The rise and rise of Family Offices in India

We started our journey in May of 2002 and we call ourselves pioneers of family office concept to the Indian markets because it was not a concept people were very familiar with back then.

We were bankers and what we intended to do was basically to create a professional platform for families which were getting richer in India after the country opened its markets in 1991. A richer society will land up with a new problem of how to manage those riches. Because the scale of wealth will go to a level where it could be generational wealth and it could be lost beyond the current generation of owners. You needed a very different solution to manage those riches. We tried to study some of the best practices in the developed markets and how wealthy families there managed their wealth. And that is where we came across the model of family office.

That is a very good question. We see a lot of difference between the two because generational wealth has been managed by some legacy thought process. First-time wealth owners may have created that wealth by way of taking risk, including putting their own money to start a venture. So they understand risk very differently. They are more growth-oriented whereas the traditional families are more protection-oriented. But having said that, even within business families, the younger generation has a higher risk appetite.  

It is a very good observation. The answer to this question varies from one individual/family to another. Conventional wisdom will mandate that when I am already taking risk in my business, whatever income I earn from it should be protected.

But if there is not much dependency on that income for the next 10 years to take care of your lifestyle expenses, it is prudent to view it as surplus corpus. Over next 10 years where equity can deliver, say, 15 per cent on average annually, the opportunity cost of missing out is huge. At the end of the day, it is a function of an individual risk appetite and hunger for growth. We have found families on both ends of the spectrum. Some are content with what they have while others are more growth-oriented and want to compound their wealth while we take care of the downside.

In such a scenario, diversification can be achieved in one of two ways. If, for example, a client has 90 per cent of his wealth in the equity of his company, we can bring it down to 80 per cent by liquidating 10 per cent of equity and investing the proceeds in debt, which is inherently less risky, thereby bringing down the overall risk.

Another approach would be to invest the proceeds in the equities of a portfolio of other companies in different sectors so that the single business risk is diversified without compromising high growth rates from equities. We usually do not recommend taking loan against securities because it immediately pushes the returns required to be generated from the market to compensate for the cost of funds. It is a higher risk strategy that we generally do not recommend.

It is a very important question because our clients definitely think differently from retail investors. Families who have been running businesses are aligned to the market and are used to compounding their return between 15 and 20 per cent. So, generally, their expectation of return from equity as an asset class is 15 per cent plus. On the debt side, the relative low returns after tax make it less attractive for clients who have higher return expectations, so we tailor the debt allocation to primarily fund their liquidity requirements. NCDs and Market-linked Debentures (MLD) provide a way to higher returns, but tax is a bit of a dampener here.

There are two-three ways in which we do it. Firstly, we follow a process called a core and a satellite. We can compare it to the base of a pizza and then have the satellites as toppings which helps us achieve customisation for individual client requirements. Secondly, we also have multiple (seven) asset allocation combinations which helps us customise for different families ranging between ultra-conservative and ultra-aggressive.

The customisation can happen across various filters, including the risk of the portfolio and the components of the portfolio. We freeze the asset allocation in the Investor Policy Statement (IPS) based on return expectation and the financial goal. We design the portfolio in a way to deliver the goals on a long-term basis and monitor the portfolio continuously.