession-family-wealth-transfer-2021

[3] Based on a 2022 survey of 2,470 individual investors  (https://www.gsb.stanford.edu/faculty-research/publications/esg-investing-what-shareholders-do-fund-managers-represent)

[4] https://www.mas.gov.sg/news/speeches/2024/beyond-the-horizon---unlocking-value-in-the-future-of-alternative-investments

[5] https://www.mas.gov.sg/news/speeches/2024/beyond-the-horizon---unlocking-value-in-the-future-of-alternative-investments

[6] https://www.mas.gov.sg/news/speeches/2024/beyond-the-horizon---unlocking-value-in-the-future-of-alternative-investments

[7] https://www.businesstimes.com.sg/companies-markets/banking-finance/private-credit-s-default-recovery-rates-are-worse-its-biggest-rival; https://www.businesstimes.com.sg/companies-markets/banking-finance/bank-england-joins-warnings-red-hot-private-credit-market

Daniel Yong
Joint Managing Partner, Withers KhattarWong

Charmaine Sng
Associate, Investment Funds, Withers KhattarWong