Family offices: Designing the family’s future

Himanshu Kohli, co-founder of India’s first multi-family office, Client Associates, loves to tell this story. Back in 1998, he was a wealth manager at DSP Merrill Lynch and finding it extremely difficult to convince a Gujarati client to stop investing his surplus cash in properties at Mumbai’s Nariman Point and instead diversify into financial assets such as capital markets and liquid funds.

The client refused to budge. He argued that the 18 properties he’d acquired at Nariman Point over 20 years had not only made him richer by Rs 100 crore, but also earned him tax-free rent of Rs 5 crore to Rs 6 crore every year. He believed his existing investments were good enough to sustain his rather austere lifestyle and, hence, saw no reason to move into other asset classes.

It might have been wise to listen to Kohli. Two decades down the road, the value of his properties has, at best, gone up to Rs 250 crore with Nariman Point prices stagnant for a while and then depreciating over the past 10 to 15 years. Nariman Point, with its old buildings and decrepit infrastructure, has lost ground to swankier buildings in newly developed areas like Bandra Kurla Complex and Worli. “The returns were not enough even to take care of inflation and he had actually lost the value of his capital and not done justice to his wealth,” says Kohli.

Kohli says the Gujarati businessman would have been richer by Rs 800 crore had he invested in a conservative plan and as much as Rs 1,500 crore if he had dared to choose an aggressive one. His experience with clients like this convinced him to quit his job and set up a multi-family office to manage the personal wealth of India’s super rich in 2002. He began Client Associates from a single-room office in Gurugram, then known as Gurgaon, along with his classmate and co-founder, Rohit Sarin. Today, he has seven offices in as many cities with more than 500 uber-rich clients or high net worth individuals (HNIs), and manages assets worth $3 billion.

We all know what a family office does. It is primarily a wealth advisor that helps the ultra rich manage their personal fortunes. Over the years, it has also begun to offer a host of other services such as resolving succession planning issues, taking care of the family’s philanthropic activities, sorting out family conflicts, designing the family constitution, and even working with family members to prepare personal development plans.

Quite simply, it ensures the continuity of family businesses and protects and increases their wealth and businesses in an era of increased volatility and generational differences. “Family offices are being put in place to transcend the urban legend that the first generation creates the wealth, the second generation spends it, and the third generation squanders it,” says Deepak Natraj, a veteran investor and adviser, former managing director of Aarin Capital, a proprietary venture fund, whose partners include billionaire Ranjan Pai and T.V. Mohandas Pai.

India is relatively new to formal family offices, but they have caught on fast. And their role has kept pace with the times. As old economy businesses lose some of their charm and cutting-edge new economy industries become the toast of the business world, they now also help India’s super rich invest in startups and put their money in riskier areas such as private equity and venture capital. Family offices began looking at fresh avenues as the more-globalised next generation of traditional business families didn’t always want to go down the old path of ploughing all spare cash back into the family business or choose the safe option of property or gold.

Reports by Credit Suisse and Kotak Wealth estimate India has more than 55 dollar billionaires and 622 tycoons worth between $100 million and $1 billion. Experts estimate Indian wealth managers are addressing a $1.5 trillion market, way be - hind $70 trillion that global wealth managers play with, according to the Capgemini World Wealth Report, 2018. “When the ownership and manage - ment of a company was the same, then a lot of the promoters’ lifestyle and other expenses were managed by the company itself,” says Amit Patni, founder and director at RAAY Global Investments and chairman at Nirvana Venture Advisors. “But as corporate governance increased, people started separating their own wealth and income from the company’s income.”

There are two types of family offices: a single family office (SFO), that manages the financial affairs of a single family, and a multi-family office (MFO), that manages the financial affairs of many families. India accounts for around 150 of the world’s nearly 10,000 single-family offices, which only cater to single ultra high net worth families. It also has around eight to 10 multi-family offices. Families with more than Rs 1,000 crore ($150 million) in assets usually set up their own exclusive singlefamily offices such as Wipro chairman Azim Premji’s PremjiInvest, Infosys co-founder N.R. Narayana Murthy’s Cataraman, and former Tata Sons chairman Ratan Tata’s RNT Associates. Those with Rs 50 crore to Rs 500 crore are more likely to hire the services of a multi-family office. Examples of such offices are Waterfield Advi - sors, Metis, Altamount Capital Management, and Acuitas Capital, as well as banks such as Kotak Wealth Management and BNP Paribas.

Yet, no two family offices are the same as different families and family businesses have varying needs and aspirations. Sanjay Mehta, a Mumbai-based angel investor, who plans the investment strategy of marquee names such as Infosys co-founder Kris Gopalakrishnan, says family offices are increasingly getting into early-stage funding and some are even coming in as angel investors. Mehta believes that by investing in startups working on new technologies like artificial intelligence and the Internet of Things, traditional families stay updated and are not taken by surprise when new innovations hit the market. “Businesses are run by metrics and numbers, but families run high on emotions, sentiments and relationships. Family offices help in managing all the people involved and ensuring that the family wealth is preserved,’’ he adds.

Patni of RAAY Global Investments believes family offices are also co-investing with other family offices. His family office has made around 14 such investments so far, going up to $4 million (through Nirvana). Nirvana’s total corpus is around $40 mil - lion of which Amit and his brother, Arihant, have put in $15 million. “Families find comfort in co- investing with another family,” said Ayushi Patni, Amit’s daughter and director at RAAY Global. “Nobody wants to foot the entire cheque. If someone asks me to invest I will ask who else has agreed.”

Clearly, one of the main jobs of a family office is to make sure families don’t put all their eggs in one basket. Harsh Mariwala, chairman of consumer goods company Marico, launched his family office, Sharrp Ventures, around four years ago when his son, Rishabh, explained to him the dangers of not spreading one’s risk. “Being an FMCG company, we get dividends and those dividends need to be invested somewhere. Until Rishabh joined, most of our stocks were used to buy back Marico’s stock,” he says.

Their family office doesn’t just look at traditional investment opportunities in equities but also funds other ventures, including those of family members. Some of the businesses the Mariwala family office has co-invested in are India’s largest beer chain, Beer Café; supply chain solutions provider LEAP; and health product website HealthKart. It has also funded Rishabh’s sister Rajvi’s initiative for mental health, Harsh Mariwala’s Ascent, a peer-to-peer learning platform for small businesses, and a new aqua-physiotherapy centre called AquaCentric. “If there is a great opportunity in the tech space with technologies like artificial intelligence, then we could invest through a fund. So it is not written in stone that we will invest only in consumer companies,” says Chaitanya Deshpande, who was head, M&A and strategic initiatives at Marico and now manages the family office along with Rishabh.

Their office allocates what the family needs for these ventures and lifestyle needs, and the rest is invested, says Rishabh. He says Sharrp Ventures is a separate institution which happens to have the same owners as Marico. It usually invests below Rs 10 crore in a business and going forward the average ticket size of the investments will rise. “The short-term goal is wealth multiplication. As the corpus grows there will be a need to institutionalise the family office. Then it becomes a self-sustaining identity of its own,’’ he adds. Rishabh is clear that Sharrp will invest only in listed equities and not in debt, commodities and precious metals. “We do have an external wealth manager who helps us out, but through the family office, we can tell him exactly what we want and what our risk appetite is.

The sky is the limit is the message one gets when it comes to the investments by Mariwala’s family office with both Rishabh and Harsh Mariwala agreeing that they aren’t averse to the idea of the family office completely taking over a company in the future.

Investments by India’s super rich in startups and other businesses vary. Premji Invest, for instance, paid around $52 million for an 8% stake in Fabindia in 2016, four years after it first picked up a 7% stake in 2012. It also has a 2.2% stake in Aditya Birla Capital, the financial services arm of the Aditya Birla Group. Similarly, Hero Enterprises, the family office of Delhi-based industrialist Sunil Kant Munjal, has invested Rs 82 crore with the family office of Harsh Mariwala in India’s largest online beauty platform, Nykaa, and is also an investor in the country’s largest hotel aggregator and asset manager, OYO. The Burman Family Holdings, as the Burman family office is called, has invested more than $500 million in new economy businesses like online insurance aggregator Policybazaar as well as financial institutions like RBL Bank and Aviva Life Insurance. It has also invested in Indian Premier League team Kings XI Punjab and children’s book publisher Amar Chitra Katha.

RNT Associates, the family office of Ratan Tata, has pumped millions into more than 30 companies across the e-commerce, payments, and electric vehicle segments. It has also launched RNT Capital Advisors—a joint venture of RNT Associates and the investment arm of the University of California—to create a joint venture fund, which has invested Rs 670 crore in cab aggregator Ola along with Falcon Edge Capital.

Similarly, Catamaran Ventures, the $130 million family office of N.R. Narayana Murthy, has also been investing in different businesses. This includes $18 million in online fashion retailer Yebhi and $20 million in online shoes and apparel retailer Bigshoebazaar, according to deal tracker Grant Thornton and Venture Intelligence.

The family business universe is growing. And so is its heft. Traditional investors were stunned when the home offices of Sunil Kant Munjal (Hero Enterprises) and the Burmans (Burman Family Holdings) bid for the country’s second largest hospital chain, Fortis Healthcare. They eventually pulled out of the race but were willing to invest more than Rs 1,000 crore upfront. “Unlike traditional venture capital or private equity funds that have what is called an investment thesis, in family offices, investment plans can evolve. We can flip our investment thesis, change it or tweak it depending on the opportunities available. The agility, flexibility and speed of closing a deal is far higher in family offices,” argues Natraj.

Family offices make your money work for you but are not constrained by rigid investment rules or defined time-lines in their investments. Unlike private equity and venture capital funds, which typically have a seven- to 10- year horizon, family offices have the luxury of time, which allows them to be more flexible and innovative in their investment decisions. Moreover, the companies that get investments from family offices also benefit from the reputation and brand equity of the family name.

Another key function is will management and succession planning, one of the biggest fault-lines in family businesses. Every family, according to Kohli, has to find a way to reconcile its personal and professional interests because the succession process can bring these two issues in direct conflict, putting both the family and business at risk. Of course, there is bias in investing. “Investments by a family office are often a reflection of the matriarch or the patriarch and what they like. They may like an industry, which is often an extension of their own business; or a segment that they personally like,” says an investment manager with a billionaire-led fund, who did not wish to be identified.

Family offices have come a long way. The billionaire Rockefellers set up the first family office in the late 19th century in the U.S. to manage the family’s fortune. Since then, most billionaires across the world have set up such offices. Kohli compares the role of the family office to the munshi of yesteryears—the original wealth advisor of kings who managed the wealth while the ruler accumulated or lost assets and wealth through battles, as well as marital and political alliances. He was also a trusted advisor, or margdarshak, for most of the king’s big life decisions.

Since the rich and the famous trust them with their personal wealth, at the end of the day what do they expect from the family office other than strict confidentiality about their home affairs? “If I trust you with my money, I’ll expect you to go beyond being just the best financial advisor. You will also be my investment banker, real estate advisor, and estate planner, all rolled into one. Additionally, I expect nothing less than a 3 am counsel, a friend, philosopher, and a guide who understands and takes care of all my life needs,” says Kohli.

Of course, there are challenges along the road such as operational risks when everything is done in-house and ensuring an appropriate governance structure. So, the role of the modern-day munshi is only likely to become more complex. As demands and pressures on family offices increase, they will also be expected to be chief risk officers to handle leaks of family secrets, cyber security threats, concerns over privacy, and reputational risks. They will also have to help cope with factors beyond the control of the top management such as changes in government regulations, markets or product disruption, or sovereign and political risks. But, most importantly, they will have to ensure that the family stays together during a crisis and doesn’t fall victim to the third generation curse.

(The story was originally published in the August issue of the magazine)