Asia Has a $22 Trillion Succession Problem

(Bloomberg) -- Having a grandfather with four wives can make for some complex succession issues, as Cheong Wing Kiat found when running his family's Singapore-based drug company a few years ago.

The patriarch and his three co-founders had more than 20 heirs with competing agendas. Buying out about half helped, but involved tough negotiations and family fights. Now, the number of shareholders is climbing again and Cheong, 59, worries for the next generation.

“Within the next 10 years, we will have to do another pruning, " he said. "But it will not be my task, and I am happy about that.”

After building vast empires, Asia's moneyed are, sometimes for the first time, confronting uncomfortable questions as they prepare for complex inter-generational transfers of both wealth and business. A new report released Tuesday by UBS Group AG and Campden Wealth predicts a coming “seismic shift" as inheritances are handed down to younger generations globally. But the need for succession planning is particularly pressing in Asia-Pacific, where only 39 percent of family offices have a strategy in place, the lowest proportion of any region, it found.

“The main factor why succession planning often has been overlooked in Asia is that the money is quite recent, often first or second generation,” said Karim Mrani-Alaoui, chief investment officer at a Singapore-based family office. “Pretty often, the person who created the wealth is still alive. So many families are just not used to setting up a proper succession plan.”

Total wealth in Asia has reached about $22 trillion and is increasing at the world's fastest pace, according to consultancy Capgemini. Yet the region has a bigger problem around succession partly because there's often no clear demarcation between wealth and business, said Benoy Philip from Singapore-based consulting firm Taproot Family Offices Pte. Many Asian empires continue to be managed and owned by extended family, which means questions around company succession and estate planning are often intertwined.

In recent years, the region has seen some high-profile fissures among wealthy families amid disagreements over control.

Mukesh Ambani, now Asia's richest man, and his brother Anil, split the Reliance group in 2005 following an ownership fight after their father died without leaving a will. In Hong Kong, a family feud over control of the city's biggest developer, Sun Hung Kai Properties Ltd., resulted in the 2008 ouster of Walter Kwok by his relatives.

“Things start falling apart if these issues are not taken into consideration,” Goh Siow Hui, ASEAN family business leader and tax services partner at Ernst & Young Solutions LLP, said. “Conflicts arise, and you see undesirable results in the newspapers, where family members bring each other to court."

In Europe and the U.S., dynasties like the Rothschilds and financiers like J.P. Morgan started their family offices as far back as the 19th century with trusts, wills and clear rules of succession. In Asia, by contrast, a reluctance to talk about death can make this kind of preparation harder.

“The subject is more easily discussed in Europe,” says Noor Quek, the Singapore-based founder of NQ International Pte, which advises family offices. “Culturally, it's a delicate subject here.” That's partly because in Western countries, wealth doesn't automatically go to family members and could be bequeathed to universities, foundations or philanthropic causes.

“I know a recent example of a very wealthy 90-year-old Indonesian owning a whole business empire,” said Philip. “His three children are already in their sixties, working for the family business and getting their salaries. But they don't dare talk about succession.”

Cheong's experiences at Wen Ken Group -- the Singapore-based traditional medicine firm founded by his grandfather and three others in 1937 -- offers a window into some of the challenges Asia's families face around inheritance and succession.

Given his grandfather's large family and many business partners, bringing down the number of shareholders at Wen Ken wasn't easy.

“We had many, many rounds of meetings and a lot of arguments," said Cheong, who ran the company from 1995 to 2011 as business leader. "There were disagreements about the valuation and a lot of suspicions.”

He even asked his father, who wanted to keep his holdings, to sell a small part of his shares to prove the pricing for the buyout was fair. Managing the firm became easier after that process. Other family members are now running the company, and Cheong doesn't hold an executive role any more. But as a shareholder he believes more pruning could be needed again someday.

The latest UBS/Campden Wealth Global Family Office Report found that 32 percent of Asian family offices had succession plans under development. About 21 percent said they had no plan and 7 percent said they didn't know.

“It could become a serious threat to Asia's wealthy if no proper mechanism is put in place for inheritance and succession planning," said Philip of Taproot. "If no action is taken, it could become a time bomb.”

To contact the reporter on this story: Klaus Wille in Singapore at kwille@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Anjali Cordeiro

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