The number of high net worth individuals in the Asia Pacific region has touched 4.3 million, equaling that to that in North America, according to the CapGemini World Wealth Report 2014. Yet the number of family offices in the region, numbering just over 100, ‘does not reflect the boom in regional wealth’ according to CampdenFB. North America has more than 3,000 family offices while Europe has more than 1,000. This disparity is set to change though, according to industry experts.
Indeed, the number of family offices in India is very few or very high depending on how you define it. A family office is usually a private entity that manages the wealth affairs for a single family. In India, that role has been fulfilled by the trusted ‘muneem’ or chartered accountant. A number of families also use the services of the corporate treasury of their family businesses. By these loose definitions, you could say there are as many family offices in India as there are wealthy families.
Jayendra Shah, partner at multi-disciplinary firm N A Shah Associates, explains the trend: “Family investment decision making has moved from informal boards to well-structured professionally managed family offices, however the lack of well laid-down governance principles in majority of families have resulted in sub-optimal utilisation of such offices or in worse situations have led to bitter disputes. Wealth managers’ offerings are quite standard and more so do not cater to the diverse requirements/challenges faced by a family office.” N A Shah has been advising families on range of issues, some for 50 years.
Very few families have completely separated the governance structure of their personal wealth from their business and set up a single-family office (SFO) as a private company to manage their wealth. Examples include Catamaran (of Infosys co-founder’s Narayan Murthy), Nadarthur (of Infosys co-founder’s Nadathur S Raghavan), Ambani, Unilazer (of UTV founder Ronnie Screwvala) etc. Industry experts estimate there are only about 20-25 SFOs although they admit there is no way of knowing the exact number as the definitions vary from family to family.
Benaifer Malandkar, CIO, RAAY Global Investments, the family office of Amit Patni says: “There are not more than 20 large family offices in India. Of course, there are a lot of smaller, non-institutionalised family offices in the country, like a one man managing the entire show. But to me, that is not a family office.”
Experts believe the need for family offices is driven by the need for governance. And the old saying about ‘shirt sleeves to shirt sleeves in three generations’ may be true. Shah believes that the recent increase in disputes is due to the fact that family businesses have started transitioning to the third generation without formally laid out governance principals and hence the interest in such services.
Range of functions beyond investments
As families become wealthier, collect more assets and become more international, they need relevant advice related to estate, tax, legal, financial planning, succession planning and the ability to access capital markets. They also need the benefits that come from a central unit managing the family’s personal affairs, philanthropic activities, book-keeping and concierge services such as managing their travel etc.
Family offices are set up to secure a family’s financial future by building, preserving and transferring family wealth and legacy.
The range of services provided by family offices can be broadly classified into four main categories – investment management, wealth transfer, administrative & tax services and concierge services.
Globally, some of these services are quite comprehensive, such that family offices are classified into class A, class B and class C depending on how many of these services are provided.
Malandkar feels that the Indian promoters’ requirements are very different from those globally. “Globally, a family office set up is more investment driven. For instance, institutions such as Rockefeller Foundation works on a strong discretionary investment mandate. There are of course very high-concierge services available but they are external to the family office.”
“The promoter families want the family office structures to also cater to their non-financial or service-oriented needs. I know one family office in India who actually has a separate COO for these services, for everything from a butler to driver requirements, occasions arrangements to anything else catering to the concierge needs of the family,” says Malandkar.
Malandkar adds: “Increasingly one can see a growing need for concierge and accounting services and we try to fill the gaps by providing our client end-to-end services. So tomorrow, even if he needs concierge services in the UK, our firm can make the required arrangements for them.”
Emergence of multi-family office
Family offices are expensive to run. For the Indian market, experts believe the minimum wealth for setting up a SFO is INR 800-1000 crores (~US$120-160 million).
For families with liquid assets lower than this threshold, there is the option to work with a multi-family office (MFO).
While a number of independent financial advisers (IFAs) and portfolio management services specialise in advising ultra-high net worth families, these tend to be limited to investments. Their services tend to be similar to private banks, and not truly ‘independent’.
In markets like Switzerland and Singapore, some of these independents have evolved into ‘independent asset managers’ (IAMs) or ‘external asset managers’ (EAMs). EAMs provide oversight to the family’s overall investment portfolio by executing through and aggregating reporting from multiple private banks.
MFOs are like EAMs but with non-investment services as well. However, even in established markets, the line between EAMs and MFOs is blurring.
In India, while there are some players that call themselves MFOs, the value proposition and business models vary so much that they can hardly be considered a segment. The earliest example is Client Associates but there are others such as Altamount, Metis, and more recently Waterfield Advisors.
Chennai-based Metis was set up in 2010 by veteran private banker IAS Balamurugan and Suresh Ramanujam. The founders felt that there was a gap in the market for a professional player to provide wealth management and business advice for entrepreneurs who don’t distinguish between their personal wealth and business. They were proven right when their clients started paying them for their services.
Metis groups the firm’s services as ‘family CFO’, ‘growth catalyst’ and ‘family risk counsel’. Balamurugan says the firm plays the role of aggregating advice from various specialist advisers like tax, legal, real estate, investment banking, wealth managers etc. He believes to do so the firm has to be completely independent, hence it has got the Investment Adviser license from SEBI.
Balamurugan believes there is a growing demand for independent service providers like his firm, as trusted advisers. “We help them create family constitutions and family boards so they can run the family wealth and family business just like a company. We help them talk about their capital and people requirements at the operating board level,” explains Balamurugan.
A more recent entrant in the MFO segment is Waterfied Advisors, set up by Soumya Rajan. The firm was in the news more recently when the Patni family offices announced that they were making a strategic investment into the firm. Malandkar of RAAY Global Investments explained the investment as a desire for the Patni family to share their expertise in running a family office with other families, yet keeping an arms’ length thus creating an independent sophisticated family office advisory service platform. Rajan welcomed the investment as it allows the firm to broaden its service to non-investment services as well.
“Every private banker or a service provider is trying to lure them into working with them. However, these providers don’t look at the larger picture of what the entrepreneur, the family or what the next generation wants to do with their wealth. They don’t realize that there could be new areas/avenues that families are exploring and these could include creating corpuses or foundations and even philanthropy,” says Rajan.
Non-investment related services “have everything to do with succession, wealth planning, drafting a family constitution, setting up a philanthropic trust and so on. Family offices also help avoid conflicts as money gets passed down to the next generation,” she adds. Waterfield is also planning to offer concierge services in partnership with a French company.
Another service that is hugely relevant in India is corporate advisory. “Because we work with a lot of entrepreneurs and they have varied needs such as our scouting for M&A opportunities for them, raising debt and equity; these activities are very fundamental to what they do,” says Rajan.
Bank-based MFOs have conflicts
One of the oldest MFO in India is one offered by Kotak Wealth, Kotak’s private banking division. Credit Suisse had also announced one last year, while others are considering offering similar services. Malandkar says one of the biggest concerns with bank-based MFOs is that they are directly paid by product manufacturers and thus remain conflicted. Her advice to private banks is that it would be very tough for them to gain acceptance by families.
Rajan agrees though she admits banks like UBS have which have succeeded by setting up the MFO completely outside the private bank. “It is paramount that they are completely neutral to be a family office. Many people claim to be a family office and that they have an open architecture. But before you know it, they have down sold some proprietary product there,” adds Rajan.
Balamurugan says Metis doesn’t compete with banks; he works with them: “They have the bandwidth to create more investment ideas and products. They are more like a team that has been delegated a particular task. MFOs usually do not have that kind of bandwidth to do it all.”
As always, one of the biggest concerns in the other Asian markets remains a lack of talent pool to cater the growing wealth populace. Outsourcing is likely to grow in popularity in Asia, given the number of individuals in Asia who are creating large fortunes and the competition for resources of all forms around the world. Unless there is a large number of professionals who are focused on the family office sector, there won’t be enough talent in the market place to create so many family offices.