Large family offices should focus on alternative asset classes like private market exposure

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Wealth managers say that alternative asset classes like private market exposure is where the large family offices should focus and they do not see merit in holding gold as a financial investment beyond 5% in the portfolio, more so in a rising interest rate.
Anuj Kapoor, managing director & CEO, Private Wealth Group and Venture Capital Funds Platform, JM Financial said “One of the top trends expected to dominate the wealth management narrative in 2023 will be private ideas. Large clients are increasingly looking at returns in multiples over CAGR. Secondly, geographical diversification of wealth will emerge as another prominent wealth management trend in 2023. In addition to liberalised remittance scheme (LRS), this is getting further fuelled by liberalised regulations on overseas direct investment (ODI) and Overseas Portfolio Investments (OPI).”

He added that alternative asset classes like private market exposure is where the large families are focusing on. Historically, the investment used to be made through private market funds. As these funds come with structure – evaluation, diligence, Investment Committee (IC), analysis, review, cheque size, follow on offers, spread across concentration which the individual families did not have. “Till recently, the conservative traditional business families looked down upon being full time investors as they didn’t consider it as serious full time work,” Kapoor said.

Larger family offices now have teams sourcing and originating direct access to founders, fund syndicators in India and offshore. The promoters are enjoying the challenge of playing active roles in mentoring their investee companies and using their own network to build synergies. They often want to invest in complementary businesses to maximise returns.
The wealth managers however, say that investing in gold, which has been there for ages, should not get much predominance in the portfolio. “Most Indian households consume or hoard precious metals, specifically gold, and our clients are no different to this trend. The Sovereign gold bonds (SGBs) are a good alternative for investors seeking long term allocation in gold. We haven’t seen merit in holding gold as a financial investment beyond 5% in the portfolio, more so in a rising interest rate environment. We do not see risk reward favourable in precious metals amid rising interest rate environments. In our view, precious metals will continue their underperformance. However, from a portfolio diversification perspective one can have token exposure. Additional fresh investments in these are not advisable,” said Sharad Mendon, Senior Managing Director, Origination & Client Coverage, Waterfield Advisors.
He added that the top asset class continues to be listed equities for all investors and the portfolio mix is guided by the strategic asset allocation for each investor. “However, we see the Private Market Investments as an emerging asset class in most portfolios,” Mendon said.

As the Indian PE/ VC market has evolved with investments of over US$ 66.2 Bn, HNIs and family offices have started catching up with institutional investors who were early in this asset class. Similar to the trends in public markets, investors are now seeking professional managers and funds who can capture emerging trends in the private markets globally, and invest on their behalf. Many large family offices are also setting up their own AIFs to directly build a portfolio of unlisted companies.

Kapoor added that smaller family offices are piggy backing and investing in ideas that larger family offices in their circles are investing in. He also added that the families from Tier 2 and Tier 3 cities have access to the information, investment options and quality of advisors. Through a hub and spoke model, every large wealth management player has teams catering to the wealth in smaller cities. Even fund managers, international bankers cover these cities. Hence, the gap in understanding of investment tools and trends is rapidly decreasing amongst the wealth across cities.

“The top 30 cities of MF as on March 2022 listed by AMFI features non-metro cities like Surat, Nashik, Kanpur, Agra, Coimbatore, Patna, Jamshedpur, Dehradun, Guwahati, Bhubaneswar, to name a few,” Kapoor of JM Financial said.

Mendon of Waterfield Advisors feels that in 2023 more and more UHNI families will set up their family offices in 2023, both in India and globally. In a recession threatened year, the focus will be on capital preservation instead of capital growth. UHNIs would also opt for global diversification as global equities will offer better entry points in 2023. “Further, as SEBI plans to simplify the framework around Business Responsibility and Sustainability Report (BRSR), and provide a road-map for ESG, we expect and hope to see increased investment decisions with ESG themes,” he said.

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