India's family offices are increasingly investing in alternative assets, particularly in venture capital and private equity, as the country's unlisted sector matures. However, their attraction to local real estate investments is on the wane.
The signs of a deeper array of investment options are evidenced by a rising number of unicorns and increased exit options. And this trend looks set to continue.
"We see the alternative investment space gaining more traction in the coming years," Soumya Rajan, founder and CEO of Mumbai multi-family office Waterfield Advisors, told AsianInvestor.
"The private equity and venture capital (VC) industry has seen strong growth this past decade, and a newer, younger generation is entering family businesses with a revitalising interest and risk appetite for this space."
Rajan has seen a growing willingness amongst families to participate in unlisted investment, to the extent of 10% to 15% of portfolios. Industries attracting the most interest include logistics, health-tech and education-tech.
The Indian VC investing space is naturally biased towards the technology sector, followed by consumer and healthcare, according to Munish Randev, founder and CEO of Mumbai-based Cervin Family Office. "Indian families have been slowly increasing their exposure to the new age economy by investing in the early stage start-up ecosystem," he told AsianInvestor.
Indian families' early experience in alternatives was underwhelming, said Rajan, with returns through funds being mostly inconsistent. However, "the PE/VC ecosystem over the last few years has matured and become more investment-friendly, she said.
In 2019, India hit an all-time high, with investments touching $48 billion. Several factors have catalysed the Indian alternatives growth story.
"The number of Indian unicorns totals 37 currently, with 11 registered in 2020 and 9 in 2019. The country has a maturing exit ecosystem, with more than 50% of aggregated exits since 2010 occurring in the last three years," Rajan said.
Further, more opportunities have appeared for family offices in the VC space as institutional funds have dried up in reaction to the pandemic lockdowns, said Randev. "Family offices, being much more flexible in their asset allocations and having relatively patient capital, were able to get some attractive opportunities."
India is also a favourable destination for direct investments and co-investments, said Rajan. She said $14 billion was invested between 2007 and 2017, growing massively to $28 billion in the three years from 2017 to 2019.
The emergence of strong spin-out managers - new managers with a strong pedigree from global PE and VC firms - such as Kedaara Capital, A91 Partners and Stellaris Ventures, had also boosted the local investment pool.
A single-family office CIO speaking to AsianInvestor anonymously, confirmed that the family had made investments in alternatives space, "but it is still early days to consider them as successful, though the early trends show promising results."
PROPERTY'S SLIPPING APPEAL
In contrast, real estate has finally lost the favour of India's wealth investors after decades of popularity. While it is still seen as an important asset by individuals and families, a mixture of oversupply and overleveraged projects has led the asset class to perform poorly over the last four years.
"There have been big defaults in this space as well. Hence real estate is not currently an active space where families are looking to invest unless it's a distressed opportunity," said Randev.
The family office CIO added: "The sector has been mismanaged, with bad corporate governance, and we have huge over-supply in the short run. Furthermore, the prices have not corrected much to spur demand.
"The commercial real estate market will see a new normal post-covid, as demand will be muted for some time. Alternative co-working models may see higher demand. We are positive of real estate in the long term but will be cautious of any new investment."
As a result, many family offices are keen to offload their physical real estate holdings, said Randev. "REITs (real estate investment trusts), on the other hand, have had a good run as they provide some yield kickers in a falling rate environment."
He believes many Indian family offices will focus on early-stage VC opportunities in 2021, via direct deals or funds and alternative debt. "The venture debt space may see renewed interest, especially in the relatively later-stage start-ups," he predicted.
Another trend among India's family offices is a rising sensitivity towards investments with a social impact. Traditionally, most family offices show their support for India's societal initiatives like rural health, bottom-of-the-pyramid financial inclusion and agriculture-based initiatives.
Aside from alternatives, some of the above family's investments support specific social sectors, where the family is also involved philanthropically.
The CIO said, "We directly support research into age-related diseases and alternative medicines, as well as funding existing government or private research institutions.
"We also support initiatives that improve the standard of life of the Indian farmer. We support the Centre for Collective Development, which works to improve the life of farmers. We also support the Naandi Foundation."
Naandi Foundation's objective is to directly invest into services such as elementary education that has positive discrimination towards girls, safe drinking water and sanitation, large scale cooperative irrigated farming in dryland areas and tackling malnutrition amongst children.