Why the hubris of Indian family offices is raising risks
Increasingly confident and ambitious family offices run the risk of creating unbalanced portfolios. This is especially true in the relatively immature Indian wealth management space, according to Munish Randev, founder of Mumbai-based Cervin family office.
Most of the country's family offices either build their own product assessment platforms or work with multi-family offices to provide this expertise, said Randev. “This topic often prompts debates, since every office believes that they have the best processes and experience,” he told AsianInvestor.
For fixed income investments, while most families will create or subscribe to interest rate models and subsequent strategies, Randev said “the credit piece gets missed out and families believe they are only investing in good investment grade products.
'Most shocks in the credit space do not come from low-rated companies, but from companies who suddenly slide down the quality scale and actually create principal losses in the portfolio. We have seen a few 'AA' or above-rated companies default as a result of governance issues, industry slump and economic issues, or in some cases all out fraudulent activities.”
The error here, Randev added, is not a lack of effort to predict credit events, but a lack of ability to do ongoing credit checks on all underlying investments.
As reported, India's family offices are increasingly investing in alternative assets, particularly in venture capital and private equity, as the country's unlisted sector matures.
The signs of a deeper array of investment options are evidenced by a rising number of unicorns and increased exit options.
"A newer, younger generation is entering family businesses with a revitalising interest and risk appetite for this space," Soumya Rajan, founder and CEO of Mumbai multi-family office Waterfield Advisors, told AsianInvestor.
The emergence of spin-out managers - new fund houses with a strong pedigree from global private equity and venture capital firms - such as Kedaara Capital, A91 Partners and Stellaris Ventures - has also boosted the local investment pool.
But the FOMO (fear of missing out) factor often leads investors to create a reactive portfolio made up of random opportunities, especially in venture capital, said Randev.
“What families need is a graduated strategy to slowly expand coverage of the VC space using a judicious mix of funds and direct deals."
In the fund manager selection process, due diligence has to look at areas such as the ability of the fund manager to attract deal flow, whether the manager has pricing power while it was exiting and which sectors it has done well in, he said
“Investing in start-ups is all the rage in most family offices. A disproportionate amount of time and resources are spent in assessing deals from various sectors,” said Randev.
He said this is often at the expense of the 80% of the family’s asset allocation invested in listed debt and equities, which potentially exposes the portfolio to undue risk.
According to US research group Fintrx, direct investments have become increasingly common throughout the family office space, particularly when it comes to single-family offices. They attribute this trend to the increase in sophistication of family office vehicles themselves.
“Over the past decade or so, family offices have accumulated the assets and talent required to effectively allocate capital directly into the private space. The result of this trend is more than half of family offices allocating capital directly to some degree.”
Favoured sectors in 2021 are technology, financial services and healthcare and biotech.
BlackRock’s 2021 survey of 185 family offices noted that few SFOs felt the need for material change to their portfolio this year. Many cited their long-term investment horizon and high allocations to alternatives as the driver of this.
There were stark regional variations, however. North American and European, Middle East and African investors appeared reasonably content, with only 17% and 18% respectively desiring change. In contrast 53% of Asian family offices intended to re-allocate, “which seems to be driven by a greater weighting to fixed income and more clarity on local equity market recovery,” according to the report.