With many first as well as second generation entrepreneurs pressing on the exit button to move into new businesses allowing multinationals seeking to gain a foothold in India or new local business houses trying to scale up their operations, a whole set of cash rich ‘family offices’ have emerged over the last decade. They are fast becoming a new crop of investor community and a big source of capital for new companies.
These close-knit families with strong business sense and deep pockets who previously focused on pump priming their own businesses with the cash generated year after year, are now ready to help other companies grow. So much so that today we have at least 5,000 family offices spread across geographies and actively playing a role in setting up new businesses. It is estimated that the top 30-40 family offices manage $15 billion worth of capital.
The debut edition of VCCircle Family Office and Investment Management Summit 2014 saw a packed house in Mumbai this week, with family office managers, doyens as well as heirs of business families small and large, asset managers and experts participating and sharing their thoughts. The summit discussed the need for family offices to come out of the comfort zone of traditional investments and seek the advice of professionals.
Here are some jottings from the opening session of the event which was moderated by Soumya Rajan, co-founder, managing director and CEO of Waterfield Advisors, a consultancy focused on family offices.
Need to professionalise family offices
Family offices have risen as an offshoot of the traditional business houses and prove to be better investors than most other form of investors because of their ability to be patient. Amitabh Chakraborty, managing director & CIO at Kitara Capital, who has over 25 years of experience in the capital market space, sees a multitude of opportunities for patient capital if met with professional and expert advice.
“There is a need to outsource (management of) family offices. Managers of outsourced family offices stand on three pillars, namely the depth of the service, the breath of the service and the relevance of the service,” he said.
Finding the right partner to run the office of a business family is a huge challenge. “The partner should relate to the objectives of the family and right now I am not sure if the eco-system in India supports those kinds of partners,” says Radhika Rajan, executive vice president, DSP Investment. She personally looks after the day-to-day running of veteran investment banker Hemendra Kothari’s family office.
The family office needs to identify the timing to enter an asset class at the right time and a professional can help them achieve that, felt the panellists.
Ability to gauge right investments with patient capital
The biggest challenge for conventional investors, including a venture capital of private equity fund, is the duration of investment. Family offices are gifted with long-term horizon on companies that they invest in.
A veteran in the financial services industry and an expert on mutual funds, Sankaran Naren, chief investment officer at ICICI Prudential Mutual Fund, advises family offices to take advantage of long-term view on investments that they have. “Family offices need to use the volatility presented by different asset classes and profit from it. They should focus much more on the valuations and the opportunities provided in the market,” he said.
Startups need time to take baby steps and grow to the next level where they can start generating profits for their stakeholders. An expert on new businesses and merger & acquisitions, Parag Shah, the managing partner at Mahindra group’s private equity division Mahindra Partners, tells investors that patience and a right structure eventually pays off.
“Family offices need to give at least five years to a company to expect any returns and grow into a trusted brand,” he shared.
Need to look beyond traditional asset class
Most business houses have made huge investments in real estate. This is either through direct investments in realty space or through short-term lending to property developers. “There are investment opportunities in private equity funds but they require longer-term perspective,” Radhika Rajan of DSP Investment said.
Indeed, many domestic funds have managed to successfully raise new funds locally even as offshore fundraising remains tough.
Structuring a family office
Family offices require clear objectives to get their structure right and accordingly find the right professional partner to run it for them. Chakraborty of Kitara Capital gives out two types of investment strategies: “A hands-on approach is where the investors are directly involved in the day-to-day businesses and another one is a hands-off approach which is more philanthropic in nature.”
Family offices in India are still at a nascent stage and hence require clear objectives to run successfully.
“The minimum objective of a family office should be preservation of its wealth. The other one should be to balance out the needs of different family members for investments in new businesses,” Chakraborty said.
The real challenge is to also keep the ‘family’ together in the ‘office’ as a large number of the rich families have seen cracks and splits in their relations after the third generation.
(Edited by Joby Puthuparampil Johnson)