Almost 70% of all family offices have been set up since 2000, with half emerging post-financial crisis in 2008. According to studies, there is $10 trillion of wealth amongst Family Offices, a figure predicted to grow to $65 trillion over the next 15 years.
The Indian startup ecosystem has been scaling at a massive pace in the last few years. Family offices have emerged as a sound and strategic investment choice for Indian startups.
It is expected that the family offices in India are going to account for 30% of the total $100 Bn of startup funding by the year 2025.
The startup scene in India is maturing with family offices expected to play a key role in its development. So, if you are a startup founder looking for funding, approaching a family office could be a good idea.
What Are Family Offices?
Family offices are private wealth management advisory firms that serve ultra-high-net-worth individuals (HNWI). They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. For example, many family offices offer budgeting, insurance, charitable giving, wealth transfer, and tax services.
With that as a backdrop, there is a saying that “when you know one family office, you know one family office.” Family offices are varied in terms of their:
1. Source:
Family offices may be solely structured around one principal (“single-family”) or multiple (“multi-family”).
2. Size:
Ranging from a few hundred million dollars under management through to multiple billions.
3. Structure:
From fully-fledged investment advisors that would rival even the most institutional of firms to just one cited individual advisor.
4. Strategy:
While wealth preservation on a real basis is generally the main goal, capital appreciation or growth can be just as important depending on the nature of the principles.
Driven by a lack of consistent returns and high management fees in private equity (PE) and venture capital (VC) funds, several Indian family offices are coming together to form a consortium to make investments on their own. Family offices are an important source of capital for PE and VC funds raising money domestically since institutional investor participation in such alternative funds is low compared to the West.
What Is Behind the Recent Rise in Family Offices?
Why have these investment organizations become so prevalent recently? In large part, it’s due to the increasing returns to the capital as compared to labour, which has created large multi-generational-type fortunes. Across numerous industries, concentrations of returns are generating significant financial wealth.
However, the second factor is just as important, if not more. Wealthy individuals and families have discovered that they can operate at a significantly lower cost than the traditional vehicles accessible to them while maintaining strong performance. In the recent past, wealthy individuals would be funnelled into institutional investment funds which would often charge significant management fees.
Also, often times a wealthy individual or family generates wealth by having domain expertise in a specific industry. This expertise can extend to operating experience, valuable relationships, or general thought leadership. By specifically maintaining a family office, the principal can continue to exercise some level of control over their investments and also have a role in helping to create value once investments are made.
Finally, family offices are often operating on a much different timeline than traditional institutional funds. Rather than a seven to 10-year horizon when looking to exit, family offices are looking across generations (many family offices say they are targeting third-generation, or 100-year wealth). As a result, holding periods can be much longer, especially if an asset is generating cash flow that is being remitted to the principal and their family.
According to the Soumya Rajan, a former Standard Chartered banker,
“While initially, Indian families started to better understand the alternative investment space by investing in PE and VC funds, the experience was very varied, with returns through funds being largely inconsistent and fund management fees being fairly high. This, in turn, prompted families to consider taking direct stakes in companies where the family could exercise greater control on their investments,”.
For entrepreneurs, raising capital from a family office or a group of family offices could be relatively beneficial, given the long investment horizon of these investors and the sector expertise they carry, having run successful businesses themselves.
“Family office capital has traditionally always been patient capital and unlike a fund which has a predetermined life, the Consortium can provide a longer runway for the exit, thereby optimising for returns,” said Rajan.
The Many Disciplines of a Family Office
Providing advice and services for ultra-wealthy families under a comprehensive wealth management plan is far beyond the capacity of any one professional advisor. It requires a well-coordinated, collaborative effort by a team of professionals from the legal, insurance, investment, estate, business, and tax disciplines.
Often, a family office provides high-level financial planning through an integrative approach. Combining asset management, cash management, risk management, financial planning, lifestyle management, and other services, family offices help clients navigate the complex world of wealth management.
The Rise of the Family Office
The stepped-up participation of family offices in the venture has coincided with a growth in the overall number of family offices being formed. Thirty per cent of the 110 family offices surveyed were founded prior to 2000, whereas 38% were founded in the first decade of the millennium, and another 20% in the five years following 2014.
This growth was driven by a number of factors, according to survey respondents. The 2008 financial crisis and the bull market that followed drove many families to take a more active role in managing their assets. What’s more, as a variety of private investments garnered renewed interest, many realized the family office structure facilitated them.
The family offices that responded to the survey had average assets under management (AUM) of $797 million for single-family offices, and $1.5 billion for multi-family offices, which comprised 20 families on average. Nearly half (45%) were located in North America, and nearly a third (29%) in Europe with the remaining divided among the Asia Pacific (13%), Middle East (8.2%), Central and South America (3.6%), and Africa (1.8%).
