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10 December 2020
The term 'family office' has usually been associated with the idea of an entity dedicated solely towards personal investments of a wealthy family or individual or some combination thereof. As a result, the expansive range of other functions that family offices can carry out is overlooked. The impact of this is that many wealthy families tend to be unaware of the broad spectrum in which family offices can assist them in their day-to-day lives. Family offices can transcend wealth management and help them in myriad ways. A critical function that family offices can perform (and have done so for many families across the globe) is to assist families in institutionalising a robust family governance structure as a means to enhance and guard the family's legacy on a multi-generational basis.
This article explores the hypothesis that viewing family offices as mere wealth management vehicles is in fact impeding their progress and highlights the untapped potential of family offices as all-round growth drivers in India. In particular, the article focuses on single family offices.
According to family membership and research organisation Campden Wealth, in 2019 single family office numbers had increased worldwide by 38% since 2017. India accounts for approximately 150 of the world's nearly 10,000 single family offices and has approximately eight to 10 multi-family offices.(1) Formal family office structures may be limited in number, but they are most certainly not limited in size. In 2019 the total estimated assets under management of family offices stood at $5.9 trillion, while the wealth of the families behind them totalled a vast $9.4 trillion.(2)
As a result of this growth, transactions that could earlier have been undertaken only by large corporations or private equity firms are now being handled by family offices. The disruptive force that has been played by family offices in recent times has been unparalleled. Family offices have taken on larger roles, with many moving into the roles of venture capitalists and angel investors. For example, Anirudh Damani-led Artha Venture Fund has invested in Oyo Rooms, online cosmetics retail brand Purplle and similar start-ups.(3) Education-focused fintech company GrayQuest has secured $1.2 million in funding, led by Mahansaria's, Jeejeebhoy's and Ashok Wadhwa's family offices, among others.(4)
Traditionally, the role of family offices was almost limited to managing of investments, administration of family affairs through estate planning and tax planning. However recently, the role of family offices is rapidly expanding. Family offices are now seeing a growth in terms of the services that they can offer as the uber-wealthy look to consolidate the provision of their needs to one service provider. Multi-generational families and businesses have started to realise the role that family offices can play in various aspects of managing and conserving wealth, succession planning and grooming the next generation, among other things. There has been a rise in the number of family offices in India in the past four years, with many business families setting up single family offices. Encouragingly, the role of some of these family offices is not merely investment related, but also encompasses functions such as:
Initiating a discussion to institutionalise a formal family governance structure is a fairly emotional experience for family businesses in India.
Several Indian family businesses were incorporated in the late 1980s and early 1990s, when economic reforms were introduced. According to a 2019 study, most of these business founders are at the brink of retirement with no planned succession. Unfortunately, studies have shown that approximately 97% of family businesses in India are operating without succession plans in place.(5)
For succession plans to be effective, planning must begin at an early stage, which commences with identifying a business's successor. Grooming a successor is one such service that family offices can offer, through exposure to the estate and affairs of the family and training on the job. Apart from this, family offices can assist in liaising with legal experts to help draft a succession plan and make the transition between generations as smooth as possible.
The role of family offices can be broken down into various stages. In the preliminary stage, family offices can assist with exploring various governance models suitable for both the family and the business. Once a governance structure is determined, family offices work on the intricate structuring and documentation and legal matters with external counsel. Family offices, by virtue of their thorough knowledge of the affairs of a family, are well placed to assist legal advisers in filling any information gaps that may arise during this process. Family offices can act as a liaison for families and ensure that there is consensus within the family on the proposed governance structure and that all members are aware of their roles and responsibilities, preventing potential disputes.
Family offices can also liaise with legal advisers who have appropriate expertise in obtaining a comprehensively drafted family constitution. While it is not often structured as a legally binding document, it does serve as an invaluable guiding document for families at all times. Finally, at the implementation stage, family offices can assist families in setting and driving the agenda for family meetings and discussions, maintaining records and helping to manage frictions that may arise.
Family offices can also help by administering the family constitution and its underlying bodies. Most well-drafted family constitutions and plans incorporate a family council or a family business board, consisting of representative members from different parts of the family. Family offices can assist in facilitating meetings between such members to ensure transparency of communication between members, financial-related decisions, planning for future generations and similar matters.
Regulating the conduct of family members is also a critical aspect of family offices as far as family governance is concerned. Family offices can help family members to outline policies to regulate their public interaction. For example, it is not uncommon to have a media policy (applicable to in-person interviews or online posts), which is adopted to regulate the ways in which family members can interact with the media or the general public when making statements about the family or the business.
Typically, a family office structure will consist of a secretariat, comprising trusted executives. Sometimes they are led by an individual who performs the role of a family office chair (it could also be a CEO designation). Family office chairs serve as the lead point of contact on all matters pertaining to the family office and are more often than not a longstanding confidant of the family or a former senior executive from the core family business. Family office chairs' close proximity to the family, coupled with their intrinsic knowledge of the family business, places them in a unique position to be able to provide objective and holistic solutions for the interests of the family at large.
Apart from investing, tax planning, family governance and related functions, family offices can provide secretarial functions to the families that they serve. Family offices often coordinate travel itineraries, plan special occasions, help with children's admission into educational institutions and hire household help.
COVID-19 has affected the way in which people look at succession and, consequently, how people look at wealth. With people working remotely, the pandemic can lead to the emergence of a virtual family office model.(6) The virtual family office model can help to mitigate issues often associated with a siloed approach (ie, where professionals work independently of each other and only as needs arise) or the full-time professional staff approach (which can be cost ineffective as full-time staff may not be needed at all times or staff members may lack experience in areas of need that require technical expertise). Several family offices are now running a magnifying glass over their processes and infrastructure to determine which model suits their needs.
In a COVID-19-affected market, Indian family offices have been looking at alternative asset classes such as hedge funds, derivatives, products that give absolute returns and private equity.(7) The younger generation in family offices is entering the business with a higher appetite for risk and greater global experience.(8) Maintaining family offices' daily operations and administration can be challenging as a high proportion of employees are working remotely. This has led to some firms upgrading their security systems and adopting automation where necessary. Those firms with virtual family offices are likely to be better positioned to respond due to higher levels of operational disruptions.(9)
Family offices have multi-dimensional facets and play a critical role in implementing a robust family governance structure. If used effectively, family offices are truly an extension of the family and act as guardians of a family's invaluable legacy. Over the coming years, there is likely to be a considerable change in the way in which resources are managed for the wealthiest families in the world. Indian family offices will likely scale up to the level of their foreign counterparts. While adopting a family governance structure is the first prudent step, business families must recognise the challenges that will emanate from giving effect to such structures. There are a host of complexities to navigate and many pitfalls to avoid.
For further information on this topic please contact Rishabh Shroff or Tanmay Patnaik at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email (email@example.com or firstname.lastname@example.org). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.
(1) See here.
(2) See here.
(3) See here.
(4) See here.
(5) See here.
(6) See here.
(7) See here.
(8) See here.
(9) See here.
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