8 minute read 29 Dec 2021
Private market investing

How family offices and UHNIs are allocating their private market investments in India

Authors
KT Chandy

EY India Corporate Tax and Regulatory Services Partner and Private Tax Co-Leader

A Chartered Accountant with over 25 years of experience in family succession planning, corporate tax, private equity, venture capital, mergers and acquisitions tax, and cross-border structuring.

Surabhi Marwah

EY India People Advisory Services Partner and Private Client Services Co-Leader

Partner, People Advisory Services and Co- Leader, Private Client Services. Bibliophile and an avid traveler.

8 minute read 29 Dec 2021

Over 40% family offices have doubled their allocation to private markets in past 5 years.

In Brief:

  • The changing face of the startup ecosystem with the spate of initial public offerings and acquisitions has created a new category of first generation UHNIs that are proactively exploring the family office route to manage their wealth.
  • Private market investments remain the alternative investment of choice with allocations to startups and VC funds comprising 18% of the overall pie. This is quite aggressive when compared to a 15% allocation to other alternatives, 20% allocated to fixed income and 36% to listed equities.
  • Over 83% family offices have an allocation to private markets which is over 10% of their overall asset distribution; and this number has been steadily increasing over the past five years for 50% of the respondents and has doubled for 40% of the participants.

Family offices are relatively a new phenomenon in India. It is becoming a sought-after structure for ultra-wealthy population to grow, preserve and transfer their fortunes across their family. Traditionally, it was European and American families who dominated the family office space, but now Indian families have also stepped into creating family offices to move away from the previous generation’s preference for reinvesting profits back into the family business and avoiding risky ventures. India currently has over 200 formalized family offices that invest, grow and transfer Ultra High Net worth Individual (UHNI) wealth, but not all UHNIs operate through a family office. With the steady rise in the number of family offices in India, economists believe that they will play a vital role in reviving the economy.

Recently, a strong trend has emerged of family offices pursuing direct private investments in the market. The primary drivers of this trend have been:

  • A search for better investment control
  • Attractive risk-adjusted returns that have limited public market correlation
  • Lower price volatility

2021 has been a remarkable year for the startup space globally. With people and businesses starting to bounce back after the pandemic, the year opened doors to new avenues of business, and we saw a meteoric rise in the success and investments for the startup and tech world companies. These changing business dynamics look promising, especially for India. Out of the 811 Unicorns in India, over 50% were created in India in 2021 alone. This has resulted due to a combination of excess liquidity and rise in high-performing startups. Moreover, the tech sector regulatory changes, crackdowns in China and availability of large pools of private capital were all positive factors for the Indian startup ecosystem. Reports suggest that India is likely to have 150 unicorns by 2025 and about 10,000 Ultra High Net worth Individuals (UHNI) with a cumulative wealth of $700 billion by 2024. The numbers are staggering, and investment opportunities are higher than ever.

The Indian Private Equity and Venture Capital Association (IVCA) and EY startup report saw an all-time high in late-stage technology deals. With a total of 500 deals attracting venture capital funding to the tune of $17.2 billion in the first half of 2021 compared to a total of $11.1 billion in 2020. There were 245 early-stage deals up until September 2021.

Perceiving these market dynamics, we took the opportunity to partner with LetsVenture’s trica and surveyed around 100 family offices and UHNIs in India. The ‘Private Market Monitor’ survey was to learn how family offices and UHNIs in India are allocating their private market investments and their prime concerns in the current market. The survey brought to fore that listed securities, fixed income and startups/VCs are the main areas where family offices and UHNIs have allocated their assets. Along with direct investment into startups, many family offices channelize their investment into the startup space through VCs, for better due diligence. Insufficient internal resources and low success with direct deals have prompted them to rely on VCs.

In our engagement with several family offices, we have gathered that most of them are becoming self-reliant and investing on digital tools for more informed decision. Through the Private Market Monitor survey, family offices and UHNIs have expressed their concern over regulatory issues including growing tax complexity and uncertainty in the wake of the pandemic. Fintech, Enterprise Tech and Consumer Tech are frontrunners for current and future investments, which is no surprise considering the digital transformation the pandemic has accelerated. Most family offices use operating costs and percentage growth in AUM as the two main metrics to measure their performance.

Additionally, we see a rise in family offices deploying several strategies to optimize and measure non-financial performance. They are planning to secure their legacy in multiple ways, and many are making investment decisions based on environmental, social, and governance (ESG) factors. The family offices in India have a long way to go to improve their non-financial factors, but they have their mind set at the right place. They have recognized the importance of ethical impact and sustainability. However, the time is now, and family offices should have a concrete plan in place.

Key highlights of the Private Market Monitor survey:

  • Private market investments remain the alternative investment of choice with allocations to startups and VC funds comprising 18% of the overall pie. This is quite aggressive when compared to a 15% allocation to other alternatives, 20% allocated to fixed income and 36% to listed equities
Trica’s survey of family offices ad UHNIs
  • The top motivating factors for participating in startups have been non-linear returns, direct exposure to technology companies and strategic interest along with an ability to add value to early-stage entrepreneurs. A small proportion of respondents saw this as an avenue to engage the next generation of the family
  • With over 40% respondents having doubled their allocation to private markets in the past 5 years, the interest of larger cheque writers to have a direct participation in a startup’s cap table is increasing. Respondents had their private market portfolio comprising 47% direct startup investments, 32% exposure to PE/VC funds and 11% to venture debt funds
Composition of private market portfolio
  • While a good 50% of family offices surveyed preferred the seed to Series A stage to enter a startup investment, 40% preferred late to pre-IPO transactions. A large portion of India’s family offices and UHNIs have been late to participate in the startup boom. The cap tables of present Indian unicorns are dominated by global VC and PE funds and this has meant lower exposure of family offices to tech startups that are in the IPO pipeline
  • But digital platforms are now making it easier for founders of large companies to run more frequent liquidity transactions in a simple and scalable manner. In fact, 39% respondents preferred secondary opportunities versus 46% who prefer primaries and 15% who actively explore convertibles
  • Fintech and enterprise tech were the top two sectors of choice by a clear majority. For fintechs, a massive opportunity has been opened by Aadhaar, UPI and the Account Aggregator framework and we have seen the fastest pace of unicorn creation in this space
Sectors of interest - Composition of private market portfolio
Family offices should strengthen their tax strategy to weather and adapt to accelerating policy changes. They can partner with external providers to access their know-how and resources to keep pace.
Surabhi Marwah
EY India People Advisory Services Partner and Private Client Services Co-Leader

Enterprise tech is riding the wave created by the large number of Indian software product companies that have successfully gone global — the recently Nasdaq listed Freshworks being the poster boy of Indian SaaS. A surprise was seeing muted conviction for the consumer tech space and this preference being tied to frontier tech opportunities

Globally too we have seen record breaking funding activities in 2021- more than $288 billion was invested worldwide. This acceleration of capital deployment has generated more unicorns, more mega-rounds and more available dollars than ever before in the history of startups. Since there are no fixed investment regulations that apply to family offices, they tend to follow their own individual investment policies. Family offices can often diversify their assets very broadly, much more than institutional investors, depending on the amount of assets under management and freedom from investment regulations.

In EY’s Global family office Study 2021, we saw that the most significant concern among family offices is heightened government or public requirements for global transparency and information exchange. 53% of our surveyed family offices express concern about a number of regulatory issues, including growing tax complexity. family offices, like traditional asset managers, often rely on outside professionals to assist with specific services that are not carried out in-house (e.g., M&A advisory, capital markets advisory, legal advisory, tax advisory, accounting). So, the growing regulatory concerns means they need to outsource these services to professionals. Over time, however, as it gains experience and builds out its infrastructure, many of these professional services can be brought in-house. There is also awareness of making investments based on the potential societal or environmental impact globally. There are also measures taken to evaluate non-financial metrics when considering potential investments. This is one area Indian family offices are lagging.

From our global survey, most family offices are considering the use of external expertise to bolster their in-house capabilities across a range of areas. On average, 67% of family offices are either currently outsourcing or considering outsourcing in areas like:

  • Estate and wealth transfer planning
  • Information security management
  • Business Tax Advisory
  • Compliance and regulatory assistance
  • Investment management and asset allocation

This highlights that, whatever aspects they are best-in-class in, family offices are generally still opting to outsource some aspects rather than build capabilities. Many offices are still emerging from the era of spreadsheets stored on desktops. Only a small percentage have deployed more sophisticated systems focused on automating workflow processes, providing remote approvals or integrating disparate functions.

For India and globally, the next five years look favourable, and we will get to witness a substantial growth in the startup space. With more family offices and UHNIs moving away from traditional investment routes, private market shows potential with high returns.

Reshmi Mary Paul, Senior Analyst, Private Tax has also contributed to this article.

The next five years look favourable and we will witness a substantial growth in the startup space. With more family offices and UHNIs moving away from traditional investment routes, private market shows potential with high returns.
KT Chandy
EY India Corporate Tax and Regulatory Services Partner and Private Tax Co-Leader

Summary

The Private Market Monitor survey by trica, in partnership with EY and AZB & Partners, showcases how family offices and UHNIs in India are allocating their private market investments and their prime concerns in the current market.

By an estimate, there are over 200 family offices in India today. By 2025,  approximately 30% of the estimated $100 billion to be raised by startups shall be invested by family offices. These are numbers that are only expected to grow.

About this article

Authors
KT Chandy

EY India Corporate Tax and Regulatory Services Partner and Private Tax Co-Leader

A Chartered Accountant with over 25 years of experience in family succession planning, corporate tax, private equity, venture capital, mergers and acquisitions tax, and cross-border structuring.

Surabhi Marwah

EY India People Advisory Services Partner and Private Client Services Co-Leader

Partner, People Advisory Services and Co- Leader, Private Client Services. Bibliophile and an avid traveler.