How The Rise Of Family Offices & HNIs Is Boosting Venture Capital Landscape

A significant trend in the HNI and UHNI space is that substantial value creation in traditional businesses is leading them to go public, supported by favorable market conditions. These businesses are experiencing annual growth rates of 10-15%, so there is a strong case for unlocking value. 

As a result, many of them are setting up their own family offices, and the growth of family offices is exceeding that of our population. While the overall population is growing at 2% per annum, HNIs are growing at 16%, and UHNIs are at a double-digit rate. Consequently, HNIs and UHNIs are considering diversifying beyond their core businesses, which have been their primary asset class to help mitigate risk. 

At the balance sheet level, this client segment is revisiting their asset allocation and wants to demarcate their business and personal wealth. Since they are traditionally heavily invested in property, they are now looking to allocate a significant portion of their assets to growth-oriented portfolios, which may include equity products such as mutual funds, PMS, AIFs, or alternate asset classes, wherein their focus will be on unlisted space. 

Unlocking value from businesses also means they will invest in venture capital through funds or direct opportunities and scout for opportunities in the international markets.

In the current scenario, four significant trends result from the massive wealth creation among HNIs and UHNIs in the last few years.

1. The financialisation of savings has become a game changer, and hence, the share of allocation in physical assets has come down while there has been a rise in investments in financial assets.
2. Equities have emerged as a mainstream asset class, and within this segment, there is a rising allocation to PMS and AIFs compared to mutual funds. There is also a higher allocation to alternate asset classes, with a bias towards the unlisted space.
3. The unlocking of value in traditional businesses is leading to investments in new-age businesses within and outside India.
4. Diversification is happening beyond traditional asset classes and India. Global diversification is achieved through offshore investments or by creating a Plan B, wherein residency options are explored in other countries through specific investment programs.

One of the main reasons for these trends can be attributed to the fact that as wealth is created, the opportunities to get real rates of return from fixed deposits or fixed income mutual funds have diminished as post inflation and taxes, they are hardly able to provide a decent rate of return. In this scenario, investors have had to diversify their wealth between physical and financial assets to achieve real returns. 

Traditionally, Indians have been far more exposed to properties than the world average and far lower in equities than the world average. There is a shift towards rebalancing portfolios by increasing the allocation to equities. In this way, their investment strategy aligns with sophisticated investors in the West. Hence, the HNI and UHNI segments have made significant investments in India.

This can be seen from the fact that individual investors and domestic mutual funds (18.8%) own a higher share of India Inc. than FPIs (17.6%).

However, in the unlisted space,~ 80% of the capital invested in Indian entrepreneurs’ businesses still belongs to foreign investors, who take advantage of the India story regarding growth prospects and returns. Nevertheless, we expect this trend to change as more HNIs, UHNIs, and multi-family offices increase their allocation to the unlisted space. When it comes to global investments, these clients have a Plan B in place. 

This could be getting EB5 visas for their children to provide the best education, setting up a business subsidiary in Dubai or Singapore, or seeking entry into the European region by taking a golden visa for Portugal. This diversification ensures that a small portion of their wealth is invested beyond India, offering security in case of any challenge to India’s growth story. We believe this diversification strategy is the best investment philosophy for these investors.

In conclusion, the family office’s thought process is to diversify and separate business wealth from personal wealth. HNIs and UHNIs have realised that businesses should be one of their investments, not their sole focus. They should not be recognised only based on that investment.

To minimise risk and promote growth, the businesses should be just one part of their wealth. As the scale of business increases and more wealth is created, this awareness among wealthy families will go a long way in promoting investments into growth-oriented asset classes.