How the rise of family offices and HNIs is revitalizing the venture capital landscape

While the total population is growing at 2% annually, the growth rate of HNIs is 16% and that of UHNIs is in double digits.

Retail investors and domestic mutual funds (18.8%) own a higher stake in India Inc. than FPIs (17.6%)

HNIs and UHNIs have realized that businesses should be one of their investments, not their only focus

A significant trend in the HNI and UHNI space is that traditional companies are going public due to significant value creation, supported by favorable market conditions. These companies are experiencing annual growth rates of 10-15%, so there is a strong case for unlocking value.

As a result, many of them are setting up their own family offices and the growth of these businesses is outpacing that of our population. While the overall population is growing at 2% annually, the growth for HNIs is 16% and for UHNIs it is even in double digits. This is why HNIs and UHNIs are considering diversification beyond their core businesses, which have been their primary asset class, to mitigate risk.

At the balance sheet level, this client segment is reviewing their asset allocation and wants to delineate their business and personal assets. Having traditionally been heavily invested in real estate, they now want to invest a significant portion of their assets in growth-oriented portfolios, which may include equity products such as mutual funds, PMS, AIFs or alternative asset classes, with a focus on unlisted investments.

To increase the value of companies, they must also invest in venture capital through funds or directly and look for opportunities in international markets.

In the current scenario, four significant trends emerge from the massive wealth creation among HNIs and UHNIs in recent years.

1. The financialization of savings has changed the rules of the game and the share of physical assets has fallen while investments in financial assets have increased.
2. Equities have become a mainstream asset class and within this segment, allocation to PMS and AIFs has increased compared to mutual funds. Alternative asset classes are also gaining more exposure, with a focus on the unlisted space.
3. Value creation in traditional companies leads to investments in modern companies within and outside India.
4. Diversification goes beyond traditional asset classes and India. Global diversification is achieved through offshore investments or by creating a Plan B where residency options in other countries are explored through specific investment programs.

One of the main reasons for these trends is the fact that as wealth is created, the opportunities to earn real returns from fixed deposits or fixed income mutual funds diminish as they can hardly provide a reasonable return after inflation and taxes. In this scenario, investors had to diversify their assets between physical and financial assets to earn real returns.

Traditionally, Indians are much more invested in real estate than the world average and much less invested in equities than the world average. There is a shift towards rebalancing portfolios by increasing equity allocation. In this way, their investment strategy is aligning with that of sophisticated western investors. Therefore, the HNI and UHNI segments have significant Investments in IndiaA.

This can be seen from the fact that individual investors and domestic mutual funds (18.8%) own a higher share in India Inc. than FPIs (17.6%).

However, in the unlisted space, around 80% of the capital invested in Indian companies still belongs to foreign investors who are taking advantage of the growth prospects and returns from India. However, we expect this trend to change as more HNIs, UHNIs and multi-family offices increase their allocation to the unlisted space. When it comes to global investments, these clients have a plan B.

This could be applying for an EB5 visa for their children to give them the best education possible, setting up a subsidiary in Dubai or Singapore, or applying for a Golden Visa for Portugal to enter the European region. This diversification ensures that a small portion of their wealth is invested outside India, providing them with security in case India’s growth story comes under threat. We believe this diversification strategy is the best investment philosophy for these investors.

In summary, the idea of ​​the family office is to diversify and separate business assets from personal assets. HNIs and UHNIs have realized that businesses should be one of their investments, not their only focus. They should not be recognized solely on the basis of that investment.

To minimize risk and promote growth, businesses should only represent a portion of their assets. As business scale and assets grow, this awareness among wealthy families will go a long way in encouraging investments in growth-oriented asset classes.