Arihant is the Managing Director of Patni Financial Advisors, which is the administrating entity for the Patni Family office. Under his leadership, the firm is in charge of managing deployment of assets across listed securities, debt instruments, real estate and other alternate assets in India, UK and the US. Additionally, Arihant’s foray in the venture capital space came about when his family business, Patni Computer Systems, was acquired in 2011 at a valuation of over $1.5 billion that included a full exit for promoters and private equity investors.
Family offices as a concept have gained increasing traction in recent years. These are wealth management firms that serve Ultra-High-Net-Worth families. Globally, UHNW families start with an investible corpus of USD 250 million. In India, UNHW families are seen with investable wealth starting from INR 100crores. Family offices manage investments, taxes, and assets. Their primary goal is to preserve family fortunes by ensuring an orderly succession for the family-owned businesses. Occasionally, their ambit may also include non-financial services such as managing philanthropic activities or planning for club memberships and educational expenses.
Although they have gained popularity in recent years, the concept of family planning is not new. In India, this concept has existed for years for wealthy families and princely estates. However, the modern idea, as we know it, originated in 1838 when JP Morgan founded the House of Morgan to manage his family’s wealth. The recent popularity of family offices can be explained by the explosion of UHNW families in India which grew by a massive 290% between 2006 and 2016 with their total net worth now exceeding USD 30 million. With the count expected to increase by 1,000 more eligible cases, this category of investors is expected to develop rapidly. Here’s a short primer on family offices:
Type of family offices
Family offices can differ in size and structure, but broadly speaking they fall under two categories, single family offices (SFOs) and multi-family offices (MFOs). SFOs serve a single family whereas multi-family offices cater to multiple families. SFOs can include a member of the family who helms the office and decides on behalf of the family. However, there must be unity within the family on this representation to avoid any future conflicts.
MFOs are more commonplace since hiring a single family office may not work out for every wealthy family. MFOs can also come into existence when a founding member of an SFO expands to include other UHNW families. MFOs offer the cost benefits of economy of scale and, hence, charge a lower commission. With a larger client base, they also offer better resources in terms of professionals with more experienced fund managers. Some MFOs may also offer customised services where the family can hire the office for a specific service.
Family offices Vs. wealth management firms
While both these firms are essentially engaged in investment, there are some essential differences that arise out of their commitments and revenue sources. Unlike wealth management firms that earn revenue through commissions on financial products in a portfolio, thus creating a conflict of interest for their clients, family offices work for the interests of the family. They do not pool the assets of a third party to build individual portfolios. Instead, their main goal is to serve the interests of the family.
Trust plays an important role in family offices, especially in SFOs where one family member helms the office and takes critical investment decisions. Other family members must agree on certain key decisions and trust their appointed representative to act in everyone’s interests. For fund managers, it can be challenging to manage the interest of various members, especially if there is a conflict.
Another key aspect is confidentiality. UHNW families typically want to keep the details about their wealth and investment away from the public domain and fund managers must follow these guidelines diligently. Confidentiality issues can also arise when one family member has wider access to information than others. However, since SFOs deal with only one family, confidentiality can be easier to impose. In the case of MFOs, confidentiality protocols are important since there are multiple family clients. It becomes even more critical where a founding family member is involved.
Why family offices are important?
The primary goal of a family office is to manage the wealth of the UHFW family, ensuring that the interests of each member are protected through wealth creation, preservation, and asset monitoring. They may also engage in non-financial goals that can include protecting the legacy of the family. Family offices can play a vital role where a family has multiple decision-makers in different jurisdictions. A family office can help in formulating consensus on important decisions, including provision for illnesses, education, or establishing trusts, and in devising succession protocols or facilitating an exit mechanism. In the process, they can help in aligning individual goals with that of the larger family.
This leads to the most critical outcome of hiring the services of a family office – conflict prevention. One of the unfortunate by products of wealth is the conflict it can generate within a family. According to one estimate, 60% of the wealthy in India experience family feuds as against the global average of 40% . Other than the breakdown of close personal relationships, it also fragments the business, often weakening it considerably and leading to wealth erosion of individual members.
Family offices can help in mitigating such risks by establishing clear and honest communication and wealth management mechanisms that follow agreed-upon goals. By establishing and facilitating succession and exits, it can resolve these thorny issues before they blow up. These offices can also help in synchronising differing priorities and viewpoints through professional advice on each instrument or decision.
As the wealth of individuals grow and more UNHW families come up, family offices have become a major investment vehicle. As their numbers grow, they can play an important role in wealth creation and management, and in building legacies that last decades.