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Allocation to own businesses prevails in Asian entrepreneurs’ portfolios: BNP Paribas

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Across mainland China, Hong Kong, and Singapore, UHNW entrepreneurs are allocating as much as 40% of their investment portfolios to own businesses — a significant surge, even for a region accustomed to high UHNW allocations to own ventures.

The 2021 Global Entrepreneur and Family Report, prepared by BNP Paribas Wealth Management, highlights this reinforcing trend in Asia. From 2019 to 2021, the average allocation to the region’s entrepreneurs’ own businesses has grown from less than 20% to 29% or more, with China leading the list with an average allocation of 41%.

Source: BNP Paribas WM • Click on image for PDF file

On a global level, own business and equities ranked in joint first place in entrepreneurs’ portfolios. But this was not the case as recently as in 2019, when the French bank’s survey showed that equities and fixed income were dominating global entrepreneurs’ investment portfolios.

Notably, entrepreneurs with an average net worth of US$25 million or more have consistently invested more in their own businesses, with a global average allocation of 27% in 2020.

This could explain the preference of Asia’s “ultrapreneurs” for allocating nearly twice as much to their own businesses as to public markets, the report notes, since respondents from the region have a far higher average net worth than their global peers (starting with US$25 million).

On the other hand, they have rapidly adjusted their portfolios in response to a robust public equities markets in the past year, with 56% increasing their equity allocations, led by Hong Kong (70%) and Singapore (67%). But their overall allocation to the asset class remains modest in comparison to their global peers (around 12% versus 19%).

More indebted
APAC entrepreneurs picked the rising levels of corporate debt as their primary concern for the investment climate, in particular in Singapore (58%), China (43%), and Hong Kong (38%). This factor is likely to have deep-rooted implications for their own ventures and private investments.

In Asia, debt usage has grown steadily since 2009 and before the COVID-19 pandemic, noted Prashant Bhayani, chief investment officer for BNP Paribas Wealth Management Asia.

Higher leverage coupled with an attractive lower rate environment has pointed to a burgeoning debt market, but Bhayani warned that central bank’s easing policy cannot last forever, and default rates could pick up quickly, threatening portfolio returns and even these entrepreneurs’ own businesses.

Cash buffer in question
“The striking difference between the report from this year versus pre-pandemic was the mindset [of the respondents] on cash,” said Tasha Vashisht, head of marketing & thought leadership at AON during a media briefing on the report.

“Before the pandemic, quite a number of individuals surveyed […] saw cash as a risk-free asset. When the crisis struck, we did see a reduction in how much of their investable wealth was held in cash, and by the time of the survey in 1Q21, many felt that their cash position was excessive.”

The second thoughts many entrepreneurs have for their cash holding were primarily inspired by the double-whammy of the negative rate environment and the persistent concerns for inflation, Vashisht pointed out.

But the reverse is true in APAC, where 29% expressed the view that they could have a “more substantial savings cushion”.

55% of entrepreneurs in China “feel confident they are holding the right amount of their wealth in cash”. The country’s entrepreneurs hold an average 10% cash as part of their entire portfolio, similar to Singapore (10%) and Hong Kong (9%). Taiwan’s entrepreneurs, on the other hand, have a markedly higher allocation of 15% to cash. Respondents from the island also expressed higher risk aversion, with the majority of them planning to “maintain wealth by reducing risk”.

Regardless of their current attitudes towards cash, commented Edmund Shing, global chief investment officer, BNP Paribas Wealth Management, investors will need to search for appropriate solutions that address inflation risks and excessive cash — which will be critical to portfolio strategy.

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