What's Fueling the Growth of Family Offices in India?
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As the country continues to grow, the list of India’s super-rich is also swelling — we are going to add more Ambanis, Tatas and Birlas or rather Agarwals (considering the number Agarwals in the Indian entrepreneurial ecosystem) to the list. According to a recently-released Credit Suisse report, India ranks sixth in Ultra High Net Worth Population and the total number of dollar millionaires in India is expected to go past 5.26 lakh by 2023. In fact, in the past year, the Hurun Global Rich List added 31 new Indian billionaires to its list.
Due to the rapid growth of family businesses in the country and the rise of new-age entrepreneurs, professionals and CXOs, in all probability, the number is bound to increase. This, in turn, has popularized the concept of family offices (FOs). Two decades ago, India barely had some 10-20 family offices to preserve their wealth, but today the number has gone well over 200. Having said that, the concept of family offices is not new to India — remember munshijis or traditional accountants?
Himanshu Kohli from Client Associates says, “This role (of munshiji) has evolved and has become more sophisticated in this organized world and now same munshi-ies are playing the role of private CFOs (chief financial officers) for large wealthy families. With this revival, the whole industry of wealth management, including family office concept is evolving fast in our society.”
Presently, there are two types of FOs – single family offices, wherein the promoter has to dedicate enough time so that their goals are met and the second one is multi-family offices, wherein, as the name suggests, several families pool their assets together, and FO helps them with their goals. Now that the FOs have finally started to garner fame, are wealth or asset management companies all set to lose the fat wallet clients?
What’s intensifying the Rise of Family Offices?
From existing businesses to the next generation entrepreneurs, FOs in India are gaining popularity for multifarious reasons. Sharing her opinion on what is fueling the growth of FOs, Apurva Damani, managing director - Artha India Ventures says “With more entrepreneurs generating wealth, and as the median incomes of Indians rise, many families are looking to develop a formal structure and even professionalize their investment vehicles. This is resulting in the growth of FOs as formal institutions.”
While on the other hand, Rajmohan Krishnan, managing director and principal founder, Entrust Family Office feels even the NRIs segment has equal contribution in giving impetus to this trend and in supporting the growth of the segment. “NextGen promoters along with NRIs returning to India to settle have exposure to these concepts during their stint abroad, all these factors are creating a need for more people wanting to engage and set up family offices.”
Krishnan also feels the new money, which the NextGen promoters are making, will pave the way for the emergence of more and more single and multi-family offices in the future. “The reason being that there is so much active work-life left in these entrepreneurs and there is an apparent need to set up their own offices to take care of their affairs, while they continue to focus on their core business or pursue their passion,” he explains.
How Family Offices Differ from Wealth Management Companies?
For many, FOs are more or less like wealth management companies, but they are not. What sets them apart is the kind of services they provide. FOs don’t just manage your wealth, but also provide multi-generational wealth management services along with other services like charity, succession planning, etc.
Not only that, an FO is a one-stop solution for a multitude of problems that a business can face at any point in time. It will look after the prestige, reputation and governance of your business, even take your legal issues and travel plans in stride. But the major difference between FOs and wealth management companies is that the former only serve ultra high net worth families.
However, Angela De Giacomo, investment manager, Bissel Family Office feels FOs will never be able to replace wealth management companies as they have a standardized business format.
“I think every family office represents a family or an individual and might perform different services according to the family requirements. What FOs will have in common is that apart from setting the investment strategy, preserving and increasing the family wealth, they will also provide tax planning and tax coordination work, documentary services, provide support services and help with the estate planning etc,” she elucidates, adding that, “I can imagine that the more personally and exclusively the family wants its requirements to be handled, the more likely it is that they might set up their own FOs or use a multi-family office.”
Additionally, single-family office is a costly affair and thus, the size of the corpus has to be at least Rs 500 crore. However, wealth management looks at managing amounts upwards of Rs 5 crore corpus and there are many clients in between Rs 5 to 500 crore, who will need wealth management services.
It is thus, Shantanu Awasthi, head of the family office at Karvy Private Wealth feels that FOs are never going to pose a threat to wealth management firms. “Both models will coexist and grow at a very rapid rate as the economic growth continues to be robust. Over a period of time, wealth management firms will reposition themselves into the advisory format.
For larger AUMs more and more multi-family offices will emerge within and outside wealth management firms,” he says assertively. However, in India, due to a fallacy, many still see multi-family office merely as wealth management outfits. It is due to lack of awareness.
Clearing the air around this confusion, Krishnan explains, “Wanting to hire or set up a family office is a status symbol and also a need to handle complex affairs of the family, which is overwhelming in nature. A family office is a layer above all the relationships, which the family has built over a period, namely wealth managers, lawyers, bankers, NGOs, travel agents, consultants, chartered accountants and so on. The family office works with the client to protect their interests for a fixed fee. There is no conflict in this engagement.”
Furthermore, Damani feels beyond the traditional pools of available capital, FOs will form their own category of capital. “This is a more patient capital that is not just driven by rewards but also strategic depth,” she added.
(This article was first published in the January issue of Entrepreneur Magazine. To subscribe, click here)