Reasons For Burgeoning Family Offices
The investment options now include start-ups, unicorns, international businesses, mines, cryptocurrencies international hedge funds, arts, unique collections and so on
The Indian economy went through liberalization in 1991. Since then, liberalization and globalization continued in various forms, which supported family-owned small businesses achieve exponential growth. Wealth kept growing and these small businesses turned into empires.
It was the same era, when another trend picked up-studying abroad. However, most of them were settling down away from their country of origin, once they completed a privileged education, given limited opportunities available in India. The scenario, however, has changed in the last decade and more so predominantly in the last five years. The second and third generations are opting to return to India and prefer to take ownership of their family businesses in a distinct way to protect a legacy.
Overall, since 2000, India has produced about 300,000 millionaires, totalling about 350,000 millionaires and in the next five years, the number is expected to swell further to over 520,000 millionaires. As more and more people are turning riches in the country, the need for family offices is also on the rise. Culturally entrenched in India is the traditional concept of family business, which is mainly the attempt to preserve and grow the wealth within families, for generations to reap the benefits. However, the avenues of profit-making from this wealth have changed dramatically over the years and this has revived the family offices culture and accelerated to the fore front. With the millennials at the helm of affairs, their global education has given a boost to the concept of family offices which has its roots in the US.
Today, the investment options are no more limited to purchasing shares of their own listed companies, lower-risk assets such as property, land, treasuries and mutual funds. Investing in start-ups, unicorns, international businesses, mines, cryptocurrencies international hedge funds, arts, unique collections and so on are the most favourites of these UHNIs. And with these changing dynamics, the role of family offices has expanded and contributed significantly to recent trends in India.
In 2002, Amit Patni, part of the founding family of Patni Computers, was the first one to start a family office in India and by the end of 2018, there were about 45 family offices successfully operating in India. As per a latest Credit Suisse report, total wealth in India has increased four-fold between 2000 and 2019, reaching $12.6 trillion in 2019. This is expected to touch $16 trillion by 2024-which is five years from now.
Given the steady increase in the wealth of UHNIs, establishing a family office is a great way to ensure family wealth is properly managed and eventually distributed to successive generations. While different economic cycles brought in different trends, COVID-19 is expected to change the risk contour completely and evaluating various investment options will also undergo a significant change. This is one of the best times for UHNIs to actually set up and invest in family offices.
The services of FOs are not limited to only managing family fortunes, but span across services like tax advising, succession planning, even philanthropy or any other financial/non-financial advises that the family may need. FOs manage complex family business structures, business liquidations, and assiduously take care of the client's wealth and their needs while the clients focus on their core businesses. FOs are evolving with flexible models customised to suit the family's requirements, the pay-outs based on the pre-determined performance, rather than the current fixed pay-outs or brokerage models.
As the cost of running or hiring a single FO is huge, the concept of multi-client family offices is also gathering momentum bringing in synergies and cost efficiencies. The biggest responsibility for the family offices will be to assess the risk and opportunities and find the convergence point.
Some of the themes we expect will emerge are investment opportunities in social impact funds and businesses touching more lives; further boost to go digital as the new normal will compel everyone to work remotely and virtually for longer than expected; market fluctuations have urged many offices to keep cash reserves. It will be critical how these cash reserves will get deployed in next 6-12 months.
In addition, 'Atmanirbhar Bharat' will open more opportunities for existing business houses to expand and is also likely to introduce a different start-up wave, which will be another area for family offices to look into for investment opportunities. Also, increased awareness and vigilance around succession plan will further highlight the importance of family office set-up. Another area of interest will be the distresses assets or asset reconstruction opportunities given many businesses have felt the burns due to the lockdown and other COVID-19 related obstacles (by-products).
Some of the things that will not change irrespective of a post COVID-19 era include regardless of the virus, some trends will continue no matter what.
The rise in direct investing, ESG investments, and the use of blockchain technology were underway before COVID-19, and there is little reason to suggest it stops now.
Also, the same goes for succession planning issues and rising operational costs. They existed before, and they will still exist. But with proper planning and action, the problems and risks can be mitigated. Family offices will continue to remain a viable and desirable way for HNIs/UHNIs to grow and preserve their wealth and assets for generations to come and spearhead a sustainable legacy.