Family Offices A $30-Billion Investor Class In India

That’s according to Jai Rupani, head at Dinesh Hinduja Family Office, and founder-chairman, Aikya Connect, a by-invite only network of senior investment officials involved with this category of investing.

“It is in very early stages and organised people who call themselves family offices might be under 100,” Rupani said. But the number will probably be around 300, each managing $100 million on an average, because a lot of tier 2 and 3 cities have strong promoters who have built good businesses, he said.

That compares with an average family wealth at $645 million and average family office assets under management at $318 million as of 2018, according to an Edelweiss-Campden Family Wealth Report.

Family offices, comprising a group of people hired to manage investments by the wealthy, have taken the shape of a new investor class in the last decade. And they are mostly created after what Rupani calls “a liquidity event”—a large inflow of cash.

“At that point, the promoter brings together a bunch of folks for investment, may be tax and legal folks together, into a small entity to manage his or her wealth,” Rupani said.

Rupani cited an example. Say, there are brothers who own a lot of property and financial assets together, but the next generation does not want to be involved in the current business.

And when the cash from exiting a business flows in, some want only tax-free bonds, while others may want security of the money or to grow as well, Rupani said. And there are those who want succession planning to ensure their children, grandchildren are well taken care of, he said. "They want to know beyond their lifetime, how does their money grow, how they invest well and live well.”

According to Edelweiss, in preparation of the large-scale generational transition, 62% of families in India now have some form of succession plan. But only 19% of these are written and formally agreed. The remainder are either simple verbally agreed (14%) or informally written (29%), suggesting that succession planning needs to remain in sharp focus. And that makes the role of family offices important.

Teams hired for family offices look at everything from overseas education of promoters' children to whether they can be directors on the board of companies or set up new firms or joint ventures or buy assets abroad.

Promoters, who have invested 40-50 years in a business, slowly take out surplus to secure the family. It starts with a $20-million tranche and then every year they add to this to keep building to a corpus, Rupani said.

“But we have largely seen that the family office starts once there is an exit [from a business], where people have at least a $100 million in their hand to invest,” Rupani said. “At a hundred-million-dollar threshold in India, you can set up a very nice family office. You can have a CIO, vice presidents for investments, analysts, associates … you are running a mini fund.”

A family office is mostly structured as a limited liability partnership. “You can [also] have a private limited company; several of them who want to invest in credit will have an NBFC licence because that’s the regulation,” Rupani said.

Those planning for multi-generational wealth transfer will set up trusts in such a way that the patriarch actually gives away to children and family members, and over time the family office manages all those buckets based on the needs of those people, he said.

“Family offices are long term-investors. They don’t need money as the wealth is multi-generational,” he said. “No family office wants to lose money... safety and security of the family comes first.”

Yet, beyond the names of family offices created by some of India’s industrialists and entrepreneurs, there is little data available publicly about their activities. Disclosures, Rupani said, are limited to statutory requirements, whether it is investment in public markets, private equity, and venture capital or real estate.

Mumbai was the most common location with 61% of the family offices, followed by Hyderabad (9%) and Chennai (7%), according to Edelweiss-Campden Family Wealth Report. Families tended not to have an investment office in a second location, but if they did, Bangalore (20%), Mumbai (15%), New Delhi (10%) and Pondicherry (10%) were the preferred locations, the report said.

Nearly 50% of the investment is a mix of commodities, gold and real estate, and that goes up to 80% for some, according to Rupani.

They invest in public equities looking at 12-14% return, 10% in alternatives, Rupani said. The next generation members returning from the U.S. are interested in angel investments, he said.

And then there is direct investing. “We have had a lot of success stories in the last three years. The family offices have invested and made 100x on one trade and that’s what is exciting the next generation,” he said.

The next generation is taking the 10% and expanding that, some by themselves and others by collaborating with other family offices, according to Rupani.

They target green energy, climate tech, venture capital and direct-to-consumer businesses, he said. Gold is in the play and even crypto is showing up, he said. “Of course, crypto has regulations so people are looking at it but not really going deep. They want to stay on the right side of the law.”

Besides investments, many family offices are involved in philanthropy, including schools, educating girl child and improving the condition of factory workers, he said.

A billion-dollar family office is investing $200 million through private investments, writing $15-million cheques, Rupani said. They think like a venture capital or a private equity fund, doing 10-12 deals a year, according to him.

For a $100-million family office, the average deal size shrinks to $1 million, he said.

Since liquidity is coming from other investments, this disposable capital is spread over three to four years.

Internationally, even at $100 million, liquidity is not enough to hire talent and pay salary and bonuses, according to Rupani. If someone were to hire global talent, then an investible corpus of at least $300-350 million is required.

“If you are in the $250-300 million range, your costs are about 0.8% of the corpus. If you drop to 100 million, the cost would be around 1.25%,” he said.

Since in India most family offices are frugal, professional advisers can run a “fairly decent” outfit with a good set of people, taking in 1% in a $100-million corpus. “These are four- to five-member teams with one senior resource running it.”