The Evolution Of Family Offices In India

Jai Rupani: The family office role is very broad. It depends on what the patriarch or the matriarch or the person who sold the business desires to do? So, there may be a promoter, who exited a billion-dollar business. He only want to invest in a tax-free bond. They will buy a tax-free bond at five or 6% and think, 'if I can make 6% of 7000 crores by doing nothing. I can sleep in my house with no risk, then I don’t need family office.' One accountant can look after the papers and monitor the investment.

But then, there are other family members. Let’s say, there are three brothers and between them they own a lot of properties and financial assets. There is also the next generation cousins. Typically, when such a business exits. Everyone gets their own cash, separately. They get their own liquidity. Now, their desire will be different. Somebody may want tax-free bonds. Some will want security for their money. Others may want succession planning done--to ensure that their children and grandchildren are well taken care off. They want to know beyond their lifetime, how their family grows? How they invest? How they live? or How they contribute towards philanthropy?

Promoters are not going to say 'I made so much money and I am going to keep it all to myself.' They are actually thinking of how to improve the conditions of people working in factories? They are willing to spend money to educate the girl child, educate children, to spend on hospitals among others. Its phenomenal. If you see the scale, it can really expand.

However, the most talked about part is always the money--the investments part. So there is always a very strong code that says investments need to be managed. And in investment management, they look at three different things--returns, risk, and liquidity.

You have to invest with that horizon, as sometimes you can have a great return but the money is locked in for 10 years. What are you going to do? So, as the head of the family, you have to kind of figure out how to make a portfolio that is looking at all these three aspects. So, it can be a very simple setup or it can be very complicated setup.

Jai Rupani: Family office is a collection of individuals that have been hired and put as a separate entity to manage the wealth of a distinguished person or a distinguished family, typically after a liquidity event.

So, a promoter who worked for 40 year to build a large business and having reached maybe 60 or 70 years old finds that the next generation wants to do other things. But, the business has got a great brand value and is running well. So, he looks to exit by selling it to a private equity player, who takes over the business. The promoter becomes cash rich. At that point, the promoter brings together a bunch of folks, some investment folks maybe tax and legal folks, together, into a small entity, separate from him, to manage his wealth. That is what a family office does.

Jai Rupani: I think wealth planning is the right word. Wealth and succession of that wealth over time plus its day-to-day management. It all comes down to managing liabilities, structure, internal structures of companies, ensuring children are going abroad. For they think--What are the regulations? Can the children be directors of the company in India? So, there are lots of complexity as wealth grows, the desire also grows. People want to set up a factory in Germany, then how to transfer $50 million to Germany? What are the regulations? Family office guys get involved in this kind of things.

Now that I am worth half a billion, I may want to do a joint venture with a beverage company. It maybe Pepsi or maybe a Pepsi substitute in India, the family offices investment team will get involved based on the needs of money.

So, if a business is very actively growing and money is deployed into that business and the returns are very good. The promoter will say why not I remove some money from this to create a separate family office? Lot of promoters of large businesses with 1 billion plus in net worth are starting to do that because they have realised that they have to de-risk themselves.

They have spent 50 years of their life and all their money in a company that could be public or private. Now, they are slowing taking out some of the extra money to secure their family. It may starts off with a $20 million tranche and then every year they add to this to keep building to a nice corpus.

But, a real family office starts once there is an exit and people have at least $100 million net in their hand to invest. For $100 million in India, you can set up a very nice family office. You can have a CIO, a vice-presidents for investment, an analysts, an associates and so forth. It is actually like running a mini fund.

Jai Rupani: There are multiple structures depending on the needs--it all depends on the family.

Typically people go for simple limited liability partnership. You can also have a private limited company. But, if they want to invest in credit, then they have to get NBFC licence because that's the regulation.

While people planning for multi-generational wealth transfer, set up trusts. The trusts are set up in such a way the main patriarch distributes the wealth among his children, grandchildren and his wife. The family office manages all these separate buckets of wealth based on the needs of these individual people.

For example, a three or five years old child doesn't need money as he is looked after by his parents. So, a grandchild is almost 100% equity, till the time he hits 18 years. When he has to go to college, he will need money to pay for his college tuition that is when he will use the trust money. Then he can do something with the capital like starting a startup or buying a car or a house as he wants to live in San Francisco or New York or wherever. The trust fund is structured in a way to allow him the flexibility in his journeys.

Jai Rupani: Family offices investment are in all asset classes. They are opportunistic in nature. They are long-term investors, they don't need the money immediately. The money is enough to run multi-generation. The big concern always is how to preserve the capital? No family office wants to lose money. The first criteria of this investment is not to lose money. So, the core set up of the portfolio is to ensure that the safety and security of the family because they have spent 50 years building the money. They really don’t want to go back to the start.

So, if it is Rs 100, then typically Rs 50 is anchored in a mix of gold, commodities, real estate, debt instruments. Some may have 80% but you will always see at least 40-50% as an anchor. Thus even if hell breaks loose, at least 50% of the wealth is safe.

Then there are people who will do public equities where, on average, you are looking at 12 to14% return over long periods. Then there is another layer say about 10% in alternatives.

The next generation members are coming back from the US with global exposure. They have a big interest in angel investing, direct investing. We have seen a lot of success stories in India in this space, in the last three years. The next generation is excited as they saw family offices making 100x in one trade, in this space. They come with a lot of knowledge as lot of them have worked across Goldman Sachs, Morgan Stanley. They have money and they are ready to invest. So we are seeing the next generation in the family taking that 10% and expanding. They collaborate a lot. They work with other family offices to do investments in green energy, climate edge, right venture, the new thing--direct-to-consumer.

Gold also has a place in that equation and now Crypto. Off course Crypto has regulations. So people are looking at it but not really going, as they want to stay on the right side of the law.

Jai Rupani: It depends! If you are a billion-dollar family office, then on average a minimum of $15 million. So, let's just say it's a billion dollar family office. Then, 20% of it is private investment, that is, $200 million. So just like a PVC fund, $200 million is your corpus and we want to do 15 deals a year. So roughly about $15 million a deal between 10 to 12 deals a year, that's the structure.

If you are talking about $100 office obviously then it shrinks. It becomes a $1 million ticket per deal, and you are doing 12 to 15 deals a year.

Jai Rupani: It's a balance, a lot of them have cash flows coming from outside. While the billion dollars maybe the deployable capital, they actually cash flows coming from other investments. If $800 million is the asset, then the yield income generating even 10% would mean $80 million a year in cash flows. So, there is always liquidity inflows, which also has to be deployed.

The $200 million that we said earlier will not be deployed in one year, but over three to four years. So on an average you will be deploying $50 million for private investment per year as you are worried about the economic cycles, interest rates, favours/tables of the year. These guys are investing over time. It is a very safe diversified strategy. Putting everything in one year is definitely not the way to go.

Jai Rupani: Globally, the expected standard of liquidity is that which is available to invest, and not the net worth. Net worth is much higher. If you really want to be a serious family office then you actually need a liquidity of at least $100 million, may be a little less. However, internationally at $100 million you are not meaningful because you are constrained as you cannot hire the right talent because international costs are much higher.

So, if someone has to set up a family office in New York or London, I will say the investable corpus should be around at least $350-400 million, for the office to run as a formal structure with all the things like paying the right salaries, bonuses, getting the right return. So that's the typical structure.

Jai Rupani: What we have seen from international benchmark, if you are in the $250-300 million range, your costs are about 0.8% of your corpus. If you drop to $100 million, the costs are about 1.25%. Most families in India remains very cost conscious. So, in India, even at $100 million if you take 1% then it’s about one million dollar. You can still run a fairly decent outfit with a good set of people with that cash. Again understand this is a small team of say five people. One senior resource, the most expensive, running the show with support from four people.

Jai Rupani: The last time we were doing this rough estimate internally, among friends, we estimated about 300 or so family offices. A lot of them are not known. They are part of 10-billion-dollar public company that keeps half a billion outside for the promoter or has just started doing $100 million. It's very early stages.

So, if you say organised people who call themselves family offices, my guess would be another 100, but people with potential to set up one and do it, probably close to 300, if not more.

I think a lot of tier two towns have very strong promoters, who have built very good businesses. They are happy how their business is running, they are comfortable. Now, if they pull out some capital to keep aside for the family office it will be a slow journey.

Today on an average, I'm talking to a new founder or a promoter every two weeks who are saying "I'm going to exit in two months."

He is getting 20 calls a day from wealth managers, who already know about his exit plan. How he should look at it? How he should plan and with whom to partner to manage his money?

Jai Rupani: I would say about between 50 and 100. Serious folks are limited because a lot of this is driven top down. It is up to the desire of the patriarch or matriarch with whom they want to do the family business. What is happening is that sophistication is increasing, so today you see family office professionals being in high demand, because everybody wants to set up one.

It has become a bit of a cache to say I have a family office. The reality is what that office does and the command they have over early investments is a very big question, today. A lot of promoters want to have one, but with only $20 million. Then, nothing can be done. No one will will join looking for growth. What can I invest in? How will I run the capital? How will I grow? How will I set it up? There are also trajectory of how much funds would they get in future. Would they get $100 million after two years of growth?

So, it is still very early in the days.

It's just about that it's a private matter. So, a lot of them don't want to be seen. They stick to their knitting. They know what they are doing. They are happy and their ecosystems, happy to meet among themselves without really any fanfare. Simple people, running the wealth.

Jai Rupani: No, right now nothing. There's no regulation in particular for family offices, because they are just a private investment vehicle. Just like you and me, managing our own money. No regulation for me, to manage my own money. It’s just a private office

Jai Rupani: I think because it is only one client there is nothing there and if for example, if you are a multi-family office which is also a big trend because not everybody has the $100 million thresholds.

Jai Rupani: Multi-family office provides the same set of services. Investment is 80% of the game with 20% is other stuff. This is mainly for folks who may not meet the singe family office threshold of $100 million.

Some may have Rs 100 crore and other Rs 50 crore of liquid wealth. They also need the same guidance. They also want to see all the investments done so far, every month. How they are? Did they go up or did they go down. They also want a special CIO monitoring all the different products and advisors.

So, multi-family offices work with all advisors whether it is IFL, Kotak, whosoever is there in the domain. They pull all that information.

For example, I am an individual with net worth of Rs 50 crore. I want to invest. Now I get monthly report from IFL, Kotak, Sanctum, etc. But, I don't have the capacity or time to look at four reports and try to make sense, as I am a working professional. What is my real net-worth? What do I own? I own a house here, another in Panchgani. I have investments with LRS offshore, and as I get older I feel the need to generate more wealth, increasing the complexity of wealth.

In a single-family office you have a whole team that is putting this report every month. They inform you on a monthly basis everything about the funds. Where it is invested, the returns/yield, the works. Everything.

This same desire, the same clarity and consolidation of all reports are also expected by the guy who owns 50 or 100 crores. If your office support that then they are just shared resources. Maybe they have 20 clients or 40 to 50 clients. So, they are not paid by the products but they get a fee from the client. So, they client driven, they're not like your typical wealth manager who comes and offers you a product and takes a commission.

Whether it's mutual fund or a private equity fund or venture fund or an AIF or a debt product. Multi-family officers are purely driven by the customer.

Jai Rupali: They are managing not single-family offices but managing small private investment offices of people for whom they are consolidating all the reports.

For example, all my reports send to them will be scraped for the data. The analyst will then put everything together. And every month, I will have a consolidate view of the wealth.

Jai Rupani: They will guide you. They are supposed to guide you. They are supposed to tell you -- Hey, this investment maybe you need to switch, maybe this product is not doing great. Just to give a highlight.

IL&FS issue happened, it's the red flag. Maybe this product has something connected to IL&FS, you should get out, right? So, these are things that they guide on, and they charge a fee typically the small fee will make it affordable for anyone.

Jai Rupani: Interestingly, you know I also founded Ikea connect, which is investment network for family offices in the country. Through this, I came across some interesting insights in terms of where people like to invest. Real estate is a legacy investment. It's something that people have owned in the past, as part of the factory growth. So, as their industries grew they acquired different land parcels, flats and apartments, office buildings, etc. Typical promoters buy an asset in his name, and then lease it to the company. So, the building is the promotors net worth. The company is happy because it does not have to spend from its capex. It just have to spend funds from operations to rent the building or the office space.

So, when the family office is set up there are some of these legacy real estate assets. Now, a lot of such families actually prefer not to go into real estate assets because they feel it’s a cycle. So, the real estate also goes through multiple seven-year cycles. It's a difficult asset class. It's not for everybody. If you, do it in a scale it makes sense, if you do it at a smaller level where you own one floor in a corporate park in Mulund. Then when it becomes empty, you need to hustle trying to find a rental. It gets difficult.

So, a lot of people have taken that real estate money and put it in REITs or the new product, INVITS. Here you can get the same type of returns due to capital appreciation.

You should have a diversified portfolio, so that you are not stuck with one asset in a micro market. If that micro market crashes, and with large amount of money stuck and nobody wanting to buy the product. Your are not going to get any yield as tenants have walked out. so, you get into this more bearish and difficult phase. This is the reason why people gravitated away it, and is moving more into public market. They are more interested in private markets, private deals or investing into funds been structured credit, and the latest flavour, crypto.

Jai Rupani: It all depends upon the risk profile. So, most of them are still evaluating it. They don't want to put in the full risk product. They will put very little but their corpus is very large. They do not want to be on the wrong side of a loss because crypto is sensitive. Also, at first government forbit it and then they went and taxed crypto earnings. Regulation is changing very fast. I see family offices don’t want to invest in crypto as it is still a vague topic, even though it is okay to hold. Family offices are camera shy and they don’t want to be in the press. So anything that goes against that doesn’t get approved . So, they would rather invest into a fund than buy crypto. They do not want to buy crypto but they like invest in venture funds or invest in an crypto currency exchanges. They will own equity in those exchanges but don't want crypto currencies.

It is still the tip of the iceberg. Honestly, its still very early in the days. Family offices are very risk averse compared to the rest of the world.

Jai Rupani: It all depends on where you are comfortable. The entities are typically geographical. The company will be where you are based. Where you have an established accountancy, legal team. It is where you will have your company. But, we have seen people diversify across jurisdiction, political stability etc. So, we see people setting up bigger offices in Singapore or in Dubai depending which is more comfortable to visit and have favourable rules, the NRS rules, the ODI rules. Singapore obviously has a lot of preferred programs targeting family offices

Jai Rupani: Singapore has several different rules depending on the quantum of money that family offices brings, like a 13R for lower capital, 13X is for the bigger capital. Then you get some preference for tax breaks, certain benefits etc. But, all these comes on expectations that you will spend X money in Singapore. That you will hire some Singaporeans. That the company is set up in Singapore.

So, there is a fair bit of legal regulation and Singapore is very stringent about it. It's not easy to set up as there are a lots of paperwork. They are very, very tight about regulations. About where the money the coming from. So, it's a nice place for Indian family offices. Because once your family office is incorporated in Singapore, you know, the governance there is very high. So, your reputations gets a boost. If you are able to clear all the paperwork, then you are good guys to work, clean cut and everything's solid. So, I think that has helped, but it's a much harder jurisdiction to set up family office.

Jai Rupani: I think either way it's easy. I think a lot of Dubai family offices were set up to manage money. But more money is still sitting in Singapore banks due to the Sharia law. You can have a team sitting out of Dubai, you may have a bank there that's managing but it's a Citibank or JP Morgan or UBS--one of the big global banks.

Dubai is Indian’s preferred one because it is easy to live there. It is very similar to our lives here and the cost of living is less. The cost of putting a team together is lower and it's quite an international life. It's getting more and more popular now. Even Dubai is getting more liberal in the way they look at the world. They are welcoming the world. They want to take some of the business away from Singapore. They want to build Dubai as a financial hub.

Jai Rupani: That's a whole separate topic and needs a lot more professional guys to address. Then again, it comes down to the needs of the family. There's a very strong regulation in India. It is not something that’s loosely build. They've done a good job. So, I will leave that one to the specialist.

Jai Rupani: If you plan it, anything is possible. The world is global today and lots of people have their capital in India but live abroad. I have friends who spend almost eight, nine months abroad. They have phones across the globe. They have one house in Mumbai, in US, in London. They probably spend three months in different locations. Their investments are global as well. So with good planning, you can plan for all of them. If the desire is eventually to live offshore, there is a path towards the right structure.

Jai Rupani: It depends on the type of quantum because LRS limits the investment to $250,000 which is not a whole lot of money. We are allowed to do $50,000 per person. So, a family of six including parents, husband wife and two kids can take up $1.5 million to an investment. It gets plenty signing six documents.

So, the minute people start thinking about investing abroad, it depends on the quantum. If the quantum to invest is around $10 million, you can invest in million outshore. But, there are things you cannot invest. The LRS money cannot go into real estate. There are some caveats to where you can’t invest. You can’t be in financial services business, keeping in mint forex inflows and outflows. Everything goes to RBI; it has to get approved. The minute the quantum is high, it has to go through proper channels. It is doable, the world is investing into India, we are investing abroad. Keeping aside what has happened in the last two years with Covid, we were on a very good track of being a global citizen.

Jai Rupani: It's very big. I would say even with the base minimum of $100 million, we have at least 300 people. That's a fairly large amount but the reality is that it is lot bigger because several of them are multi billionaires. So, there is really no way to peg it because you don’t have a finite set of folks. But it's a fairly large number there and it's getting stronger because folks within that ecosystem are coming together and exchanging ideas and doing things together. Also the mentality has shifted from conservative to entering private markets. I do want to be out there, there is next generation coming. The next gen’s desire to do other things is also playing a big part.

Jai Rupani: We have seen both. It depends on how they are structured. Larger ones have a common entity that has everything in it, public market, private market, investing everywhere. So, if there is loss in one, then get set off by the gains in the other.

Lot of newer offices have it in their personal names because it's just testing the water. It's first investment, they are yet to get a structure out there in place. The moment you start a structure then anything happens if someone passes away, does they really say that these many shares move to whom, right, you can have those in flux today.

I could invest in 10 companies without any thought because my estate will move to the next level in a certain direction. But the moment you see an bigger structure with lots of things inside that are very important. Then I highly recommended to hire the right advisors to get counsel, and not to rush into investment, no matter however exited it may be.

It's okay to stay in cash. It’s okay to stay invested in tax-free bonds for the near term, not in this rate cycle. But keep it in a place where you would not be in a rush to deploy the capital. There's a lot of people who will push you towards that. But without a strategy, it does not make sense to deploy.

Jai Rupani: The reason I set up Ikea connect was actually out of my own personal experience when we started institutionalising our family office. I realised when I spoke to folks in India, lot of them were still in early stages. So, I spent almost four or five years, every quarter travelling abroad, going to family office conference to learn the best practices, etc.

And in India, these family offices, none of them became friends in this journey. Why can't we just have an association because the best learning we realise is more from informal advisor that comes from outside. It's actually sitting across the table with a fellow family office, either the CIO or family member and telling them, I'm having this problem. I'm trying to figure out a structure for this in Singapore or I am trying to invest in crypto funds in New York. You know, do you know anybody, who has done this before. I am looking for a new hire in XYZ and you realise that there is no network like that in India.

So, I created this network which is a closed-door network buying right when a family office together and it's been a phenomenal journey. It's been fantastic. We have got 40 plus family offices who are members of the network. We meet three times a month, either virtually or offline, discuss investments, discuss growth, discuss how we can help each other. This is not recorded. These are all private, one-on-one or one-to-many conversations. It's a fantastic space.

By the time we roll the next one, our network will be probably over 100. Which is more than we want, the best group of family offices. To be part of this is a lot of is giving. Are you willing to share? Maybe you are from the farmer business? Can you talk about the consumer driven systems? Can you help somebody else invest into a consumer company? Can you share your knowledge? It's not about taking, It’s about exchanging ideas, connecting, learning and sharing with each other.