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How Indian family offices are looking to tip the balance of local venture market

Written by Moulishree Srivastava Published on 

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Private wealth in the country swelled up to USD 12.6 trillion last year, growing four-folds since 2000.

Mrunal Jhaveri realized early on he wasn’t interested in the manufacturing business his father had set up two decades ago. Based out of Mumbai, his family runs Jhaveri Flexo which produces packaging materials such as flexible laminates and exports it across the US, Canada, and Europe.

He was more keen on trying his hands on startups, investments, and financial markets.

In 2014, he and his brother Alay Jhaveri decided to get the first-hand experience of how startups work. They set up a last-mile bulk delivery startup YourGuy Concierge. However, two years down the road, they sold YourGuy to logistics firm LogiNext and took different roads but toward the same goal–to make money for the family.

While Alay joined the family business, Mrunal started Icebreaker Tech, a family office to manage and grow his family’s wealth.

Since then, Mrunal has backed a slew of promising startups in India and abroad. Some of his portfolio companies include USD 850 million worth medicine delivery app PharmEasy, daily goods delivery startup Country Delight, currently valued at USD 200 million, hyperlocal delivery firm SuprDaily, which Swiggy acquired in 2018, and streaming platform FuboTV, that is listed on Nasdaq.

Mrunal is a part of the next generation of Indian business houses that are venturing into the risky, yet enticing world of startups, backing the new-age companies through their family offices.

The rise of family offices

Typically, family offices invest in assets and manage wealth for the rich. According to the data collated by research firm Venture Intelligence, last year, family offices in the country poured in almost USD 900 million in private equity and venture capital investments.

Over the last few decades, private wealth in India has thickened. A 2019 report by Credit Suisse said the private wealth in the country swelled up to USD 12.6 trillion last year, growing four-folds since 2000.

India had 150,000 ultra-high net worth (UHNW) families with a cumulative net worth of  USD 2 trillion in 2018, a report by Edelweiss and Campden Family Connect stated. This number is expected to rise to 400,000 UHNW families, which will have a combined net worth of USD 5 trillion by 2025. Campden Family Connect is a private network of HNIs and business families.

A family office can be a single-family office that is established in-house by ultra-rich families, or a multi-family office, set up by professional wealth managers who serve various rich clients. A 2018 Forbes report said India accounted for around 150 of the world’s nearly 10,000 single family offices and had around eight to 10 multi-family offices.

Source: Venture Intelligence. Infographic created by Shermin

India’s some of the most prominent and active in-house family offices include PremjiInvest, the family office of Aziz Premji, chairman of the country’s IT giant Wipro, Catamaran Ventures, the family office of N.R. Narayana Murthy, co-founder of IT behemoth Infosys, RNT Associates, the family office of Ratan Tata, former Chairman of Indian conglomerate Tata Group, and Sharrp Ventures, the family office of Harsh Mariwala, chairman of consumer goods company Marico, among others. According to the Campden Family Connect survey, almost half of the rich Indian families work with multi-family offices for some service or the other.

“We are seeing professionalization of wealth,” Anirudh Damani, managing partner at VC firm Artha Venture Fund told KrASIA. Before setting up the VC firm, Damani ran a family office called Artha India Ventures (AIV), for his family, which runs K Damani Group.

According to Amit Patni, director at Campden Family Connect, who is also founder and director at RAAY Global Investments, a family office, the wealth of the business houses was earlier tied with operating businesses, and whatever they earned was plowed back into the company.

However, he said, two things happened over the last 15-20 years that created enough liquidity for promoters and their families: a lot of businesses got listed, and many PE and VC firms started investing in large Indian businesses.

“That is when they started looking at creating a separate structure to manage and grow their wealth,” he added. And it was only five to seven years ago that family offices, which generally invest in equity, debt, real estate, and gold, began looking at the startup ecosystem, primarily led by the next generation.

Crossing path with the startup ecosystem 

In 2012, when Indian market regulator SEBI chalked up guidelines for alternative investments, it made it easier for domestic PEs and VCs to raise funds from Indian investors. As a result, fundraising from the likes of domestic HNIs or institutional investors became substantial, explained Ankur Bansal, co-founder of venture debt firm Blacksoil, which has two family offices as backers.

At about the same time, high-profile global VC firms had begun looking at the Indian startup ecosystem, which was at a nascent stage then.

Bansal said while the startup and VC industry in the country grew, fund managers played an instrumental role in educating the family offices about the private equity and venture capital asset class.

Over the next few years, as global VC firms like Sequoia Capital, Tiger Global, and SoftBank, started writing big checks to Indian startups at a high valuation, making a handful of them unicorns, family offices realized what they were missing on. “That is when family offices got attracted and said even though it is a risk, why not allocate some money to startups, because if it is a success, we would make 10-20 times money,” Patni said.

According to him, family offices usually allocate 5-10% of their wealth to either invest in startups directly or via VC and PE funds, but this could go up to 20-25%.

Siddartha Pai, founding partner of early-stage VC firm 3One4 Capital, told KrASIA in a recent interview that a lot of wealthy families, which were earlier comfortable with the public market because of ease of entry and exit, and lower tax rates compared to private markets, have changed their stance over the last few years.

Read this: How Anirudh Damani de-risked investing in startups with a self-sustainable investment model

“What they have also realized after the recent blip in the stock market, where the markets fell close to 40%, is that from the asset diversification perspective, it is important for them to invest in private markets, especially into startups and venture capital class,” he said.

This is where the next generation of business families is stepping up to engage with startups, often not wanting to go back to traditional businesses.

“A lot of second and third generations in these families prefer to participate in the startup ecosystem either through investments or through their own startups,” said Bansal. “Many realize that traditional businesses can only sustain if they have some startup mentality. So a lot of family offices have given the mandate to the next generation to go and play an active role in startups in the sector they understand.”

Mrunal feels the next generation that is coming into the business, “does not mind taking a bit of aggressive and risky approach and feels startups can give good multiples on investment going forward.”

The see-saw between VCs and startups

Typically, in-house family offices have investment officers to evaluate interesting startup deals. They take these deals to the promoters, who with the help of an internal committee decide whether to invest or not.

Then, there are wealthy families that prefer to invest in VC funds that back startups. Instead of evaluating individual startups, they evaluate four to five funds and put in money there. 3One4 Capital is one such example that counts a few family offices as its backers including Siddartha’s father, T.V. Mohandas Pai’s family office.

“When family offices work with VCs, they will evaluate VC’s fund managers (GPs), look at how long the fund has been in existence, its past record, and performance of startups the fund has invested in,” Patni said.

Mrunal of Icebreaker Tech, who has invested in a couple of VC funds, said, he would only invest in a fund if the investment thesis and the investment style of the fund matches with his own. One can get good deals to invest in through VCs and connect with other investors who have invested in those VC funds for co-investment opportunities, he said.

However, family offices don’t have a say in funds’ investment strategy, unless the family office sponsors the majority of the money and have a seat on the investment committee.

Rishabh Mariwala, son of Harsh Mariwala, founder and chairman of Indian consumer goods giant Marico, who runs Sharrp Ventures, told KrASIA, the quantum of access, engagement, learning, and understanding one would have with portfolio companies when investing through VC funds is limited.

“When I invest directly in startups, it puts the onus on me and my team to back the right entrepreneurs. But the potential return is significantly higher,” he said, adding, “there are very few funds that have actually returned (LP’s) capital in India. The VCs ecosystem in the country hasn’t matured yet.”

Mrunal believes, investing directly into startups, give family offices “skin in the game.”

“Things are much easier for us when we put in money directly,” Mrunal said. “But to ensure we are in a safe zone, we ideally look at investing in a startup when a VC fund also participates in the round.”

Investing directly in startups, however, may have its own downside for family offices, as typically startups run out of money every six to 12 months and need to raise follow-up rounds. “So family offices would need startups to keep raising money to reach a point where they can get their returns back,” said Patni.

That is why most VCs are closely involved with startups’ operations so that they can make sure the latter survives.

Startup

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There is a third way though in which family offices are associating with startups. A few are becoming general partners (GPs) themselves. This essentially means that family offices can set up their own funds, where they would put in money as well as raise money from outside and appoint a fund manager that would back startups. This arrangement would let them have more say in startups while ensuring they can fund follow-on rounds for their portfolios more easily.

For instance, Patni’s family office has anchored three tech funds, each with their own portfolio of companies, with the combined AUM (asset under management) of USD 100 million. Patni who hails from the Patni family that had established India’s one of the earliest IT companies, Patni Computers, was one of the first ones to establish a family office in 2002.

“We are LP-GPs. We have already earmarked money from our family office for these funds,” said Patni. Apart from investing in technology startups, he said his family office also invests directly in brick and mortar startups.

Similarly, Damani’s Artha Venture Fund is backed by his family office Artha India Ventures. He believes that while not many families opt to become GPs, there is likely to be another three to five family office led GP funds that are going to come in. However, he said, unless the next generation concentrates on becoming a GP, those funds may not do very well.

“Things are different, when I am representing my family, versus if I had a professional representing my family,” he added. “When you are answerable to your family, at the dinner table, every rupee is accountable for you, and then you make sure that your founders also understand that every rupee given to them is accountable.”

To be sure, every family office has its own investment style and risk appetite. While for most of the family offices, Series A and B may be a sweet spot, there are many who have not shied away from making seed stage or late-stage investments. However, Patni believes, all family offices write checks based on trust.

“They look for co-investment opportunities, like how it used to happen in olden days in real estate projects where builders would invite his connections to invest, and those connections would bring along their connections,” he said. “In startup investments also, they piggyback on others (families in their network).”

Sharrp’s Rishabh believes, family offices are long-term, patient investors, which are here to stay, and are going to become “a force to reckon with.”

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