Asia is now home to more than a quarter of the world's 2,754 billionaires and this portion is predicted to rise to one-third by 2023, according to Wealth-X's 2021 Billionaire Census. This wealth eruption has generated a spate of direct investment opportunities for Asian families and created a regional boom in family offices (FOs).
Singapore saw the number of FOs multiply fivefold from 2017 to 2019 and the number of single-family offices now stands at over 400. This surge encompasses both new Asian FOs and those from Europe and North America that are seeking to tap into Asia's regional growth and explore co-investment opportunities.
“As one of Asia's most politically stable, well-regulated and competitive economies, Singapore is an ideal base for FOs to centralise global portfolios,” said Suzanne Johnston, Singapore-based partner at law firm Stephenson Harwood. “Singapore's financial sector provides ready access to global and regional markets, and it is regarded as a secure jurisdiction with a well-developed legal system and a good rule of law.
“Singapore is a low tax jurisdiction, but it is not ‘offshore'. It has a network of 25 free trade agreements and more than 80 Double Taxation Agreements (DTAs) around the world, which assists FOs to manage withholding taxes from overseas investments efficiently. It is also well located geographically for wealthy Asian families, so it is viewed as an excellent place for them to establish residence.”
Singapore's FO sector has enjoyed some help along the way. The Family Office Development Team (FODT), a strategic partnership between the Monetary Authority of Singapore (MAS) and the Economic Development Board (EDB), was set up to develop Singapore's FO ecosystem across three pillars: enhancing the operating environment, developing capabilities in financial and professional services, and building a connected FO community.
To meet the rising demand for FOs, Singapore has also been strengthening its competencies in managing FO requirements. The Institute of Banking and Finance Singapore (IBF) has set up ‘skills map' programmes for FO Advisors, Executives and Management Professionals to deepen technical skills and competencies (TSCs). Plans are also in the pipeline for more programmes covering environmental, social and corporate governance (ESG), philanthropy and venture investing.
The success of these efforts was evidenced by the government's decision, as of 18 April, to apply stricter criteria for FOs to receive tax incentives in Singapore. The amended conditions apply to sections 13O and 13U of the Income Tax Act and include increased minimum requirements for assets under management, making local investments, local business expenditure and hiring investment professionals.
These new rules have generally been welcomed because they are likely to attract more funds from FOs for Singapore's fund managers and help to stimulate the Singapore economy. The measures for ‘local investments' include not only equities listed on Singapore-licensed exchanges, qualifying debt securities and funds distributed by Singapore-licensed/registered fund managers, but private equity investments into non-listed Singapore-incorporated companies with operating business(es) in Singapore.
FOs that invest in local start-ups will need to manage these active investments with care. In particular, they might consider setting up two highly advantageous structures – Employee Benefit Trusts (EBTs) and Pre-Initial Public Offering (Pre-IPO) Trusts – to enhance and protect their investment at every stage of the growth cycle.
“We're definitely seeing an uptick in enquiries around EBTs in relation to start-ups,” said Johnston. “Given the need to attract, incentivise and retain high calibre employees in these markets, we would expect EBTs to become an ever more significant tool.”
An EBT is a type of discretionary trust established by an employer for the benefit of the company's employees to holds assets, most often shares, share options and awards or bonus payments. An employee is typically required to remain as an employee of the company for a set period of time before the benefits vest with them. At this point, they can either hold the shares and receive any dividends that are paid, or they can sell the shares back to the company for a prescribed sum.
The trustee would generally be guided by the recommendations of the plan committee of the company in respect of which employees, or groups of employees, are to benefit and when – vesting conditions are typically based on criteria such as performance milestones or specific vesting schedules – and the type of awards to be delivered to the employees – in the form of shares or, if the company has liquidity, cash from the sale of shares.
“EBTs are an effective way to create an internal market for shares of private companies, to manage the share cap table where multiple employees hold shares directly and to enable employee shareholders to sell their shares and receive value,” said Johnston. “They also enable the deferral of employee bonuses – whether in cash or shares.”
“EBTs act as a vehicle for warehousing shares, so that awards can be met when required under a company's employee share plans, and for buying shares from employees who are required to sell their shares, for example, if they leave the company. This prevents the family ownership being diluted.”
The initial public offering (IPO) process is a watershed event for business owners that will have significant implications for their personal wealth. A key challenge is how best to ensure business continuity and to manage the liquidity created during the IPO process and then transition it to subsequent generations. By placing the equity into a trust prior to an IPO, the family can retain control and stewardship of the company while minimising the commercial and emotional frictions that can arise before and after an IPO.
“Pre-IPO trusts are essential for the key individual shareholders – founders, chief executives and senior executives – at a highly exposed moment for the business,” said Johnston. “They provide for business continuity in the case of any disputes, legal actions or shareholder departures. Provided that the trust is irrevocable and any powers retained are limited, pre-IPO trusts can offer asset protection and allow for succession planning by bringing the next generation into the business.”
Singapore business owners can create a pre-IPO trust and then transfer the shares in the holding company to the trustee so that the shares in the company to be listed are held indirectly by the trustee through the holding company. The trust will serve to protect the IPO process from a possible adverse event to the business owner(s) – divorce, incapacity or death – and assist in reducing the risk of fluctuations in the price of shares.
Following a successful IPO, the trust can then provide important family asset arrangements for major shareholders. Having the shares of the company in the hands of the trustee offers the potential for wealth and succession planning, irrespective of the number of family members or any changes from one generation to the next. It can also serve to exclude spouses and partners from claims of ownership.
“A trust can allow the business owner to pass down his mission statement for the company and the family,” said Johnston. “This type of trust needs a robust trustee that can administer actively. Whether this is a professional trustee, or a private trust company (PTC) that is administered by a professional trustee, will come down to the objectives of the family.
“We often recommend that a ‘family constitution' is drawn up, which sets out how the family should deal with the shares in the company over time. A family constitution can be wrapped around the entire structure to establish how decisions are taken by the family, which in the longer term leads to greater family harmony. Where clients create their own PTC to act as trustee of the structure, we also recommend that they should put an ‘operating manual' in place to set out best practice for the PTC.”
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