Author: Suprita Mallya
When it comes to managing wealth, family offices have become an increasingly popular solution for high-net-worth individuals and families. A family office is a private wealth management firm that offers high-net-worth households a full range of financial services. The financial affairs of a single wealthy family or a small group of households are often managed by these agencies.
Depending on the needs of the family, family offices provide a variety of services, although they typically offer investment management, lifestyle management, tax preparation, estate planning, legacy planning, charity giving, risk management, and other financial services. In this article, we will explore the ins and outs of family offices and the different avenues of investment that they invest in.
In recent years, family offices have gained widespread attention as more and more wealthy families look for ways to consolidate and streamline their financial activities.
Today, the number of family offices has increased tenfold. Some of the prominent family offices in India include Ratan Tata’s RNT Associates, Adani’s Family Office, Azim Premji’s Premji Invest, Narayan Murthy’s Catamaran Ventures and R.K Damani’s Bright Star Investments. As opposed to the preceding generation’s inclination for reinvesting profits back into the family business and staying away from innovative but risky initiatives, Indian families have recently entered the family office space, which was formerly dominated by European and American families.
Depending on the size and complexity of one’s wealth, one may or may not require a family office. A multifamily office manages the wealth of more than one company whereas single-family offices work exclusively for one family. Those with a net worth of $250 million might consider establishing a family office. Multi-family offices can be an option for those with a net worth of at least $30 million.
The investment asset mix depends on the size of the family office and also to a large extent from where the family office derives its income.
- Private Equity: According to a survey conducted by EY from 100 family offices in India, private markets remain one of the top alternative investment methods with allocations to start-ups and VC funds comprising 18% of the pie which is quite aggressive as compared to other allocations. For better due diligence, many family offices channel their investment into the startup industry through VCs in addition to making direct investments in firms. Non-linear returns, direct exposure to technological businesses, strategic interest, and the capacity to offer value to early-stage entrepreneurs have been the main drivers for investing in start-ups. It is expected that the family offices in India are going to account for 30% of the total $100 Bn of startup funding by the year 2025.As opposed to 40% who favoured late to pre-IPO transactions, a good 50% of family offices preferred the seed to series a stage to enter a startup investment. In addition to this, family offices also invest in individual company shares through mutual funds or ETFs. Some of the sectors of interest include Fintech, Enterprise Tech, Consumer Tech, Frontier Tech, Healthcare, Agri Tech, Ed tech and others.
- Fixed income investments: Instruments such as government and corporate bonds, municipal bonds and treasury bills are often used by family offices to generate a steady stream of income and provide stability to a portfolio.
- Alternative investments: Family offices may invest in alternative assets such as hedge funds, real estate investment trusts(REITs), commodities, infrastructure investment trusts(InvITs), litigation funding and luxury assets. These investments can offer diversification benefits and higher potential returns than traditional investments, but may also carry higher risks. “There is also growing interested in investments to secure residency in a foreign jurisdiction like the US, Portugal and Dubai which have investments linked to residency schemes”, says Nishant Agarwal, senior managing partner and head of the family office, ASK Private Wealth.
- Philanthropic and impact investments: Family offices are among the most effective early adopters of impact investing, frequently demonstrating the strongly held beliefs and unique purpose that set them apart. They have recognized the importance of ethical impact and sustainability. Families may live out these ideals through impact investing without having to sacrifice financial gains. Many are making investment decisions based on environmental, social, and governance (ESG) factors. As a result, impact investing is growing rapidly, with US$715 billion now invested worldwide using impact criteria, according to PwC. For instance, Azim Premji’s Premji Invest primarily supports philanthropic initiatives of the Azim Premji Foundation.
- Passion Investment: A passion investment is a commitment of time, effort, and money to a pursuit of a personal goal. This can range from engaging in a pastime to exploring potential business ventures. In addition to watches and designer handbags, 53% of India’s ultra-wealthy are likely to invest in art for their passions, with jewellery following in second at 41%.
Family offices also concentrate on developing the demographics, products, and service range of their current firm in order to increase their wealth. Engaging in acquisitions and mergers might increase their money and influence. For instance, Walmart’s acquisition of Flipkart, an Indian e-commerce startup, was a logical step to expand its e-commerce presence in a market with significant development potential.
While establishing a family office requires significant resources and expertise, the benefits of having one can be immense for families who are committed to preserving and growing their wealth over multiple generations. As the number of ultra-high-net-worth families continues to grow worldwide, the demand for family office services is expected to increase, making it an exciting and dynamic field to watch in the years to come.