Passion Pays. Four fads for Indian HNIs

Wealthy investors around the world may be quite taken with art, wine, climate change or Alibaba’s New York debut, but Indian high net worth investors (HNIs) don’t follow these global fads. Leading wealth managers agree that wealthy Indians aren’t keen on passion investments, climate change bonds or any of the newfangled options that are now making waves overseas. Rather, it’s four other investment avenues that have caught the fancy of Indian billionaires. Check these out.

While Alibaba’s US IPO attracted global investors in droves, wealthy Indians were cool to this offer. The belief that the Indian market holds far greater promise than anything overseas has prompted Indian HNIs to look mainly at local start-ups to sate their appetite for risk.

Angel funding in e-commerce start-ups seems to be quite the rage with desi HNIs, going by the scores of online ventures that have raised big money in recent months. Orios Venture Partners recently raised a ₹300-crore fund, the first in India to invest in technology products and e-commerce firms. Timesaverz, the Uber-like portal for household help, recently closed funding from angel investors.

“Many of our promoter clients and senior finance professionals who have made their money are keen to invest in start-ups. E-commerce is particularly sought-after,” says Ashish Shanker, Head of investment advisory services at Motilal Oswal Private Wealth Management.

HNIs hear of interesting opportunities through networks such as Indian Angels or The Indus Entrepreneurs. “Though they aren’t yet ready to invest at the idea stage, many HNIs are willing to take their chances once a start-up is able to show proof-of-concept. Typical investment sizes are in the range of ₹25-50 lakh.” The exit is usually through sale of stakes to other strategic investors or private equity funds.

Rajesh Iyer, who heads advisory and family office services at Kotak Wealth Management, concurs and flags the trend of co-investing. “HNIs typically look to take exposure as angel investors in e-commerce ventures. But there’s also the option of co-investing. Basically, if your private equity fund can only take a certain exposure to an e-commerce firm due to its internal exposure limits, you can write out a cheque as a co-investor,” he explains.

Making a difference to the great Indian middle-class is another endeavour that has excited the wealthy. Their philanthropic activities were earlier restricted to family trusts or donations, but a new breed of professionally-managed social ventures is changing this.

“What has changed in the last couple of years is the manner in which these (social) ventures are managed and offered to investors. There has been a lot of professionalisation,” explains Iyer. In philanthropy, new agencies have sprung up which do the due diligence on non-profits and draw up lists of investment-worthy firms. They also offer regular updates on the difference that one’s investment is making. This has really caught on with HNIs, says Iyer.

The areas where HNIs are trying to make a social impact are also changing. While earlier, everyone used to make a beeline for medical facilities or schools, there’s a much wider menu of choices today. One investor mentions a social venture that helps artisans in Rajasthan market their handicrafts globally. Another is focused on making affordable feminine hygiene products for disadvantaged women.

While many of these ventures raise small sums amounting to a few crores informally, larger SEBI-registered Alternative Investment Funds have a minimum ₹1-crore ticket size. “HNIs invest in them mainly as a feel-good investment, but a return expectation makes these ventures more sustainable,” says Shanker.

While climate change doesn’t really get desi investors all hot and bothered, they are taking a fresh look at windmills as an investment, especially with their tax advantages restored.

“HNIs are displaying keen interest in investing in windmills. You typically invest ₹5-8 crore upfront and receive regular, long-term returns from the power generated and exported to the grid. Businessmen prefer this for captive use if they run a manufacturing firm. But there are also pure investors who consider this as good investment for the long term,” says Iyer of Kotak.

Tax experts say that two tax concessions in the recent Budget have made wind power attractive.

For one, the tax holiday granted to power generation projects under Section 80IA, which was set to lapse in March 2014, has been further extended. Two, the accelerated depreciation benefit for wind power, which allows windmill owners to write off as much as 80 per cent depreciation in the first year, has been restored.

Finally, it is not as if Indian HNIs have forgotten conventional investments. The fizzy equity market has prompted them to re-allocate money from debt into stocks. But it isn’t the Nifty Fifty or even the blue-chips that are now appealing to them. The spotlight is on under-researched mid- and small-cap stocks.

Typically, leading brokers do not recommend too many stocks beyond the top 150-200 stocks by market capitalisation. But the bull market and the belief that foreign investors are running out of headroom in larger stocks, have driven HNIs to seek out smaller stocks.

G Chokkalingam, founder and CEO of Equinomics, a boutique portfolio management firm, says, “Today, everybody wants to invest in the next MRF or JK Tyres. Logistics and chemical stocks have done extremely well in the secondary market in this rally. So, HNIs were keen to pick up IPOs from these two sectors.”

The penchant for under-researched stocks is why so many boutique portfolio management firms are springing up, he says. He notes that one thing that has changed with Indian HNIs after the 2008 crash is that they’re not content to simply hand over their wealth to a portfolio manager and sit back.

“They want to be informed, consulted and convinced about every stock acquired for their portfolio.”

With the Budget hiking the tax incidence on debt mutual funds (if held for three years or less), HNIs are keen to take direct bets on high-yielding non-convertible debentures (NCDs) too.

“NCDs offer an internal rate of return of 18-21 per cent, which results in a 13 per cent or so post-tax return, which HNIs see as very attractive,” says Shanker of Motilal Oswal.

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