Soumya Rajan: ‘I look at family offices as patient capital’

SOUMYA RAJAN, MD & CEO, Waterfield Advisors

Family office capital, unlike a fund, has an investment horizon stretching to 15 years

As the number of high-net-worth and ultra-high-net-worth families grows, many advisors are now involved with setting up family offices to cater to the complex needs of these families. Globally, it is estimated that there are around 4,000-5,000 family offices, of which only 3-5 per cent are housed in Asia-Pacific, suggesting a significant growth potential over the next five to 10 years. Soumya Rajan, MD & CEO, Waterfield Advisors, an India-focused boutique multi-family office, shares her views on how family offices are making a difference to the way UHNIs manage their wealth.

Can you give a brief on how family offices operate?

The family office space is for ultra high net worth family segments. They look at the needs of families in a holistic manner. Unlike banks and other financial institutions that provide only investment guidance, family offices also advice on business succession, investing the liquidity generated by them and on legacy and philanthropy.

Banks do not typically cater to these areas, neither do they look at the sensitivities around company structures, shareholding pattern, differentiating between ownership and management, when it comes to succession.

So, what is the profile of your clients? Are they all from business families?

The profile is mainly family-owned businesses in the ultra high networth space, typically with investible surplus of over $60 million.

They would have operating companies that could be holding a stake in other businesses or could be interested in buying ancillary businesses. We manage around ₹9,000 crore of assets under advisory and this covers roughly 20 families.

We have two lines of business; one is the family-office business and the other is the corporate advisory business. Corporate advisory is also important because for many clients; liquidity is created because of what happens on the corporate side.

Many of them don’t want to go to investment banks right at the outset as the information is sometimes quite sensitive.

So, we hold discussions with the families in terms of the structuring or the restructuring they want to do and the investment bank comes in at a later stage.

Because once the deal enters the investment bank territory, it is information in public domain. The families we deal with are also in the listed space, so sensitive information needs to be dealt with care.

How are the investments managed? Is it on discretionary or non-discretionary terms?

It is completely non-discretionary. We are registered with SEBI as investment advisors because we believe that this is the only way you can avoid a conflict of interest with the client.

Our business model is predicated on the fee that we receive from the client. That’s the way things are expected to move forward too.

Many regulations that have come out from SEBI recently are aiming to make investors adapt to the fee-based advisory model rather than the commission-based one. They have stated that investment advisors will be a separate category.

Then they introduced the concept of two different NAVs for mutual funds; in the direct one, distributors are not involved. Recently SEBI has asked for disclosures on the commissions that are being paid to distributors.

All this is to move towards greater transparency and the advisory model is in tandem with this drive. Ultimately, what it does is to lower the cost of investment for the family; particularly if you are dealing with large corpuses, even 50 basis points can make a large difference to the returns. Ultimately, the distribution cost comes from the returns.

What are the asset classes that you recommend as investments to your clients?

We advise across assets classes that include equity, fixed income, real estate and alternative asset class. We see a growing interest of family offices in the alternative assets space due to the evolving eco-system in the venture capital and private equity side.

Many families are already looking at angel investment, seed investment, and so on, to participate in the start-up ecosystem. Allocation to this asset class has grown from 2-3 per cent to around 15 per cent now.

This is a very long-term and illiquid asset class. I look at family offices as patient capital because unlike a fund that has to exit an investment in five or seven years, family office capital is more long-term oriented, with investment horizon stretching to 15 years or even longer.

Since there is no re-investment risk in this space, family offices are allocating more to start-ups.

They use two routes to invest in this space; one, through fund managers with good track record, or by directly investing in unlisted companies. A group of families could come together to invest in these companies or it could be a single family making the investment.

So, do you help them with valuing an unlisted company?

We do. We help them do the due diligence and value the company. That is covered by our corporate advisory team.

Do you advise the families to churn their portfolios often based on your perception regarding the prospects of various asset classes?

The family office segment generally follows a ‘buy and hold’ strategy. They do not move their portfolios around much. They review their asset allocation strategy once a year, typically in April, taking the macro economic conditions into consideration. This is typically not changed unless there is a significant economic event that warrants a change. They are quite disciplined with their investments and the portfolios are tailored keeping in mind exposure risk and concentration risk as well.

What is the view on real estate investments among UHNIs now, given that price appreciation is hard to come by?

We are seeing a little bit of unwinding of real estate positions of many families. They have made big money over a certain period of time. They are not making any fresh investments in real estate. Most new investments are going into equities or five-year debt. My sense is that once there is a real estate regulator in place, money could flow into real estate again.