The rise (and rise) of the family office

There’s a new kind of investor steadily gaining credibility in India as long-term players with deep pockets. Meet the family office: A concept introduced by JD Rockefeller in the 1800s to manage the great wealth he generated, but now gaining rapid ground among Indian promoters.

The 2019 IIFL Wealth Hurun India Rich List showed that the number of rupee billionaires (net worth of over ~1,000 crore) grew to 953 from 831 in 2018, with their wealth equalling 27 per cent of the country’s gross domestic product (GDP). It’s a fastchanging list: Unicorns are toppling older industrialists who have got quashed under debt and distracted diversifications. Therefore, while cumulative wealth of billionaires rose 2 per cent, on average each person’s wealth declined by 11 per cent in 2019.

The 20s will be the decade when the family offices become a muscular investor class comparable to mutual funds. In less than a decade, the likes of Premjiinvest, for instance, have emerged as the benchmark, employing professionals and making big-ticket investments across the spectrum of equity deals. Market players attribute the huge HNI (high net worth individuals) demand in recent market offerings, such as Bharat Bond exchange-traded fund and the Embassy Reit, to the increasing number of family offices.

For the start-up ecosystem, this is also becoming an important source of funds: Family offices are often a good funding option as they have a long-term investment horizon, besides offering start-ups access to networks and often a big brand boost through association to attract other investors.

The trend started with first- or second-generation tech entrepreneurs from Infosys and the Patni family little more than a decade ago and later received a boost by promoters who sold their operating businesses to multinational corporations (the Seksarias, Burmans and Bansals). Now it’s gaining wider acceptance among promoter families. Market players estimate that over 100 family offices are currently functioning, encouraged by the success of family offices such as Premjiinvest, Catamaran Ventures, Unilazer and so on.

One key factor driving this trend is the increasing separation between business ownership and management. In companies that have been in existence for four or five generations, each new generation has taken up management leadership positions by default —whether it had the aptitude or not. This has led to considerable wealth destruction in many families — to the extent that many old industrial names from the 1950s and 1960s don’t even exist today. Plus, the growing influence of institutional investors and private equity funds as shareholders is accelerating this process. Besides, top business schools have also been popularising the family concept and its relevance for the Indian super-rich for some time. With professional teams running operating businesses, the family office becomes important for promoters not only to ensure their wealth is preserved, managed and grown through diversification, but also to provide new business and growth opportunities for the Gen-next outside their traditional operating businesses.

The second factor fuelling this trend is the mindset of the millennial promoters themselves. Not interested in running old-school industrial and commodity family businesses, the next generation wants out. The noisy shop-floor and the dusty factories are often a far cry from the Ivy League education and short work stints in New York and London with global banks and consultancies. Their interests often lie in technology, start-ups, consumers and other digital economy plays and not belching smokestacks. Creating family offices allows them to do that.

Three, some in the next generation are increasingly jittery about preserving their inheritances — having seen significant wealth destruction among families of their peers in the last 18-24 months. Therefore, mitigating risks has become increasingly important. For instance, a significant part of promoter wealth traditionally has been held in land banks. These assets have provided great capital appreciation over decades but by nature are illiquid.

Family offices are helping not only in terms of diversifying investments but also bringing objective perspectives into managing wealth, rather than only relying on advice from “uncles, friends and trusted advisors”.

Four, wealth creation at a time of increasing tax scrutiny and regulatory oversight is also pushing promoters to re-calibrate. Safety today depends literally on diversity. Not wanting to put all their eggs in one basket, the family office is helping build an international footprint by establishing new ventures — often headed by a member of Gen-next who has settled overseas to create an outpost for the family empire.

While definitions of what constitutes a family office vary, the concept of having a dedicated organisation to preserve wealth, grow it as well as build one’s social capital through philanthropy and impact investing has become the latest status symbol for India’s ultra-rich. Therefore, the fifth (and last) reason behind the rapid growth of family offices is that they have become the ultimate status symbol and the badge to seal an entry into the league of the global super-rich. If you are or want to be on the Rich List, you’d better have a family office.