Can Impatient Indian Entrepreneurs Find Patient Capital in Family Offices?
Often misunderstood as investment offices, family offices in India are undergoing widespread experimentation.
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Ultra big Indian family businesses appear to be finally transitioning from their traditional "munimjis" only to a slightly closer but highly professional form when it comes to managing their massive wealth. Family offices, a concept popular on foreign shores, are basically private wealth management advisories that have begun to show shoots of growth in the Indian market too. Radically distinct from the traditional wealth management shops, family offices devise a methodology to manage investments of a wealthy individual or family via an outsourced solution. However, the concept, being at a nascent stage in India, has not been fully comprehended. Often misunderstood as investment offices, family offices in India are undergoing widespread experimentation.
WHAT ARE FAMILY OFFICES?
Family offices are an ideal forum for an open and candid discussion among family members on their expectations, needs, aspirations, fears and much more, according to Aditya Gadge, Founder and Chief Executive Officer of Association of International Wealth Management of India (AIWMI). From the most conservative of investment mandates that invest all money in Government bonds and deposit the rest in banks, to the most aggressive mandates pushing investments into early stage unlisted ventures, the family offices tend to operate in very idiosyncratic manner. "Family offices are typically expected to provide an all-round solution to the needs of the family, both in terms of execution as well as strategic direction to manage their wealth. Therefore, to run a family office successfully, one needs to have two distinct teams for execution and strategy respectively," says Nitai Utkarsh, the Chief Investment Officer of SAR Group's Family Office.
Rajmohan Krishnan, Principal Founder and Managing Director of Entrust family office investment advisors says over a period of time, one starts developing a warm relationship with the client. One learns about their family, personality, dreams and aspirations. "And so many clients trust wealth managers such as me implicitly. One feels responsible, answerable. It was killing my conscience that I wasn't acting in the best interests of my client," he adds.
"The best way to do so, I felt, was to create a new modus operandi. One that made the investor happy and prosperous, ensuring a long-term relationship with Entrust Family Office," adds Rajmohan.
The execution team generally have professionals in accounting, MIS, taxation, legal, and in some cases even concierge. On the other hand, the strategy team members are from the fields of portfolio management, investment research, banking, venture capital operations, investments and so on.
Nitin Shakder, the Founder and CEO of Green Capital, a multifamily office says, they look at long term opportunities vis-à-vis all asInset classes and study them over a period of 10 years to provide services. "Some of the key metrics we employ are risk reward calculators, money flow, dynamic and passive asset allocation tools," says Shakder.
INDIAN FAMILY OFFICES VS SILICON VALLEY FAMILY OFFICES
The biggest difference between the two is the extent of sophistication in terms of the approach towards carrying out its activities. "Right from setting up processes and systems to guide the way an office operates, to the people, software, and tools used, the Silicon Valley family offices have a reasonable head start," says Utkarsh. He adds that in terms of investment, the Indian family offices are still very conservative, focusing mostly around safer and more familiar avenues such as the principal's own businesses, popular financial instruments predominantly in the listed space with high liquidity and low risk profiles. However, for a Silicon Valley family office, the focus is clearly on exploring new and untapped opportunities such as venture investments and other alternative assets that can generate higher returns than the traditional assets in the US cannot provide.
WHY SHOULD UHNIs OPT FOR FAMILY OFFICES
The key ingredient for the success of a family office is the trust between the promoter family and the management. In light of the recent Tata Sons versus Cyrus Mistry controversy, a lot of family businesses can try imbibing this through their family offices, believes Gadge.
Shakder says, "Most Ultra-high-net worth-individual (UHNI) investors link investments with an understanding of business sectors or more clearly identifying opportunities linked to core businesses or asset classes. Compounding of investments is emerging as a key trend rather than following any short term indicators. Trends and wealth creation happens over time and takes an effort to building yield, portfolio and strong assets." There are no defined sectors that are preferred by family offices and the investments really depend upon the objectives of each individual, who has set up a family office according to Utkarsh.
HOW CAN FAMILY OFFICES BENEFIT?
Family offices are usually designed to serve on long term basis – at least for three generations including the current one. Family businesses will do well if they are willing to adopt this long term approach, according to Gadge.
In families business, that are in to third or fourth generation, wherein family members have gone separate ways with their careers and interests, the cohesiveness of the earlier generations could be missing and hence setting up a family office could be a good way to get it back. Aditya Gadge believes, the bigger requirement for family office kind of structure is among the Tier-II HNI business families in India. Utkarsh says, family offices in India are being set up by the class of rich who are either selfmade or have progressive second generation taking over the reins (in case of inherited wealth). The greater focus of these Family Offices is to have at least some (and in many cases, significant) allocation to unlisted ventures of different sizes.
It can be said that many of the promoters and principals of these family offices like to work with entrepreneurs and therefore invest time and money in their ventures to whatever extent is allowed by their long terms wealth management objectives.
HEADWINDS FACED BY FAMILY OFFICES IN INDIA
Gadge says, a peculiar trait in a lot of Tier-II family businesses is that a miniscule separation between the company and promoter wealth exists. This is not only risky but may also lead to issues of governance and family disputes. Setting up a family office can help such families separate the management of company's wealth from the promoter's wealth. This also has another connotation - in such cases family culture becomes the business culture. A family office should not over-protect or coddle the family members at the cost of financial prudence, cautions Gadge. He says technology should be used to manage promoter wealth and should do with minimum number of advisors on board.
(This article was first published in the February issue of Entrepreneur Magazine. To subscribe, click here)