Indian family offices add to GPs’ options

"Our head of buy-side is someone who's done private equity since the 1990s in India and previously worked for an international GP. We have another team member who used to be in charge of a $400 million distressed PE fund. We understand how the cycle works, how fund investing works and so we're able to remove some of the marketing froth."

These are not the words of an executive from a global fund-off-funds; they were spoken by the founder an Indian family office. Altamount Capital is the first independent dedicated multi-family office in the country, and part of a new breed of professional operators managing investments for a growing population of high net worth individuals (HNWIs).

Families represented by the firm have backed several PE funds, including education investor Kaizen, Multiples Private Equity, agriculture-focused Goldridge, HDFC Realty and IDFC's infrastructure fund.

The way Altamount manages its clients' money - as part of a long-term allocation into asset classes including fixed income, mutual funds, private equity and real estate - is still very much the exception rather than the rule in India. The vast majority of predominantly single family offices still invest on an ad hoc basis, often relying on the advice of accountants or stockbrokers rather than executives with experience in alternative assets.

"In normal global practice, family offices typically function like any other LP," says Navin Kumar, director of fundraising and investor relations at Mumbai-based private equity firm Milestone Capital. "They don't exist in India as of now. The family office concept here is in its infancy; it's taking shape."

Investors by elimination

In spite of this, an increasing number of local PE firms have begun to turn to family offices for capital. Perhaps the primary cause is the continued strait-jacketing of the asset class' biggest potential domestic contributors. The Indian state controls all of the country's pension funds, banks and insurance companies, and thereby ensures that no more than 10% of their assets under management can be invested in equities of any kind.

Family offices - which aren't subject to this kind of government regulation - are therefore an attractive source of capital for those without the resources to focus all their fundraising efforts overseas. Add to this the simultaneous rise in the family wealth - almost 70% of the listed stocks in India are now family-owned, and the Capgemini Merrill Lynch Asia Pacific Wealth Report found that Indian HNWIs were worth $582 billion in 2010, almost double the 2008 figure - and it has a compounding effect.

"There is more money with families, and there are more families with money in India," says Samir Inamdar, co-founder and CEO of Bangalore-based GP Forum Synergies. "Rather than traditional old business families, there are a lot of newer families who have more money as surplus for investment, such as the proceeds from their holding in the IT company they work for."

Milestone Capital, which has raised capital from family offices for its seven private equity and real estate vehicles, was one of the firms that kick-started this trend. Back in 2008, the firm decided to attract more Indian retail households as LPs by bringing down the minimum threshold levels for subscription to its funds from $1 million to a mere INR1 million ($19,000). The bulk of its counterparts in the industry followed suit. "Obviously it gave us an advantage: each time I'd go out and bring about 3,000-6,000 investors into my fund, and four years later, we have an investor base of more than 17,000," says Kumar.

As Milestone and many other firms have since discovered, having family offices on board can be an advantage in itself. Their greater receptiveness to the concept of private equity when compared with some commercial institutions and their speedy decision-making processes are key factors in this respect.

How big an appetite?

But how interested are the family offices themselves in participating in private equity? Appetite clearly fluctuates from sector to sector, but in general, areas that fall outside the easily accessible listed space, or pose unique investment challenges, are favored when it comes to selecting a GP. Industries such as agriculture, technology and education are all subject to challenges and regulations, and so family offices often prefer to invest via an experienced private equity or venture capital firm that seek direct exposure to the assets.

Additionally, the changing nature of wealthy Indian families - from custodians of old money to groups of professionals with hands-on experience running businesses - means that family offices are increasingly prioritizing operational ability among fund managers. "What they value is operating expertise and track record," agrees Inamdar of Forum Synergies, which first raised money from Indian family offices in 2009. "That's one of the reasons our fund is very attractive for them - we bring to the table strong business leadership and an operating track record."

Indeed, some family offices have become so comfortable with running their own businesses, that the prospect of investing with a GP can be overshadowed by the lure of direct deals. The Singh brothers, for example, sold Ranbaxy to Daiichi Sankyo five years ago and have since expressed no interest in participating in private equity, instead reinvesting the billions they made from the sale in building out a hospital business and a financial services business. And the Piramal Group, run by Ajay Piramal, has even set up two of its own PE vehicles, a real estate fund and a healthcare fund.

The concern for Indian GPs is that many family offices still haven't yet decided whether they would be better off buying a property or company on their own rather than making an investment via a third-party fund. A number of the industry's current backers could be treating their fund commitments as an opportunity to learn industry best practice with a view to going it alone in the future.

Were this to happen, however, it is unlikely that GPs and family offices would end up chasing the same kinds of assets. Richa Karpe, who co-founded Altamount Capital in 2008, argues that investment strategies are sufficiently differentiated that there is little chance of direct competition. "Funds are looking at a scalable business that can create a valuation multiplier in the next four years because that's their average holding cycle," she explains. "There are some businesses that need much more patient capital and longer holding life cycles, which means PE firms can't look at them."

There are also cases in which one or other investor type would be ruled out automatically by the wishes of the promoter - one might demand a strategic investor with knowledge of education or entertainment or sport, for example, while another might want PE capital to scale up and increase the valuation. It's therefore conceivable that rather than representing even more bodies in an already crowded investor space, an influx of direct-investing families could instead offer a new potential exit to players on either side of the fence.

Skeptical views

Another, broader, concern is that like LPs from other categories and geographies, Indian family offices have been starting to regard the local private equity industry with a certain amount of skepticism. The lack of vintage diversification among Indian PE funds means that the entire industry is being affected by the same macroeconomic issues and so far few vehicles have borne the fruits of great returns.

Unlike internationally, where fixed income returns are 2-3%, and listed market returns have been muted, fixed income products in India generate returns of 10-12%. As a result, some question the value of investing in an illiquid and comparably risky asset class that produces only moderately superior returns. A number of firms have attempted to reverse the widespread apprehension about returns by introducing higher hurdle rates at which the carried interest fee is taken - typically 14% rather than the industry standard of 8%.

When it comes to Indian PE firms' ability to rely on fundraising from local family offices in the coming years, much will depend on the performance of existing vehicles. Indian families may be the most nascent of LP categories, but this watchful gaze trained on domestic players is what unites them with far more experienced LPs across the globe.

"The next few years is really going to be the big thing where all LPs look at GP teams to see what success they can bring," adds Karpe. "If they are successful, then people are going to give capital, there's no doubt about that."

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• Topics
• South Asia
• LPs
• Fundraising
• India
• Family office
• LPs
• Fundraising