Creating wealth is easier than managing wealth, says Raamdeo Agrawal, Co-Founder & Non-Executive Chairman, Motilal Oswal Group. Fortunes are made - and destroyed - often within a generation. But when businesses do survive beyond the first, expanding families and conflicts of interest among family members could potentially implode businesses and destroy wealth.
"When the size of the economy doubles, the wealth of business families increases manifold. Assigning Family Offices to protect and utilise the wealth according to the wish of its founders will help avoid mismanagement of assets," says Agrawal.
Several business families in pre-liberalisation India disappeared because of a lack of focus on wealth management and preservation. However, an institutionalised wealth management system through Family Offices is gaining popularity at a time when assets are appreciating faster than ever.
There are just over 100 billionaires in India with a wealth of around $400 billion - a large portion of which is the value of the promoter shares they hold.
Family Offices are privately held entities that handle corporate groups' wealth and investments. They can be a single Family Ofice - handling one family's wealth - largely run under the guidance of the patriarch or someone appointed by the family, or a multi-Family Office that handles wealth of many families and are run by professionals.
According to the internal estimate of a foreign bank, Indian business families may have deployed about Rs 6-7 lakh crore of wealth through Family Offices.
Family Offices serve several purposes, says Harsh Goenka, Chairman, RPG Enterprises. "Firstly, regulatory compliance has become an important area that needs professional management. Over the last few years there have been a lot of additions to the regulatory framework in the country and most diversified groups have a number of entities in their holding structure." Goenka notes that investing surplus funds, maintaining asset allocation according to the risk profile and managing the return on investment (RoI) is another aspect that family offices address. "With the boom in the start-up ecosystem, most families have set out to invest in promising ventures and Family Offices are tasked with identifying and investing in suitable projects. Besides, it is important that the next generation is involved in the functioning of the Family Office so that there is greater degree of awareness and exposure to the family's balance sheet," he adds.
Running a Family Office is not an easy task. As the custodian of family wealth, Niraj Bajaj, youngest cousin of industrialist Rahul Bajaj, faced a tough time during in 2017-18 when he was charting the Family Settlement Agreement (FSA) of the 25-member family, which has nearly Rs 1 lakh crore worth of assets as shares and properties. The FSA, which delineates how the family wealth will be divided and who will manage which companies, is essential to continue running the business as a joint family venture and avoid disputes within.
The Bajaj family, headed by Rahul Bajaj, holds promoter shares in individual names and through 14 holding companies. There are large trusts such as the Jankidevi Bajaj Gram Vikas Sanstha, Jamnalal Bajaj Foundation and Jamnalal Kaniram Bajaj Trust. Operations of these entities come under the ambit of Family Office. Niraj Bajaj, who runs the family office with around 30 employees, says: "I have been handling the Bajaj Family Office for the last 30 years, on behalf of the joint family. In this period, the number of family members increased, new companies were added and wealth appreciated. The Family Office acts as a supportive system for improving business and safeguards personal wealth."
Billionaire Azim Premji's Family Office controls the operations of Premji Invest, the investment arm of Azim Premji. The fund started in 2006 with $1-billion capital has more than tripled its investment value in a span of 10-12 years. It has invested in Aditya Birla Capital, Flipkart (through Myntra), Snapdeal, FabIndia and Future Retail, among others.
Similarly, RNT Associates is the Family Office of Ratan Tata and Catamaran Ventures of NR Narayana Murthy, doing investments, including in start-ups. Ratan Tata has invested in over a dozen startups, including Paytm, Ola Electric, Snapdeal, Tork Motors, UrbanLadder and Lenskart. Mukesh Ambanis Reliance Family Office has last year facilitated sale of the private pipeline owned by him to Brookfield for Rs 13,000 crore. Catamaran has venture capital investments in Paper Boat, Innoviti and Healthspring.
The business of Family Offices is becoming increasingly relevant these days as the churn in the economy has started affecting investments of high-income earners. Gautami Gavankar, Executive Director & Head, Estate Planning and Family Office Services, Kotak Mahindra Group, says most Family Offices today are looking for investment opportunities in diverse sectors, and the smart money is moving into sectors where value creation can be seen over the long term.
"In addition, ultra high networth individuals (UHNIs) and high networth individuals (HNIs) are ensuring that there is a 'safety pot' kept aside to deal with any exigencies and manage their cash flow requirements," she adds.
Another emerging trend is that many families are exploring immigration, and considering various places in Europe for the long term, according to Gautami.
The reason for that is diversification of risk and taking advantage of cross-border opportunities over time, apart from the reasons of lifestyle, being closer to the family and ease in living and doing business abroad. In such cases, it is important to set up Family Offices in India to manage wealth.
Family Offices tend to look for long-term investment opportunities and prefer direct investments that offer more control and lower fees. In the current scenario, distressed assets are also a big focus area for them. Many families are looking at impact investments and social investments as well. "Philanthropy, which is usually a big part of most family ethos, has seen a ramp-up recently. The next generation, in particular, is looking to make a social impact and bring about a positive change, says Gautami of Kotak.
"While multi-Family Offices follow a disciplined, asset allocation-based approach depending on the risk profile of investors, single Family Offices in India are more inclined to make investments based on the patriarch's views," she adds.
Multi-Family Offices also focus on other aspects such as compliance, tax/legal implications and give more rounded and holistic advice, Gautami thinks.
Ultimately, it's all about using wealth responsibly.
@nevinji