As economic power shifts to countries in the Asia-Pacific, India has been at the centre of attention with its rising earnings and positive economic growth. Consequently, eager foreign institutional investors invested an estimated USD$17.8 billion in Indian equities in 2009. That interest doesn’t look like it will slow anytime soon. The HNWI financial wealth forecast (CapGemini Merrill-Lynch) indicates an annualised wealth growth rate of 12.8% for the Asia-Pacific region versus a global rate of 8.1% up to 2013. And by 2013 it is expected that HNWI wealth in the Asia-Pac region will surpass that of North America. As a result, India is an attractive target market for Multi Family Offices and their service providers.
There are many positive elements to the story in India. The ruling Congress Party continues to build on its victory margin in the 15th general elections in May 2009 and its stock index recently hit a two-year high. The economy has rebounded sharply from the slowdown of growth from to 8.5% in the fourth quarter 2009 to 6.1% in the first quarter of 2010. All of this represents a refreshing contrast from tepid growth in the West.
Indian Ultra High Net Worth (UHNW) Mind Set
In India as in many other parts of Asia, there is a tendency for influence within the family to be centralised in one or two people. Gaining the trust of the patriarch and his inner circle is the key to business acquisition. Maintaining confidentiality and discreteness are considered highly desirable qualities in any business association. Many western companies have followed the joint venture model, so they are able to lead the business with an Indian partner and not surprisingly, most Private Bank heads are persons of Indian origin. Though not xenophobic, Indians are just emerging from an inward looking mind set.
Wealth in India is concentrated with entrepreneurs and business owners. Some 60% of the market cap of non-government owned, listed companies in the Bombay Stock Exchange 500 is accounted for by family owned businesses. A first generation family may have most of its assets in the form of equity holdings in its own family business and typically portfolios vary depending on the evolution of the family. Second generation families have high concentration in family business assets and beyond the second generation, real estate constitutes a significant chunk of the portfolio.
Indians have a high risk appetite and look for high returns, creating demand for expert investment advisory as well as sophisticated investment channels.
Concerns of Indian Families
Indian businesses are predominantly family-owned. Several family businesses have grown over generations by re-creating the business over time, restructuring the relationship between the family and the business and handling personality differences through governance mechanisms. All of them grapple with issues relating to growth, governance, resource management, succession and culture. Over the past 10 years there has been a growing recognition for the need of a more structured approach to family business issues.
As Indian businesses turn global, families need help in many areas. There is increasing recognition for the need to evaluate and engage international asset managers, especially for alternative asset classes. Indian families see the value of international service providers offering one stop advice on overseas tax, legal and regulatory frameworks. Following the crisis of 2008, there is also an increased sensitivity to risk management, transparency and cost effectiveness of the providers. Many UHNW families are investors in other enterprises through direct minority stakes, as well as traditional private equity. Traditionally however, they are happy to co-invest with other known families.
Products and Services
As wealthy families move from first generation to the second and third they seek solutions for advice, structuring and facilitation of family governance related issues (such as family agreements), and family business structures (such as Family Business Boards and Family Councils). Wealthy families also need leadership development for the next generation, especially the heir apparent.
Unlike in the West, there is no great demand for philanthropy related services in India. However, as elsewhere in the World, there is a curiosity factor related to exotic investments such as art and stamp collection. Consequently providers of luxury goods such as private jets, yachts, cars and fashion goods have flocked to India in the past 10 years.
The market for UHNWI services is fragmented. Such families have traditionally been offered primarily wealth management products and services of departments of private banks (Citi Bank is the leader in non-resident Indian services) and diversified investment banks (Kotak and Merrill-Lynch are key players).
In response to the changing demographic and the needs of the wealthy, the boutique multi-family office is appearing in major cities. Typically these rely on an advisory-cum-product distribution model to sustain themselves. Some of these boutiques are spinning out their own speciality investment funds, such as realty. As in any other market, there is no shortage of family advisers like accountants and lawyers, who attempt to offer a broader range of services to their clients.
Regulatory Landscape
The Central Bank (Reserve Bank of India - [www.rbi.org.in](http://www.rbi.org.in)) regulates banks and also Foreign Direct Investments into India and fund based activities of non-banking financials companies (NBFCs).
The Reserve Bank of India has received considerable appreciation for its conservative management of regulatory grey areas and is well regarded amongst its peers. The financial markets have their own independent regulators for the securities market, insurance and commodities (Securities and Exchange Board of India – SEBI - [www.sebi.gov.in](http://www.sebi.gov.in), Insurance Regulatory Development Authority - IRDA - [www.irdaindia.org](http://www.irdaindia.org) and Forward Markets Commission - FMC - [www.fmc.gov](http://www.fmc.gov). in, respectively).SEBI also regulates secondary market investment by foreign institutional investors, foreign venture capital entities and Portfolio Management Services (PMS).
A multi-family office may engage in its business from any off-shore location. If this practice is carried out onshore it may be advisable to seek registration as a provider of PMS under the SEBI Act. (“Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise), the management or administration of a portfolio of securities or the funds of the client, as the case may be, is a portfolio manager”).
Legal firms are not permitted to practise law onshore in terms of the recent Bombay High Court judgement (Lawyers Collective vs. Bar Council of India and others).
India is a virgin market for experienced professionals focused on achieving long-term goals. However, like all Asian markets, it requires patience and commitment to the client relationship to get a taste of success. In the borderless world of the ultra wealthy, I contend that the cost of ignoring this market will be completely unaffordable.
