Family offices continue to gain momentum in India after Covid-19 disruption

It is said that much before the vaccine drive began in India, some family offices had arranged for the wealthy to climb into private jets in January and inoculate themselves abroad. With the percentage of the vaccinated still in a single-digit proportion of the population in the second half of March and cases rising every day, they may have had the right idea.

But this is not the only function that family offices have been fulfilling during the pandemic. Many wealthy families have grown more aware of the need for an entity to handle their wealth and put it to effective use in addition to clearing the way for better succession and estate planning. Conditions have become even more favourable for such institutions to grow in India after the Covid-19 disruption, according to experts.

Nipun Mehta, founder and chief executive officer for multifamily office BlueOcean Capital Advisors, said that an increase in wealth is an important driver for the setting up of family offices.

“Stock markets rising always helps,” he said. The S&P BSE Sensex touched all-time highs during the last year, crossing 50,000 for the first time ever. Indian listed companies have collectively never been so valuable. Their total value crossed Rs 200 trillion during the year after the pandemic began.

Another important driver is a liquidity event, he added, which happens when promoters sell all or part of their firm. This leaves them with wealth that is not tied to the business, and scouting for avenues to deploy this capital is where a family office typically comes in. A family office is an entity, which helps manage the wealth and meet the needs of a single rich family. A multifamily office performs the same function for more than one family.

Interestingly, the last two years saw the largest number of private equity buyout transactions. This is when a fund buys a controlling stake from the existing owner allowing him or her a way to exit the business. There have been 281 such transactions each during the years 2019 and 2020 in India, according to deal tracker Refinitiv, which is now part of the London Stock Exchange Group. This is the highest number of such deals for a year in nearly a quarter century, according to Refinitiv data going back to 1994.

Amit Patni is part of the founding family of software major Patni Computer Systems and is also Director, Campden Family Connect, a network for wealthy families. He said that the pandemic has brought possibilities like a sudden illness and death to the fore. People begin to better understand the importance of having an institutional mechanism like a family office to ensure continuity and avoid conflict when generations change.

“Family offices continue to gain momentum,” he said.

A study of family offices in India from a couple of years before the pandemic showed that slightly less than half the wealthy families in India may have been making use of such structures. There were 78 families studied of which only 49 per cent had family offices, according to the Family Wealth Report 2018 brought out by Campden Wealth and Edelweiss Private Wealth Management, part of the Edelweiss financial services group. Each of these family offices managed average assets worth $318 million (Rs 2,306 crore) or enough money to buy a new Rolls-Royce every year for the next two centuries. The average net worth of the families was $645 million (Rs 4,678 crore) or enough to buy Rs 1 crore worth of shares of every company that is available to trade on the BSE, and still have a few hundred crores left over.

The report noted that 62 per cent of families have a succession plan in place to transfer this wealth. But only 19 per cent of this is written and formally agreed upon. The rest are either informally written or oral agreements.

This is not surprising given that family offices are a relatively recent phenomenon. The largest proportion of family offices (34 per cent) was formed in 2010 or later. More than half (58 per cent) were founded in the year 2000 or later. This is also true elsewhere in the world. “...over two-thirds...of family offices globally (67 per cent) were founded on or after the millennium. This suggests that the recent expansion of the family office space is common in more places than just India as other areas, such as Singapore, Australia and the United Arab Emirates, have also seen a rise in family offices since this time,” said the 2018 study.

“Due to the pandemic, the need to set up a family office towards personal wealth management has gone up significantly. We have seen a spurt in hiring of professionals as well in this space,” according to Nitin Jain, managing director and chief executive officer at Edelweiss Wealth Management.

Jain said he believes India is in a phase where intergenerational transfer of wealth is underway. Families across the wealth spectrum are aware of the need to make this transfer seamless, he said.

Those with family offices already are looking to make hay as the pandemic rages by putting their cash to use, according to a Global Family Office Report 2020 from the financial services group UBS.

“Eyeing dislocations and market opportunities, almost half... of our respondents (45 per cent) told us in May that they’re planning to raise their allocations to real estate. A similar percentage is aiming to raise allocations in developed market equities, followed by developing market equities,” it said.