With over 200 of them recognized in India, organized family offices (FOs) are a phenomenon more prevalent and relevant than ever, accounting for over 20% of India’s $3 Trillion of wealth. It is expected that in the next five years, India will be home to over a thousand organized family offices. Globally, these offices are established by families with an investible corpus of over USD 250 million, although in India FO setups manage as small as Rs 100 Cr or USD 15–20Mn of family fortunes.
Traditionally, FOs have concentrated on asset classes such as rental real estate, debt and fixed income securities, and public market equities through a variety of channels. However in the recent years, a majority of them have come to taking a serious look at alternative investments for a meaningful allocation of their investable corpus. For instance, RNT Associates joined Singapore-based Jungle Ventures, SG Innovate and Accel Partners in 2016 to launch a venture fund called SeedPlus, which makes seed investments focused on financial technology, artificial intelligence and cybersecurity. Ratan Tata is also personally an adviser to technology-focused VC firms Kalaari Capital and IDG Ventures India (now Chiratae Ventures).
The family office of Indian pharmaceutical scientist Dr MD Nair engages in pre-IPO deals, PE and angel investments. It has already had successful exits from companies like Catholic Syrian Bank and hybrid seed developer Advanta India. Unilazer Ventures, Premji Invest, JSW Ventures and Catamaran Ventures are some other large Indian family offices that are very active in the private and alternate investments space.
A recent industry survey of select family offices found that 83% of the respondents had set up AIFs, with over two-thirds investing in PE and hedge funds. In addition, over two-thirds were looking to increase their allocation to PE over the next 12 months.
What are the drivers to look at alternative investments…
1. Potential for alpha returns
According to pitchbook data, median IRRs post year 2000 for funds across the globe range between 10–14% while the top quartile funds have delivered between 15–22% for most of the period in the last two decades. This compares strongly to long term real estate returns (6–8%), debt market returns (7–9%), long term public market returns (10–12%) and even the well managed mutual funds and PMS schemes (15–18%). With the caveat of additional risk involved, alternatives have a chance to create alpha returns in the portfolio for a family office.
2. Developing a connect and understanding into the future led by technology companies
Successful family business owners are acutely aware of the need to stay abreast with the latest and the best which could create an impact, direct or indirect, on their business and future plans. They can no longer ignore how the new principles of IOT are changing efficiency and communication paradigms. Or how AI is reshaping organizational planning, skilling and customer interface mechanisms. Or how creating a blockchain around their assets, supply chain and transaction logs may no longer remain optional or limited to the realm of frontier tech companies. Participating in funds that are investing into the latest technology companies or innovative business models creates beneficial exposure to the family office promoters and in turn gives them the cutting edge for their own business. In many cases, the family offices can get a chance to directly get involved into these startups as strategic or financials partners with the help of their partner funds.
3. Portfolio diversification
By the very definition, splitting allocation across assets is meant to be able to balance risks and cyclical upheavals within specific asset classes owing to macroeconomic factors, geopolitics, regulatory dynamics or any other reasons. Private markets have shown remarkable resilience in the face of volatility in public equities, interest rate movements, political transitions and even foreign investor sentiments to a large extent. Experts from the family office space suggest an allocation of 10–15% for “risky” alternatives within the overall portfolio to be able to provide the diversification from traditional asset classes but also to be able to ride the potential upside.
4. Western precedents
Sophisticated family office operations in the US are known to have a healthy allocation towards alternatives and the reason to no small degree is the availability of high-quality GPs or even private paper accessible for direct investments. While India still has some way to go before the same can be claimed, there are enough avenues that have emerged in the last decade in the form of experienced GP groups coming together in a variety of PE/VC funds — global franchisees, domestically focused local funds, corporate or family anchored funds and the like.
What this means to the ecosystem in India
Family offices as meaningful LPs in Indian funds are here to stay. Increasingly PE and VC funds are tapping into the investible corpuses of progressive family offices. This trend is likely to accelerate with more and more GPs inviting them to participate into their funds, as well as FOs increasing their allocation towards this asset class as they come to terms with the slightly different risk to reward equation that alternatives are associated with. This is a welcome transition for the Indian ecosystem as it enables wealth creation sprouting from the Indian startup and SME ecosystem to happen in India and at a widespread level rather than stay limited with institutions — domestic or international. It is healthy, inclusive, synergistic and in many ways appropriate.