MC Explains: What are family offices and why are they gaining prominence?

AIFs

In addition to mutual funds and portfolio management services, family offices are now becoming a major source of liquidity for the stock market. This trend has been steadily catching on over the last couple of years. Through this explainer, we look at the structure of a family office and how they operate.

What exactly is a family office?

It is a private wealth management advisory firm that serves ultra-high networth individuals (UHNIs) like industrialists and businesspeople.

How many family offices are there in India?

There is no official data available on this. But those in the industry estimate there could be anywhere between 200 and 250 family offices, having risen sharply in the last couple of years.

How are they different from traditional wealth management firms?

Traditional wealth management firms typically serve multiple clients, whereas a family office caters to a single UHNI or a business family, and the financial solutions are highly customised since there is only one client.

How is a family office structured?

The UHNI or wealthy family usually sets this up as a separate legal entity, often as an investment company or a family trust. It will have a team of investment analysts, portfolio managers, specialists in various asset classes like equity, debt, real estate, private equity, and alternative investments, and a risk management team.

Why the sudden rise in family offices?

Promoters who have realised substantial gains from public equity markets or M&A transactions often establish family offices to manage their wealth, says Sraboni Haralalka, co-founder and executive director at Wodehouse Capital Advisors.

This trend is expected to accelerate as the second generation in many mid-sized companies are not keen on being part of the business.

How active are family offices in the stock market?

According to Shrey Shah, global asset allocator at Ashika Global Family Office Services, family offices are quite active in the initial public offering (IPO) market as well as pre-IPO market, looking to put in money as anchor investors. To participate as an anchor investor, family offices must be registered as investment vehicles. Hence, many family offices are setting up alternative investment fund structures to be able to bid for the anchor book portions in IPOs.

Can family offices invest in overseas assets?

The family construct and succession planning objectives determine the investing structure. Family offices are also actively exploring structures for offshore investing through the GIFT City route of family investment funds (FIF), says Nimish Shah, managing director, family office, at LGT Wealth India. The FIF structure allows single-family offices to run a fund specifically for their family and, hence, gives them the flexibility to invest abroad with potential tax advantages offered by the International Financial Services Centres Authority, which is headquartered in GIFT City, Gandhinagar.

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