Evolution of Family Offices in India:
In the dynamic landscape of investments, family offices have emerged as key players, steering the financial trajectory of Ultra High Net Worth individuals (UHNIs) and high net worth families. They offer greater control over investments, risk-adjusted returns, global portfolio management, diversification, and wealth generation.
There is no one-size-fits-all approach to constructing a family office. Tailoring their strategies to the unique needs, risk appetite and objectives of the family, these entities navigate market complexities, capitalize on emerging opportunities, and align with evolving investor preferences.
Traditionally, Indian family businesses preferred putting their earnings back into their own projects. But with the rise of family offices in India, now numbering over 200, there’s a shift to a more organized way of handling and passing down wealth. These family offices are becoming more self-sufficient, using digital tools to make informed decisions, and giving importance to things like environmental, social, and governance (ESG) factors, not just financial performance.
Specifically in India, the significance of family offices’ investments takes center stage. Anchored by the firm belief that one’s roots need not limit the expanse of investment portfolios, family offices in India are breaking free from conventional sector constraints. They are channelling funds into a diverse array of startups, not only mitigating risks judiciously but also tapping into the vast potential of novel industries. They also present an opportunity to engage and gain insights into these innovative sectors that are shaping the future of our nation.
Through their investment in the Indian startup ecosystem, family offices are not just diversifying portfolios; they are also establishing connections, facilitating learning, and positioning themselves for remarkable growth.
It’s a chance to learn and participate in these novel sectors that are shaping our country’s future. By investing in the Indian startup ecosystem, we as family offices are not merely expanding our portfolios, but we are also forging connections, fostering learning, and positioning ourselves for exceptional growth
Key investment strategies:
Family offices in India are increasingly diversifying their investment strategies and asset classes, adapting to changing market conditions and opportunities. Here’s an overview on the key investment strategies:
Private Market Investments: Indian family offices have shown a significant interest in private market investments. Over 40% of family offices have doubled their allocation to private markets in the past five years. The appeal of private markets lies in their potential for better investment control, attractive risk-adjusted returns with limited public market correlation. However, these investments are illiquid and family offices that can hold on such investments can enjoy high returns if investments are made mindfully, and lower price volatility.
Allocations to startups and venture capital (VC) funds make up 18% of the overall investment pie, which is substantial compared to other alternatives. The startup ecosystem’s growth, especially in technology, has been a key attraction, with many family offices investing directly in startups or through VC funds.
Listed Securities and Fixed Income: Alongside private markets, traditional asset classes like listed securities and fixed income continue to form a significant part of family office portfolios. These investments offer a balance of growth, stability and liquidity, which is crucial for wealth preservation, a primary goal for family offices.
Real Estate, Commodities, and Private Equity: Globally, family offices have been focusing on real estate, commodities, and private equity. Private equity, in particular, has gained traction, moving towards the forefront in the family office space, driven largely by venture capital investments. This shift indicates a broader approach to asset allocation, balancing between public equities and more private, fund-based investments.
Diversified Portfolio for Inflation Protection: In the face of inflationary pressures, family offices are advised to maintain diversified portfolios comprising real assets like equities, gold, and real estate. This diversification strategy not only offers protection against inflation but also aligns with long-term growth objectives. Additionally, investments in areas like automation or high-margin businesses are recommended to match returns with inflation drivers.
Cryptocurrency Investments with Caution: While there’s interest in cryptocurrencies, family offices are recommended to invest only a small percentage of their assets in this class, given its volatile nature and the overarching goal of wealth preservation.
Sustainable Investing: Sustainable investing is gaining momentum, with family offices allocating a growing portion of their portfolios to this area. From 16% in 2020, the allocation rose to 20% in 2022 and is anticipated to reach 31% in the next five years. This trend reflects a growing emphasis on ethical impact and sustainability in investment decisions.
A few years ago there was a chase to get VC funds on the cap table. Today founders have started realising the value that FO’s bring to the table apart from providing patient capital as there is no hurry to exit.
Conclusion:
In summary, Indian family offices are embracing a mix of traditional and alternative investments, with a notable inclination towards private market investments, particularly in startups and VC funds. They are also focusing on diversification to mitigate risks, including the impact of inflation, and showing an increasing interest in sustainable and impact investing.
With the access to better deals in FO, we see this only asset allocation to alternates only getting higher.
-The author is Founder, Sattva Ventures. Views expressed are personal.
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