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Wealth Management Magazine I VOL 2 I 2009

COVER STORY

LIFESTYLE

ECONOMY

Wealth Transition in the Asian Family Business

The ballet of bubbles

The path ahead for the Indian economy

Disclaimer: Please note that the opinions expressed in this document are authors’ own and not necessarily that of BNP Paribas.

This Publication (Communication) is intended solely for authorised recipients and no one else and BNP Paribas shall not be responsible in case the same is received and/or acted upon by any other person/entity; it shall be the duty and responsibility of the recipient, to ascertain that he is entitled and authorised to receive this Communication and/or to act on it, as per the laws and regulations of the country of citizenship of the recipient and the country of receipt. The information and opinion herein is provided for information purposes only. It does not constitute investment, legal or tax advice nor is it to be relied on in making an investment or any other decision. Please seek relevant professional advice before making any investment decision. Although the information appearing in this magazine was obtained from sources which BNP Paribas considers reliable, we do not guarantee its accuracy and this information can be incomplete or summarized. Reproduction in whole or in part is prohibited without prior permission of BNP Paribas.

BNP Paribas (2008). All rights reserved.

Dear Client, We take great pleasure in presenting to you another issue of Mosaic.

Managing the transfer of family wealth across generations can be a daunting task. Inheritance plans in business families are even more complicated as wealth and worth are often intricately woven into the business. In our cover story, Julie Teo, our MD and Head of Wealth Planning Services, Asia identifies the factors which influence inheritance decisions.

We also have, in this issue, the Ambassador of Champagne in India, Rajiv Singhal, introducing us to the fine world of Champagne and its diverse types.

In our regular column on Economy, Dr. Andrew Freris, our Senior Investment Strategist, Asia looks ahead to the longer term prospects of the Indian and the Asian economies.

As always, through this magazine, we aim to bring to you insights from experts on a broad selection of subjects that may be useful and of interest to you. We hope you will find it interesting reading and look forward to your feedback and suggestions.

The ballet of bubbles See Page 8

Warm Regards, Gautam Joshi

Feedback & Suggestions gautam.joshi@asia.bnpparibas.com French Bank Building, 3rd Floor 62, Homji Street, Fort Mumbai 400 001

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Editor’s Note

Cover Story

Wealth transition in the Asian family business Succession planning goes beyond ensuring successful wealth transition for the family, as Julie Teo elucidates.

T

he Chinese proverb, “Each family has its own difficult scripture (or sutra) to recite”, holds true for all families.

Whilst many issues faced by families in wealth and succession planning have common underlying themes, each is unique, and hence the solution for each family is different. While underlining the common challenges faced by family businesses, one should bear in mind that a tailored solution for any family requires an in-depth understanding of the family’s own circumstances. This means successful wealth transition and succession planning needs to accommodate the family’s aspirations and objectives.

The Modern Asian Family Characteristically, the modern family is small in size and enjoys greater affluence. However, smaller nuclear families do not underestimate the need for formalising wealth transition arrangements.

The world today is global in nature, be it business relations or familial relations. This brings about a greater need for planning of the next generation business leaders for succession or inheritance. In Asia, especially where businesses tend to be predominantly familyowned, succession issues and wealth transition are given high priorities. But similar to their western counterparts, whilst many are aware of the need to plan, the percentage of families who plan and proceed to implement it are considerably low.

Common Observations About Asian Family Businesses Asian family businesses have been frequently portrayed as single decision maker type business model. This is increasingly changing as the value of engaging professional managers, advisors and the involvement of second or third generation family members is gaining acceptance. Families, whose businesses began postWorld War II, are transitioning from first generation to second or third generation family members.

This may involve siblings and cousins, thus creating a set of new and complex family issues, such as higher number of family members and added diversity in levels of business interest and talent.

As the next generation business leaders take over the reins, we are also witnessing an evolution in cultural norms, both globally and in Asia. For example, families have become more democratic in the decision-making process by involving more family members; and there is increased focus on merit and abilities, rather than merely on birth order and gender in wealth transition.

The current business environment is more competitive and fastmoving. So families can no longer be complacent, and expect that their businesses will survive the stewardship of family members who are not as qualified as professional managers. As the younger generation takes on more responsibilities, there is a greater need for families to plan ahead for business succession. Familial relations have taken a global perspective as members of the younger generation receive foreign education, thereby creating social networks beyond their home ground. This creates the need to consider cross-cultural and crossjurisdictional perspectives. All these developments have compelled families to be more focused in strategising and preparing the family for business succession and wealth transition.

Transition of Wealth & Family Succession through Generations Described below is a broad framework of the transition through generations for family owned and managed businesses.

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In a culture where a handshake seals the deal, challenges are faced by both the first generation wealth creators and the second or third generation family members.

Cover Story

THE TRANSITION PROCESS Some steps to managing generational family business, in particular the second

The Transition In successful Asian family-owned businesses, there is often a strong bond between the first and second generation. The second generation family members typically enter the business at a young age and may even participate in growing the business into a successful venture.

Those who are not involved in the business may be aware of their parents’ strong commitment to the family business, and have developed emotional ties to the business which they can understand and appreciate.

The second generation family members are usually siblings, which means the bloodline and emotional bonds tend to be stronger, regardless of personal differences. The third generation’s perspective is different as they are the grandchildren of the patriarch or founder, and usually would have little or no awareness of the business in its formative years.

They may not feel as strongly as the earlier generations.

Third generation family members, who include cousins, are usually more diverse in their interest, background and talent. The perception is cousins are rarely as close as siblings and this distance, in reality, often increases as third generation members forge close relationships with their spouses and friends.

and third generation succession: 1. FAMILY STRUCTURE It is important to understand the perspectives of the successive generations as family members may view the family and business as different components. This is not the case with the first generation where their family and business is considered as one.

While business celebrates talent and achievement, in a family the members expect respect.

3. DIVERSIFICATION

The family must understand the risks of having its assets committed to a single business, and it should examine if they are sufficiently diversified. Often when the business reaches the third generation, there is an increasing need for diversification.

5. MISSION STATEMENT

Nowadays, most families are encouraged to prepare its mission in a statement of purpose with the objective of providing an opportunity to think and express what it wants as a family. The family must decide what it wants the business to be, what are the values, what to expect in terms of growth and return on investment, etc.

Conclusion

2. FAMILY VALUES The family should review and discuss the values that have made it successful over the years, and how it can preserve those values. Since the family’s financial capital is important, it should consider intellectual and human capital to be equally important for it to thrive. In this context, intellectual capital refers to competence in the management of family matters and human capital refers to the family’s functioning as a community of interest.

4. FAMILY MISSION The family should decide what its mission should be as a family-owned business and determine if it is realistic and desirable for it to continue to own and manage it. The family should decide whether its mission should include diversifying its holdings and setting up a family office to manage its financial assets or to fund educational opportunities or finance entrepreneurial projects for family members.

6. DECISION MAKING

The family must decide how it will make decisions about family matters; for example whether a governing or advisory council should be constituted, how will family members be kept informed and given responsibility for making and carrying out family objectives, etc.

7. STRATEGY The family must develop a strategy for accomplishing its succession goals; for example, how will younger family members be trained to take on responsibility, who will guide and evaluate them?

How will their assuming responsibility affect professionals working in the business who are not members of the family?

Family unity is the underlying theme for wealth transition.

There are three broad principles that apply to family unity across cultures:

The “Three Pillars of Family Unity” The first is an appropriate balance between ‘structural’ and ‘process’ solutions. Creating the right platform for family unity involves a balancing of the right structure that binds the members of the family to certain ways of doing things and creating the right atmosphere for the family to work productively together. The ‘structural’ element refers to setting up a family trust and the latter, “process” means family governance and family advisory.

The second “pillar”, a more process oriented subject, is the extent to which the family functions as a community of interest. The long-term wellestablished successful families we know often create an environment in which there is a shared understanding of the family’s mission and strategy and an open forum for communication about issues.

The third “pillar” is the “public purpose” of a family seeking to leave a long-term legacy. Families have important private purposes, but those that stay together for generations also find a purpose that looks outside the family. For example, the family becomes interested in its business assets not only for return on investments but for the good the businesses do for all their communities: employees, suppliers, customers and the cities in which the businesses reside. Another aspect of public purpose is the family’s interest in social development and engagement in philanthropy.

For most families, the transition from a hierarchical family dominated by first or secondgeneration entrepreneurs to a communal environment is one that involves a substantial commitment and a lot of hard work as well as the general mirth found in family interaction. Not every family wants to, or can, create itself as a community; those that do not usually end up selling or dividing their business assets.

Julie Teo is currently Managing Director & Head of Wealth Planning Services, Asia of BNP Paribas Wealth Management. She is responsible for managing the bank's wealth planning services, business covering trust and estate planning, insurance, family office & family advisory and strategic philanthropy

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Family gatherings are frequent; family members do not always agree about decisions but the spirit is such that they will support family decisions once made.

Lifestyle

The ballet of bubbles A loud pop and bubbles rushing from the bottle in a stream of celebration identify Champagne, the most famous sparkling wine in the world. Here’s a quick introduction to its varieties.

M

adame Lilly Bollinger famously confessed “I drink it when I’m happy and when I’m sad.

Sometimes, I drink it when I’m alone. When I have company, I consider it obligatory. I trifle with it if I am not hungry and drink it when I am; otherwise I never touch it – unless I’m thirsty.”

It was Champagne, the sparkling wine that comes from the finest vineyards in the northernmost wine growing region of France, where in the 17th–18th century, the Benedictine monk Dom Perignon lent the masterstroke of effervescence to a long standing wine making tradition.

The magic of Champagne can never entirely be captured in words.

It must be experienced.

Champagne types are diverse, each with its own inimitable style and flavour. Some of the more widely produced styles are differentiated by ageing, grapes, dosage or harvests. Each Champagne is prepared to satisfy the different palates. In order to be savoured, the food served with the Champagne must compliment it.

Brut NV, a classic offering and

period

recognised

disgorgement) gives medium sweet

style

of

the

house.

after

the

stressful

A unique blend of base wines from

flavour to it. If you like gulab jamuns

many years – its notes are not

and jalebis, this is just the right one

supposed to change over the years.

for you.

Aged for atleast 15 months, this usually makes up the chunk of bottles

Extra Brut, is thought to be the

resting in the fabled cellars. Tastes

revolution of the 21st century – again

divine with pakodas.

based on the variation of the dosage.

With no addition of sugar, this is

Rosé, the path breaking offer of the

“bone-dry” and is presented “pure”. It

20th century, has a distinct pink

can fully express its delicate aromas

colour, which is a result of blending a

without being masked by sugar.

still red wine from the region or by allowing

a

prolonged

contact

Vintage, the wines of one single

(masceration) with the red grape

harvest

that

is

one

year.

In

skins. Rose, is the unrivalled wine of

Champagne, the house declares a

romance, if you have to have it with

vintage only if they believe that it was

food, try it with desserts.

an exceptional year. These wines are aged longer than their non-vintage

Blanc de blancs, is made 100% from

cousins. These are wines with great

the

character and complexity.

white

chardonnay

grapes.

Intensely refreshing, it is an interplay of floral and mineral overtones. Blanc

Brut MV, is an undated offering with

de blancs is a small treasure and

a twist. The wines for the assemblage

represents the elegance and finesse of

(blending) are chosen only from

chardonnay. An excellent aperitif!

the vintage years declared by the house. It would be unfair to club them

Blanc de noirs, made from either

with

pinot noir or meunier grapes or a mix

multi-vintage was born. Enjoy with

of two. The black (red) grapes give a

oysters and foie gras.

as

non-vintage,

so

the

Champagne is the unique and customary symbol of festivity, rendezvous, celebration and romanticism; and an indispensable companion to intense, glorious or quiet moments. The wine of the kings and celebrities, Champagne has celebrated triumph!

A second fermentation in the bottle and ageing on lees, became defining characteristics of Champagne. This wine is a result of the harmony that is achieved by the master winemakers between the very challenging climate, chalky limestone terroir, choice of only three grapes (Chardonnay, Pinot Noir and Pinot Meunier) which for good measure must only be hand harvested, and adhering to benchmark regulations to create a treat for the senses – and a perfect drink for any of Lily Bollinger’s moods.

white wine, as no contact of the grape skin with the juice is permitted while

Cuvee Prestige, is the pinnacle of its

pressing. This champagne is powerful

production. Usually made in small

and rich in aroma and would perfectly

quantities, it is its rarity that ensures

complement a nice tender steak.

a cult following. It is a symphony of the best reserve wines at the

Demi Sec, a variant of the Brut NV, is

command of the winemaker, aged a

essentially a dessert time wine. The

minimum of 3 years. Some houses are

addition of some sugar as dosage

just releasing their 1996 and 1997.

(which soothes it through its healing

Rajiv Singhal is a consultant to international luxury products and Ambassador of Champagne in India

mosaic I Wealth Management Magazine I VOL 2 I 2009

9

Economy

The path ahead for the Indian economy The rest of 2009 and all of 2010 are likely to be uneventful for the Indian economy; the likelihood of higher interest rates should raise cautiousness among investors approaching the Indian equity market.

Summary • With the economies registering low growth in 2010, the recovery of the G3 economies (The United States, European Union and Japan) will be slow and measured.

However, the Asian macro prospects remain significantly brighter, because Asian economies, including India, did not experience any banking or credit crisis but instead bore the economic impact of the slowdown in the G3 economies.

• It is important to emphasise at the outset that the longer term prospects of the Indian economy will remain encouraging. However, in the short run, the performance of the financial markets is not necessarily correlated with that of the real economy.

• The key concern for the Indian economy is the likelihood of a rise in interest rates, reflecting the normalisation policy of the RBI and the sharp rise in the fiscal deficit.

Re-acceleration of WPI inflation will not help either.

FIG 1: INDIA–3M INTERBANK & GOVERNMENT BOND RATES, 2006-09

3M INTERBANK RATE

2Y GOVERNMENT BOND

10Y GOVERNMENT BOND

12 11 10 9 8 7 6 5 % 4 3 JAN-06 MAY-06 SEP-06 JAN-07 MAY-07 SEP-07 JAN-08 MAY-08 SEP-08 JAN-09 MAY-09 SEP-09

• The view of Wealth Management on equity investment remains constructive. In Asia the outlook for South Korea and China is promising, despite the chances of tightening the monetary policy in the latter.

In the case of India, the position is neutral because of above-average valuations, the worsening macro and interest rate outlook.

Interest rates Official interest rates in the G3 economies are most likely to stay unchanged through 2010, the difficulties in establishing an exit policy which does not kill-off the nascent and weak recovery.

However, in the case of the US, longer term bond yields will come under pressure to rise because of the US fiscal deficit and the need to maintain an expansive fiscal policy.

Following the recent 2009-10 Union Budget of India, it became clear that the borrowing requirement of the Indian government would increase considerably as the fiscal deficit for FY10 is expected to rise to 6.8% of GDP.

FIG 2: INDIA - WPI, 2006-09

WPI MAIN INDEX

The economy and inflation The prospects of a poor monsoon for 2009 is likely to cap the GDP growth rate for 2009-10 but the performance of the economy so far has been strong with the GDP growing at 5.8% and 6.1% on a year-on-year basis respectively, during the first and second quarters of this year. The economy could achieve a 6% GDP growth rate for 2009 and possibly for 2010.

WPI FOOD

14 12 10 8 6 4 2 %0 -2 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09

As Fig.1 illustrates, the markets reacted to the wider deficit by accentuating the rising tendency of medium and longer term government bonds yields while the shorter term rates remained relatively flat or mildly rising. It must not be forgotten that the RBI had embarked on a program of aggressive cuts in interest rates starting in October 2008 and ending in April 2009 with a total of 325 bps cuts. In the context of the credit and banking crisis in the G3 economies, these moves made a sense and it helped to cushion the Indian banking system, although in terms of systemic and market movements the impact of the credit crisis was minimal. However, the RBI in its last credit review stated clearly that it would look to normalise the rates at some stage.

As shown in Fig.2, inflation, however, presents a different picture. After falling to deflation levels in 2009, primarily due to the high base effect of 2008, WPI inflation is now reaccelerating into a positive territory, pushed along by the rising food prices.

If the monsoon turns out to be poor, it can push food prices higher up in which case the costs of food subsidies will also rise at the time when the budget deficit is widening.

As indicated, the RBI has signalled its desire to hike rates in order, among other reasons, to keep inflationary expectations down.

This in itself will make the growing fiscal deficit worse. For example, the interest rate payable on the national debt is expected to rise as percentage of all revenues, from about 35% in FY09 to nearly 37% in FY10. Over a third of revenues, instead of being spent on infrastructure or productive programs, are used to service a growing national debt

The balance of payments will remain relatively stable as oil prices (oil representing nearly one-third of all imports) are not expected to rise significantly, if at all, from current levels, and the pace of economic growth in India may not justify a strong spurt of imports growth. The modest recovery of the G3 economies will not lead to an exports boom.

The INR is also expected to remain range bound although the weaker dollar could support it at stronger levels.

In sum The rest of 2009 and all of 2010 are likely to be uneventful for the Indian economy, although the likelihood of higher interest rates should raise the degree of cautiousness by which investors approach the Indian equity market.

Dr. Andrew Freris is Senior Investment Strategist, Asia, BNP Paribas Wealth Management. He is with the Bank since 2000 and has headed research for leading global banks. He has taught at London Metropolitan University and at the City University of Hong Kong, and is the author of numerous books and articles on economy and finance.

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The key concern for the Indian economy is the likelihood of a rise in interest rates, reflecting the normalisation policy of the RBI.