Introduction
India, today has more than 500 active high-net-worth family offices. The wealth of these family offices was built from successfully growing and managing a traditional business spanning at least a generation. Some examples of large family offices include Catamaran, Munjal, Mankind, and others, where generational wealth was accumulated over a long period of time from traditional businesses.
Now managing this wealth and transitioning this to the next generation effectively requires active management and oversight. In this article, we will look at some ways of using private market intelligence to do this better.
The main tasks that family offices do, including managing the investment portfolio in both public and private markets (like uncovering opportunities, and consolidating portfolios), compliances, some form of portfolio-level reporting, philanthropy activities that the family may be committed to, managing shared assets, and succession planning. The ultimate goal is, finding ways to bring in the next generation and continue the path of wealth creation.
The need for research on the portfolio and evaluating market conditions for entry or exit is an ongoing activity that family offices cannot easily outsource or build automation for. Primarily because trustworthy family office managers are irreplaceable due to their understanding of the family needs and objectives. However, their effectiveness can be drastically enhanced with timely market intelligence, which is useful in more than a few situations.
Let us look at 2 situations when intelligence built on credible data comes in handy.
Researching and Deciding When to Consolidate
At any given point in time, family offices should have the full knowledge of the current performance and growth potential of investments made. These include positive events like new product launches, sustained growth year on year, funding events, or negative events like untimely director/auditor change, sudden drop in growth rates, and degrades in ratings/asset positions/financial ratios among others.
Competent family offices keep a steady stream of data flowing in so that the trusted individual is reviewing and suggesting a course of action that will benefit the family in the long term. Usually, there will be thresholds on both positive and negative events that the portfolio company can weather and emerge stronger.
On a periodic basis, family offices need to review, the value, growth, returns, and risks associated with the investments. This need is partly satisfied by the portfolio companies themselves reporting their MIS. But an independent and credible alternative to cross-verify and at the same time make it convenient to review periodically, is crucial.
Imagine having all the family office investments in one screen, where the date of first investment/last investment, total invested amount, and the overall return multiples on every portfolio company are available. With a double click, being able to drill down further to get the income statement or details of a particular recent deal. Suppose such a review leads to consolidation decisions where few of the investments that have achieved their objectives, need an exit, and steps towards finding suitable buyers need to be initiated. The natural next step would be to have a pipeline of opportunities to invest the return proceeds that match the family office objectives.
We have been witness to divergences of preferences between generations. For example, the new generation may not want to hold real estate, while the family office wealth could be concentrated in that asset type. Similarly, the grandfather’s favorite investments may not necessarily be the grandson’s preference. Ultimately boiling down to situations when portfolios will have to be rejigged systematically by finding both exit and entry opportunities.
This process needs to be managed and re-run regularly for the current investments while considering the current market conditions and emerging opportunities.
Uncovering New Opportunities
Every traditional business is getting transformed in the face of two key changes in this generation. One is the fast-paced technological change and the other is climate change. The next generation may want to respond to these changes by leveraging their family wealth. These opportunities need to be evaluated with a grounding in intelligence and insight about the sector/subsector/industry along with the nuances between them.
For example, Artificial Intelligence and Machine Learning developments that are happening are bound to affect several industries. If the family office portfolio includes only manufacturing-related companies and wants to explore opportunities that emerge due to AI/ML, they would require a grasp on the developments and the nature of opportunities.
Imagine having a list of companies that are attacking the manufacturing industry with AI/ML-related products emerging from the new-age startups. This provides an excellent ring-side view to the new generation to involve itself in informed decision-making and potentially shift the direction of investments from the office. Similarly, the emergence of alternative assets or impact investing could be candidates for evaluation. Here again, building a solid deal flow funnel independently becomes necessary. Needless to say, this will have to go through the family offices’ considerations on risks and returns and weigh accordingly.
Conclusion
It is important for family offices to use market intelligence too;
- Uncover new opportunities,
- Manage portfolios effectively, both with data-driven and insightful intelligence that is reliable and up-to-date.
High-net-worth families should consider partnering with existing private market intelligence providers and have them as trusted partners to optimize and revamp their wealth management strategies.
(The author is Mr. Murali Loganathan, Director Research at PrivateCircle.co, and the views expressed in this article are his own)
