Can Alternative Investment Fund be the way forward for family offices?

Abhishek Goenka is the head of venture capital at the RP Sanjiv Goenka group. The group is known for Spencers and SaReGaMa, along with CESC. 

He is, however, coy about his next investment. The I's haven't been dotted and the T's not been crossed on it. But, he will talk about his fund. He has targeted a Rs 3-billion one, with Rs 1 bn in from its lead Limited Partner. We’ll come to the identity of the lead LP a little later.

Goenka works out of Gurugram, and is excited about his role in the investment vehicle. It is a good time to be in business. There are a lot of opportunities, and he has a clear thesis. He wants to invest in three types of companies — fast moving consumer goods, consumer goods and durables, and technology companies that enable consumer goods. It is sharply defined. 

There is a deeper reason for this. He has the backing of a group which has businesses such as Spencer’s, built on a balance sheet with a revenue of Rs 20.9 bn in 2017-18. He wants to use it — that seems the story of every family office. Be it N R Narayana Murthy’s $130-million Catamaran Ventures or the $1-billion Premji Invests. 

Yet, there is a small but marked difference between what Goenka is doing and the typical family offices. Here, the group company is the lead LP with Rs 1 billion. But, Goenka will approach other wealthy individuals to raise the other Rs 2 bn, and will register it as an Alternative Investment Fund (AIF). It will be complete with the rules that bind AIFs, including the part where the fund manager gets a two per cent management fee and 20 per cent carry.

There are a few more investment firms trying to walk this path. JSW Ventures is one and Artha Venture Partners possibly another. JSW Ventures is in the process to acquire capital for another fund, where the Jindal family will be the lead LP. Artha Venture, supported by the K Damani Group, launched an early-stage venture capital (VC) fund in June. 

Some start-up founders are nervous when they talk to family funds. “There is always the fear that a financial investment might become a strategic one,” says the founder of a bootstrapped company in Bengaluru, who is trying to raise his first round, on conditions of anonymity. He also says, often time, the valuation becomes a huge sticking point. “Family funds dispense cash more conservatively than ‘regular’ VCs,” he adds.

This bridge helps allay these fears. It also gives the start-ups the best of both worlds. “If we decide to invest in, say, a consumer goods company, we can give the company and the founder access to distribution channels they would have to build from scratch,” says Goenka.

He says most companies in the sector struggle with four basic things. One, how to market their products right. Two, right capital. Third, investment in infrastructure. Fourth, distribution.

“I believe we can help a company with the third and fourth,” he adds. That's the advantage of a hybrid system. And, it takes away the entrepreneur's worry of a strategic investment. The fears, says K Ganesh of GrowthStory, are unfounded but even if they did exist, this bridge solves it. 

He explains that usually venture funds, which are bound by the international style of functioning, can run for eight years. “They are tied to the 6+1+1 system,” he says, which does not work in India. Acquisitions are rare and though there is opportunity to scale, it takes a long time. This, he says, means VCs need to stay invested for longer. These new hybrids will make them a different beast when it comes to VCs, as they won’t be tied to the same cycle. “But, along with that since an exit has to happen, investment with an eye on a strategic acquisition will disappear,” Ganesh says. 

There are a lot of upsides for family offices to take this route. “Typically, old-school businesses have never dealt with negative margins and these kind of business decisions seem alien to them,” Ganesh says. And, in family offices, there is reason to be conservative. “But, when the exposure is relatively limited, they can relax a little more,” he adds. Also, there is the two per cent management fee and the 20 per cent carry. “These big businesses have seen the exits the likes of Flipkart can give people, and that is possibly another reason for this.”

The connections these family offices have with the group companies also encourage potential LPs to part with money. 

However, there is a big challenge. Ganesh says it all rolls back to the LPs. “When it is a professionally managed fund, without one family’s name on the door, LPs believe the fund managers don’t have a safety net and they tend to perform better,” he explains. This hesitation could make the initial jump-off point difficult to attain.