Imagine you have a vast estate that your family has built over multiple generations. The financial assets you have accumulated over the years have ensured your family's financial stability and growth, but with the changing economic headwinds, you want to ensure the wealth is well managed for future generations. That's where family offices come into play.
A family office is a dedicated financial entity that provides customised wealth management services tailored specifically to high net worth families. These firms take a holistic approach to managing their clients' wealth, going beyond investment management and providing expertise in various areas like tax planning, estate planning, and family governance.
In essence, family offices become the family's central hub for all financial decisions. Unlike traditional wealth management firms, which often have a one-size-fits-all approach, family offices can tailor their services to the specific needs and goals of each family.
Another benefit of family offices is the high level of confidentiality and discretion that they provide. Many high net worth individuals value their privacy and do not want to draw attention to their wealth or personal lives. Family offices can provide a safe and secure environment for these individuals to discuss their financial affairs and make decisions without fear of public scrutiny.
How Family Offices Came to Be?
The roots of family offices can be traced back to the sixth century, and they have evolved over time to become an important investment vehicle for wealthy families. Today, there are approximately 7,300 family offices worldwide managing over $6 trillion in assets, making them a significant player in global investments. The average family office has around $1 billion in assets under management, but this varies widely depending on the size and complexity of the family's wealth. In addition to this, the number of family offices in Asia is growing rapidly, with an estimated 3,000-5,000 in operation today.
The modern concept of the Family Office emerged in the 19th century, by the establishment of the House of Morgan by the family of John Pierpont Morgan in 1838. Through subsequent mergers and acquisitions, this evolved into JP Morgan & Chase, one of the world's largest banks, managing assets worth around US$2.75 trillion.
Over the past two decades, the number of Family Offices has increased globally, particularly in the last ten years following the 2008 financial crisis. The global family office industry is expected to grow at a CAGR of 6.8% between 2020 and 2025, reaching $16.6 trillion in assets under management. This growth can be attributed to wealthy families experiencing significant losses on their investment portfolios managed by banks and financial institutions.
Unlike wealth management firms that earn commissions from financial product manufacturers, Family Offices prioritise the best interests of the family, thereby avoiding conflicts of interest. As a result, many affluent families have established their own Single Family Offices or integrated into larger Multi-Family Offices.
Why are Family Offices Needed in India?
India's liquid wealth has experienced remarkable growth, accounting for US$12.6 trillion or 3.3% of global wealth. High-Networth Individuals are projected to witness a staggering compound annual growth rate (CAGR) of 27% over the next five years.
By 2023, only the United States, China, and Russia are expected to have more billionaires than India, highlighting the unprecedented growth in the country.
Additionally, the wealth of Ultra-High Networth families is anticipated to triple from the current US$2 trillion to US$6 trillion by 2025. Notably, there has been a shift in investment preferences, with a noticeable trend of households moving towards financial assets instead of physical assets as favoured by Wealth Creators in the past. There is also a changing approach to investment strategies, as more promoters now establish separate capital pools for their legacies rather than reinvesting all their wealth into their operating businesses.
Succession and exits play a vital role in creating liquidity events for Family Businesses. These businesses typically go through three stages: the Initial stage or Founder's Stage, the Siblings Partnership stage, and the Cousin's Confederation stage.
As businesses mature, families often feel the need to establish a Family Office during the second and third stages. This provides a governance framework to manage family dynamics and facilitates discussions on exits and liquidity events.
Unfortunately, wealth creation can also lead to conflicts, particularly in the context of succession. India, in particular, has seen a high incidence of family feuds, with approximately 60% of the wealthy experiencing deteriorating relationships due to disputes over money, compared to a global average of 40%. Family Office structures can serve as effective tools for managing inter-generational wealth and mitigating conflicts in such scenarios.
Additionally, the Venture Capital and Private Equity ecosystem in India is maturing, providing liquidity events for promoters and entrepreneurs. Research shows that family offices are becoming attractive sources of capital for hedge funds, private equity funds, and investment banks. This trend is driven by three main factors: family offices have significant wealth seeking investment returns, they offer integrated wealth management services, and their long-term investment horizons promote fund stability.
Family offices are seen as ideal structures for implementing cohesive wealth management strategies, similar to pension fund investors. Philanthropy is often a key aspect of family offices, serving as a platform to discuss family values and educate the next generation about investment management. There is also a growing interest among family offices in socially responsible investing, aligning investment interests with philanthropic values.
There is also a trend of globalising assets, with family offices being set up in multiple jurisdictions to access global markets, driven by the presence of 17.5 million strong NRI Indian diaspora and HNI families residing overseas. More and more Family offices are increasingly using technology to improve their operations, such as investment research, portfolio management, and client communication.
Types of Family Offices:
Single Family Office (SFO)
Single family offices, as the name suggests, are designed to cater to one specific family. They focus on preserving and growing the family's wealth over generations, tailoring services to the needs of that particular family.
Single family offices typically work with families that have a high net worth and complex financial affairs. They provide a more personalised approach to managing wealth, offering expertise in areas such as investment management, tax planning, estate planning, and philanthropy.
In India, single family offices have seen a rise in popularity among wealthy families as they offer a more discreet and customised approach to managing family wealth. According to the 2022 Wealth Report by Credit Suisse, India's high net worth population is estimated to grow to 1.91 million individuals by 2026, and single family offices can provide the necessary expertise to manage the complexities associated with this growth.
Multi Family Office (MFO)
Multi family offices, on the other hand, cater to multiple families, offering a similar range of services to individual families but at a larger scale. They may work with clients from different countries and regions, allowing for more diverse investment strategies and expertise.
Multi family offices are well-suited for families with moderate to high net worth looking for a more cost-effective alternative to setting up their own single family office. They provide similar services to single family offices but with a more general approach that can cater to the needs of several families.
In India, multi-family offices have seen growth as they offer an attractive option for wealthy families seeking professional wealth management services at a lower cost compared to single family offices. According to the 2021 Global Family Office Report by Campden Wealth, India ranks third in the world for the number of multi-family offices, with 57 operational multi family offices as of 2021.
The Gist
With the unprecedented growth of wealth in India, family offices can help families preserve and grow their assets over generations. They offer a safe and secure environment for confidential discussions and decision-making, ensuring privacy and discretion for high net worth individuals.
When families rely on multiple professionals, important matters often get overlooked. However, a Family Office minimises such omissions by providing oversight and preventing information gaps. While a Family Office may not be suitable for every family, those with substantial assets, complex financial situations, and a desire for streamlined financial management can find it to be an ideal solution.
Additionally, family offices can play a crucial role in managing family dynamics, mitigating conflicts, and facilitating discussions on succession and liquidity events. Whether through single family offices or multi family offices, families in India can benefit from the expertise and resources offered by family offices.
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