SUMMARY
According to Munish Randev of Cervin, the entry of family offices in the startup ecosystem remained slow in the earlier years because of their characteristic of being relatively risk-averse
The Indian family office landscape has undergone three distinct waves of change, each marked by shifts in investment strategies and generational influences
Randev advises family offices to consider the venture fund route if they want to invest in startups without being directly involved
The evolution story of Indian family offices as an investor class is quite interesting in the startup context. Despite their decades long existence, which can be traced back to the times when India was still under the Zamindari system, it was not until 2005 that they gained prominence as investors.
Notably, the Indian family office landscape witnessed a paradigm shift just a decade ago, with the advent of the startup culture and the entrance of ultra-high-net-worth individuals (UHNIs) as limited partners (LPs) in Indian funds.
Shedding light on the on the evolution of Indian family offices, the founder and CEO of Cervin Family Office, Munish Randev, told Inc42 that this class of investors originally aimed to de-risk the family businesses by creating a separate kitty of wealth, facilitate proper inheritance transfer, and plan for succession.
Cervin Family Office is a multi-family office, whose founding team has counselled more than 105 family offices, collectively managing over $4.5 Bn in financial assets, according to Randev.
He emphasised that family offices were initially risk-averse and primarily focussed on wealth preservation with some growth rather than only wealth creation. As a result, their entry into the startup ecosystem remained slow. However, in recent times, they have become more prominent and actively involved.
At present, India is home to more than 300 family offices, and according to Inc42’s Investor Landscape 2023 report, these offices have invested in over 200 startups since 2014.
“Until 2010-2011, in the VC funds, most bigger LPs were offshore investors with some sourcing from domestic investors. There weren’t many Indian investors. An eight or 10year old fund with no liquidity and no guaranteed returns was not something that appealed to the family offices a lot. But then the perception changed,” Randev said.
Indian Family Offices & The Three Waves of Change
The Indian family office landscape has undergone three distinct waves of change, each marked by shifts in investment strategies and generational influences.
The first wave occurred in 2005 when family offices transitioned from only investing in direct real estate, some listed equity and gold to exploring real estate funds and venture capital funds..
The second wave emerged when second or third generations of family members took over family businesses or control of wealth. This generation, with many having professional degrees from Indian & international universities, gained exposure to the startup ecosystem and the promising opportunities it offered. Consequently, around 2014-16, family offices began to pivot towards venture capital funds — a high-risk, high-return investment approach centered around new sectors and unestablished business models.
The third wave of change materialised with the arrival of third and fourth generations of ultra-high-net-worth individuals (UHNIs). Some of them veered away from entering the family business, seeking to transform their family office into a wealth creation platform while delegating certain family business responsibilities to professionals.
For instance, Eragon Ventures serves as a noteworthy example of a single-family office that took flight after its founders sold their stake in the family business, J.B. Chemicals, when the global investment firm KKR acquired the company in 2020.
“We have seen many family business owners selling out in the last few years and this trend is here to stay,” he added.
Overall, the evolution of family offices in India has been influenced by changing investment preferences, generational dynamics, and exposure to newer investment opportunities.
“So, once they started understanding what a family office is, they started setting up structures, very initially a CFO kind of person to lead (along with his/her main job of corporate finance), analysts and associates to understand and make deals. Hence the allocation story started,” Randev said.
Direct Investing Vs Venture Funds: The Core Dilemma Of Family Offices
For every family office, investment strategies revolve around risk management, weighing the potential impact on their lifestyle. According to Randev, inflation takes on a different meaning for ultra-high-net-worth individuals (UHNIs), encompassing additional costs like travel expenses, luxury purchases, and club memberships.
“We refer to it as luxury inflation which is much higher than the usual parameters like Consumer Price Index (CPI) etc,” he said.
The primary goal is to ensure their total portfolio yields a certain returnin the long run according to the goals and risk appetite of the family. Consequently, around 75% to 90% of the UHNI wealth remains invested in safer options such as fixed income, listed equity, real estate, and gold, while only 10-25% finds its way into startups, either through direct investments or venture funds. This is because family offices encounter several challenges in this domain.
Lack of Historical Data: Unlike traditional investments like stocks and debt, startup space lack extensive historical data which can help the family offices in making comparisons and devising strategies. Valuations in the startup space can be highly diversified with no fixed assessment rules. That makes this asset class a bit risk to enter.
Fear of Missing Out: With startups becoming the talk of the town, family offices fear missing out on opportunities in this domain. The aftermath of the pandemic and the market downturn further fueled this fear, leading to hasty startup investment bets and decision making.
“This is a major issue and a risk in any new asset class which becomes a buzzword not only in the investing circles but also social and family gatherings” said Randev.
Inability To Track Deals & Investments: The startup investing journey may open the floodgates to increased deal flows, which could lead to mistakes due to difficulty in saying no to potential opportunities. Also, due to multiple small ticket individual investments, the portfolio can quickly accumulate, leading to a larger pool of holdings which gets hard to keep a track of in the long run. Family offices need a proper mechanism of keeping an eye on their unlisted investments and also make sure their rights as investors are properly prescribed and adhered to.
Amid these challenges, Randev advises family offices to consider the venture fund route if they want to invest in startups without being directly involved. However, for those interested in understanding the startup space, direct startup investing provides more exposure and opportunities.
“Direct investing in Startups also needs a proper plan and structure so that the family office doesn’t enter the market rudderless. This is the most important phase for a family office,” he added.
Families looking to enter this segment must invest time in learning, strategising, and tracking their investments. Proper planning will pave the way for informed and fruitful decisions in the dynamic world of startups.
