Benaifer Malandkar, CIO, RAAY Global Investments, a family office set up by Patni family, chats with Morningstar’s Ravi Samalad on the evolving trends in family offices.
How have family offices evolved in India so far?
Rough estimates suggest there are around 30 family offices in India operating in a formal capacity. And the number is increasing. Family offices will mushroom as the wealth increases. A recent study published by New World Wealth called ‘The India 2018 Wealth Report’ shows that Indian economy has grown from US $3.2 trillion to US$ 8.2 trillion in just ten years. India has 120 billionaires and expected to increase going ahead.
Traditionally, wealth has been managed with the help of the distributors. As the wealth grows, distributors become just a means of a product base. As a family office, there is a lot more which goes into the genesis of designing family wealth. And that is why the need for a family office. The professionals sitting inside such a set up determine the aspirations of the family, their goals, their risk matrix and based on that allocate wealth.
What factors are contributing to the rising wealth in India?
Earlier, companies were built to be made business empires which were run over three to four generations. Now, businesses are working towards generating wealth. The companies are founded so that they can be sold for a value in 10-15 years. Also, a lot of professionals are becoming wealthy. We have so many examples in India where people have started seed/venture capital funds which did some investments which generated wealth for them through exits. The capital markets since Jan 2017 have seen more than 90 IPOs. IPOs give exit which creates wealth.
What kind of services do you provide?
Most people tend to think that family offices essentially provide wealth management services. But wealth management is only a part of it, say 30%. The remaining services include succession planning, keeping tab of changing tax laws in various jurisdictions and making sure that monitoring is happening smoothly. We also spend a lot of time with the next generation of the family to make sure they are aligned to the vision of the patriarch and can find their calling in their areas of interest.
What kind of challenges do family offices face in India?
Identifying the right human capital. You have to make sure that professionals thrive in a family office and have a sense of belonging.
How is the team incentivized? Is it based on the growth in assets and returns from underlying investments?
Not essentially. We have built a mechanism where they partner in growth. We have corporatized the office from day one. We sought SEBI registration even if it was not required. Being auditable by SEBI makes it credible. Also, the kind of growth, fungibility and learning opportunity you give to people plays an important role. If a professional gets driven by intellectual stimulation, then naturally family offices are a good place. Compensation is also important. The running cost of family offices internationally is not more than 3-4% of the overall wealth. In the Indian context for families to adapt to that is fairly difficult. But if the interest of family office is aligned with the interest of the promoter then that works the best.
What are the unique goals and aspirations of your clients?
Safeguarding the wealth, growing it and having a smooth succession are the key goals. Each family mandate is different and the portfolio composition thereby differs. Erstwhile, families preferred capital preservation. Now, they want to do something which is their domain expertise. If someone has made wealth from healthcare, then he/she will be happier to fund companies in healthcare because they understand that segment. Another trend is that more wealth owners are likely to pool their resources to start a seed fund. For instance, Axilor Ventures is a fund started by Infosys co-founders.
Which kind of startup companies has Patni family office invested in?
We set up a VC fund called Nirvana Venture Advisors in 2012, which invests in leading companies in the fast-growing Indian internet and mobile segments. Family wealth initially seeded it post which it has raised money from other institutions.
We have another vehicle with Mr. Mohandas Pai called IdeaSpring Capital. It is more into futuristic IT solutions capitalizing on artificial intelligence, Internet of Things, etc.
At the Family Office, RAAY, we have focused on the consumer space in the last five years. We have four portfolio companies and one strategic investment in financial services company ,Waterfield Advisors, a multi-family office. The other seed investments in our portfolio include Bombay Shirt Company, White Owl Brewery and Wellness Forever. We actively participate on their boards, steer the management towards a forward-looking thought process. We have seen most of these companies multiply significantly.
What filters do you apply while investing?
We take a serious look at the growth potential of the idea itself. Whether the gap has been identified correctly and who is behind that. The pedigree, intent and rationale of promoters matters. If we like the idea, we do research on our own. We have a team which explores the market and take ground level feedback and understand from their suppliers, customers, competitors etc. After that, we come to the financial model.
We do not invest anything at proof of concept stage. The business should be in existence for two to three years and generating revenue.
Do you look for companies that have broken even?
Most of them can’t break even so early. But they should have solid revenue and thought through their product range. We don’t invest much in angel phase.
How much is your involvement in your portfolio companies?
We meet the promoters and review the businesses every two months. Sometimes, they need guidance. We visit their factories/ stores especially in the initial phases and those of competitors to see if we can pick up anything from there.
For instance, Bombay Shirt Companies used to sell shirts out of a kiosk. The company makes customized shirts. We steered the company into and opening stores so that they have more footfalls. We have seen amazing amount of traction in this company in the last four years.
Where are the young ultra HNIs preferring to invest?
They are trying their hands at certain ideas that they like. For instance, if somebody is excited about food business then the family office channelizes them into meeting entrepreneurs on that side. They learn along with entrepreneurs. For instance, Akshay Mansukhani (son of Onida group co-promoter Vijay Mansukhani) is running a fund but he is investing his money and learning along with the entrepreneurs. This is how he is growing the money inherited from his ancestral business.
What kind of challenges do companies face in succession planning?
Succession planning is a big issue in most family businesses. Each family has its unique individuals. So we try to assess on a neutral platform. If there is a running business, then we try to assess if anybody from the family has the skill sets enough to maneuver the business in line with the patriarch’s vision. Should we get a family member or an outsider to run the business? Mr. Harsh Mariwala has done his business succession very successfully. He has chosen to run it with a professional team. Mr. Uday Kotak will have to think about it too. He has two children and whether they are actually going to be bankers is a question mark. So he needs to decide who is fit to run the business – family member or the robust team of professionals he has led for years.
