The numbers are staggering. The uber rich and famous in India may be sitting pretty with a combined investible wealth of some Rs 10 lakh crore. Managing the dollops of cash of this class is a task. Indeed, delivering stellar returns that beat the luxury inflation rate (usually higher if not double the Consumer Price Index) is becoming a specialised affair. Every rupee invested creates a big impact for investment decisions are often accompanied with the endorsement of businessveterans.
It cannot be ignored that these Ultra High Networth Individuals (UHNWI), each with investible funds of anywhere between Rs200 crore to Rs300 crore, depending upon how you measure it, are a growing tribe and already quite sizeable.
Consider an important finding of the Credit Suisse Research Institute's Global Wealth Report 2017. Only a small fraction of the population in India (just 0.5 per cent of adults) have a net worth of over $100,000 but, given India's size, even this small percentage translates into 4.2 million people. Equally significant is the finding that the country has 340,000 adults in the top 1 per cent of global wealth holders.
So, how do these people, many of them founders of companies, handle this personal wealth that they have assiduously built? How do they ensure that it does not get eroded and is not just preserved and grown but also smoothly transferred to the next generation? All of this, while also keeping intra-family disputes at bay. This is best done by setting up family offices, a class of entities that have emerged and grown in India over the past decade.
Rise of family offices
So, what exactly is a family office? A true-blue family office manages a business familys matters end to end. Gopal Srinivasan, Chairman and Managing Director of TVS Capital Funds, a mid-cap growth equity fund, points out that a classical family office is actually a six layered operation. It includes a wing that deals with the family business and is responsible for corporate actions, participation of the family in boards and business councils, decisions on investment and divestments of the holding company. The second division deals with succession and management and deals with all the legal issues related to planning and succession. Then, it is tasked with grooming and onboarding of the next generation, and career planning for them. Another role is family wealth management. They also help promoters take a call on new business ventures and, finally, offer sundry services to the family such as travel or education.
"Today in India, the family offices are still very investment-oriented but there are families grappling with larger succession issues, which is why they create a family office and that family office then helps to establish a family board, create a family constitution so that the values of the family are preserved. In the constitution, it spells out how conflicts, in case they arise, are resolved," says Soumya Rajan, Founder, Managing Director and CEO of Waterfield Advisors, a leading multi family office. Srinivasan adds, that only the top 20 or 30 richest business families - with wealth of over Rs10, 000 crore - have full blown family offices. Its the wealth management of the promoter family that is seen to be their primary responsibility in India. Azim Premji, founder of Indian IT giant Wipro, is believed to have the biggest family office in India - PremjiInvest - but Business Today could not independently verify this. Officials at PremjiInvest declined to comment but conversations with informed sources and media reports reveal that it indeed is perhaps the largest of its kind, managing around $12 billion, or nearly Rs80,000 crore. It hit the news headlines following the Walmart-Flipkart deal, where it emerged as a major beneficiary thanks to its early investments in Myntra, which later got acquired by Flipkart.
Similarly, a major chunk of Sunil Kant Munjal and Anand Burman's investments into Fortis Healthcare is their family office money. This is, therefore, being seen as the coming of age of an alternative source of capital for new ventures. Whats more, family offices are patient and willing to provide long-term stable resources to build businesses. Plus, it comes with strategic investors who are willing to give companies more runway to perform well. And the good news: Expect more of this to happen, say family business experts. "We see this as a growing trend, where patient family office capital, unlike capital from a fund which has a finite investment period, will come in to support the creation of long term sustainable businesses," says Soumya Rajan. As for the family office landscape, she explains, "In terms of true-blue single family offices, there would be about 50 of them and to this if you include those that also have funds, then the number could be around 150 to 200." Of course, not all investment decisions by family offices pay off. For instance, PremjiInvest burnt its fingers with Subhiksha, the Chennai-based retail chain, where it invested and lost in 2008. But the experience would have greatly helped it to refine its processes and learn what not to do.
Family offices exist broadly in two formats. Single family offices that cater to the wealth of a single family. "Single family office makes sense when the wealth is sizable, often in excess of $150 million. Otherwise the costs of maintaining the office might be more than the benefits that it provides," says Nupur Pavan Bang, Associate Director, Thomas Schmidheiny Centre of Family Enterprise at the Indian School of Business and someone who has spent years in trying to understand this space. The other format is the multi-family office. These, she says, "cater to the needs of many families. They tend to be more cost effective as the costs are shared among many families."
Not much is known about the pot of money that each UHNWI has and where his or her family office is parking it. Most family offices tend to be limited liability partnerships and families avoid discussing their personal wealth in the open or how they are putting their money to work and managing internal affairs. However, some broad trends in terms of investment options and the scale of wealth are apparent. T. V. Mohandas Pai, co-founder of Aarin Capital, and one who also played a key role in the growth of Infosys into an Indian IT bellwether, estimates that Rs10 lakh crore is the investable funds with UHNWIs. It seems in line with various other estimates. Considering that some studies put the number of UHNWIs in India at over 2,000, which even at a conservative level of $50 million (about Rs300 crore) each, would translate to around Rs7 lakh crore. Drawing an analogy from the trends in the US, he says: "In the US, people founded companies, put their capital, raised investment, became founder managers then got professionals and became board members and then started divesting and recycling capital. We are seeing a similar trend in India, started by the IT industry where founders have built companies, then stepped down, sold part of their stake and set up family offices with large capital."
Capital allocation holds the key
Pai, who along with doctor turned entrepreneur Dr Ranjan Pai has a family office in Aarin Capital, says a family office must be about capital allocation depending on the family's risk appetite and not about investment. Investments are best done by those who have the expertise to do it, he points out. "My son Pranav Pai told me we have invested in 31 funds. We invest in funds managed by others because management of investments is a major task that requires high energy, focus and is a specialised activity. I see capital allocation as the prime job of a family office." Pai adds that "start ups are one of the investment options that family offices look at and this is because they can give a good return and are disruptive. It is an asset allocation issue." But then, its one of the options and, according to Pai, last year, "start-ups raised $13 billion globally but not more than 10 per cent of funds or about a billion dollars is from India and coming from individuals, Indian funds, angels or family offices"
Rajans Waterfield Advisors today deals with 40 families out of 7 locations through offices in Delhi, Mumbai, Chennai and Bengaluru, with 38 employees managing assets worth $2.5 billion. She sees family offices "as a safe harbour where families can discuss sensitive issues which then helps to preserve the family legacy and the family wealth." As family offices mature, governance standards become better with more professionals brought in to lead. India has, in Rajan's view, seen some great examples of families that have professionalised operations of the companies they promoted and successfully segregated ownership and management. She cites the example of Asian Paints which has unrelated promoter families or that of the Burman family (of Dabur) and the Murugappa family apart from a few others. Rajan therefore reminds that the need for a family office is linked to the purpose that the promoters want it to serve. As is apparent, the focus of the families cited above would be more around the dealing with , continuinity of the family legacy and responsibly managing family wealth. Whereas others, such as Sunil Kant Munjal or the Patni family for instance, who exited an operating business and have investible funds would want the family office to be an investment platform.
One of the big problems with family businesses in India is the challenge of segregating business and personal assets. It is for instance, not uncommon to find that in some mid-size families the CFO in the company is also managing the personal wealth. That needs to change with more professionals and advisors specifically advising the business owners on family matters because the complexity of issues they need to deal with today have changed. Regulations are also getting a lot tighter and promoters need to be on the right side of the law and not take chances.
Nupur Pavan Bang, Associate Director, ISB (Photo: harsha vadlamani)
So, how is the wealth of the rich put to work and how much returns do they expect? Most family offices, as is apparent, aim to keep the families satisfied with a post-tax return of at least between 10 to 12 per cent on their overall investment corpus. "It is essentially superior economic returns that we are proud of and work hard for. But along with the returns, we need to ensure the team is getting better, learning more about the companies it is investing in," says K. G. Lakshminarayanan, Director at Catamaran Ventures, family office of NR Narayana Murthy. Ask him about Catamaran's big achievement and he says: "Our team size has expanded, we have understood more about the companies we invest in, set up Anviti, a new insurance and reinsurance broking company. Then, the partnership with Amazon (to help small and medium businesses get online and tap into online customers) is doing well." But then, how is the wealth invested by family offices? On what basis are investment decisions made? "We keep it simple. We look at exceptional businesses in the listed and unlisted space that are run by capable and ethical managers, have a long runway ahead and creating tremendous value to the end markets they serve," he says.
T.V. Mohandas Pai, Co-founder, Aarin Capital (Photo: chandradeep kumar)
It is apparent that investment needs careful analysis. Typically, as Business Today gathered, investments tend to get segregated into three categories. One is the conservative risk capital, which, Rajan describes as the "family's go-to money in the event of a major financial collapse or if a black swan event happens. This is the pool of capital that the family can fall back on and could be in the form of a sovereign debt, tax free bonds or fixed deposits or other such investments that are extremely safe." This would typically make up for about 25 to 30 per cent of total portfolio. About 15 per cent of the total kitty is at the other end of the investment spectrum. That is, if there has to be 10 to 12 per cent post tax return on the overall portfolio then you need to have investments that are giving you 16 to 20 per cent return. This could be in venture capital, private equity, angel and seed investment space. That can give exponential returns over a 7 to 10 year period. It may not be more than 15 per cent of the overall portfolio of a family office. The balance or the remaining funds - about 60 per cent of the total kitty - sits in what is called the market pool. This could be in listed equities, fixed income, all products that are mark-to-market investments. Here, they need to beat luxury inflation for these are people who invest in high end cars, jewellery and lifestyle holidays.
Family offices typically monitor investments and advice families on when to stay put and when to exit. For instance, Soumya Rajan gives the example of the recent Punjab National Bank fraud and says that family offices were also exposed to the fallout because various mutual funds were holding the banks stock and debt. "At Waterfield we quickly started taking stock of the developments and assessing the risks that our families could face and see how to ringfence their investments from such external risks and shocks," she says.
Soumya Rajan, Founder, MD and CEO, Waterfield Advisors (Photo: Rachit Goswami)
So, what is the way ahead? "Our aspiration is to be a pre-eminent, globally respected investment firm that even global investors would reach out to for help to either understand aspects of a sector or specific companies," says Catamaran's Lakshminarayanan.
Clearly, family offices would gain heft over the next few years.