Led by a new generation of entrepreneurs, India’s family offices are shifting from traditional investments in physical and tangible assets like real estate to investing in technology, healthcare, and retail stocks.
This new wave of family offices is engaging in stock market investments, including pre-IPO placements and secondary market operations.
“Born into a world of technology, the next generation, especially those born after 2000, view technology as equally crucial as finance for running a business.
"This perspective drives them to assemble teams with the necessary capabilities, including technological expertise, to operate successful family offices and provide effective stewardship across all their ventures,” said Falguni Shah, a partner with PwC India, a multinational consultancy firm.
Media reports recently said US beverage major Coca Cola is also in talks with a series of Indian family offices to sell part of its stake in its bottling company in India for $1 billion.
Similarly, Oyo, a hospitality start-up, is in talks to raise Rs 1,000 crore from family offices -- valuing the company at $2.5 billion.
Some of the prominent family offices making investments include L&T Chairman AM Naik’s family office, Marico Chairman Harsh Mariwala’s family office, Burman family office and Bhartia family office which is running the Jubilant group and Parekh family of the Pidilite Industries that makes Fevicol brand of adhesives.
Crishna Godrej and daughters are also looking to set up a family office, media reports said on Monday.
Experts attribute the unprecedented stock market boom to several promoters selling stakes in their traditional businesses and seeking new opportunities both in India and abroad.
“In the last decade, the trend of entrepreneurs exiting businesses has gained momentum.
"This shift is driven by favourable valuations and the diminishing stigma associated with selling a family business, which is no longer relevant to the next generation,” says Ketan Dalal, managing director of Katalyst Advisors, a tax consultancy firm that advises several family offices.
“In this context, if the funds are substantial, a passive approach to deploying such funds may be sub-optimal.
"Hence, an actively managed investment approach through a family office generally makes sense,” Dalal added, noting that several new entrepreneurs are setting up family offices with a corpus of Rs 250 crore and above.
Punit Shah, a Partner with Dhruva Advisors, a consultancy firm, notes that many families want to set up offices to manage wealth after selling their traditional companies.
“We have also seen enhanced interest in setting up Family Investment Funds (FIFs) in GIFT City,” says Shah.
The Gift City in Ahmedabad, however, has not seen any registration so far as investors seek more clarity on regulatory norms.
Dalal explains that managing substantial family funds often involves a combination of instruments.
“For example, if a Rs 500 crore fund needs to be deployed, then Rs 250 crore could be managed by the family office, another Rs 100 crore by a multi-family office, and the rest through a combination of AIFs (alternative investment funds), portfolio management schemes, or other managed funds.”
Overseas Offices
As more Indians join the rich club, several families debate whether to set up an office in India or overseas.
Experts say opening an office overseas depends on various factors, including availability of funds through the LRS (liberalised remittance scheme) remitted over a period of years from India, a family member based abroad, or special regulatory dispensations obtained, particularly if the investments intended are international.
“Given the high setup and running costs, as well as the cost of investment professionals, the quantum of funds that would justify a foreign office would probably need to be much higher than an office in India,” Dalal said.
Shah adds that family offices have consciously diversified their investments over time, keeping geographical, currency, and political risks in mind.
“As a result, overseas family offices are rapidly becoming a norm. Family offices are also looking at different classes of investments with an open mind,” Shah says.
Tax regimes are also a consideration when deciding to set up an office.
“Family offices are usually run through a corporate form but could also be through a Limited Liability Partnership (LLP).
"The issue with an LLP is that a pure investment LLP could face regulatory issues since LLPs (and partnerships) are intended for carrying on a business, as opposed to only investing.
"Also, the LLP tax rate is 35 per cent as opposed to 25 per cent for companies, though for capital gains, the lower concessional rates would apply in either case.
"Incidentally, in a company scenario, there is a cash trap since dividends entail extraction costs,” Dalal explains.
