INVESTING FOR THE ULTRA HIGH NET WORTH INDIVIDUAL’s IN INDIA THE FAMILY FUND

INVESTING FOR THE ULTRA HIGH NET WORTH INDIVIDUAL’s IN INDIA

THE FAMILY FUND

With the number of Ultra High Net worth Individuals (UHNI) increasing at a very fast pace in India and with large number of first generation families having wealth over a Billion dollars, the average age of billionaires in India being in their late thirties and forties, such UHNI investors require specialized structures  in order  to make their investments where in a customizes approach and undivided attention from the fund manager with enormous flexibility to meet the need for every such UHNI/ family. Hence most of the services provided by banks under the private banking domain may not help the UHNI clients to a great extent and they require a more customised and specific approach to manage their wealth and investments.

Wealthy investors have been investing in collective investment schemes like Alternative investment funds (AIF), Mutual funds and other schemes for many years.

Often they are seed investors whose investment provides a fund manager with sufficient mass to launch a fund as there has to be a minimum contribution by the sponsors in case of AIF the minimum contribution by the sponsor needs to be anywhere between 2.5 to 5% with a minimum amount of INR five crores to ten crores respectively depending on the kind of fund launched.

The turmoil in the financial markets in the last few years has presented unprecedented challenges to the collective investment scheme vehicles that have been used and therefore to the wealth investors as equity holders in these schemes.

Investors suffered huge losses valuations were suspended and redemptions were suspended or limited via impositions of gates. Gates being a provision that limits redemption to a certain value or percentage of an investors holding. Most of the investors were not paid in time. UHNI’s realized that their level of wealth or relationship with the fund managers did not itself give them any preferential treatment and they could be paid in priority. UHNI’s were left discussed by the limited amount of information  they received about the investments made and a lot of questions arose on the kind of selection of the companies and instruments were the investments were made. In spite of the being a large part of the investment fund they had limited influence over the service providers. There by setting up their own family fund.

Hence there has been an increased interest amount UHNI to look at a collective investment scheme or setup that focuses on their interest and where the fund manager gives preferential treatment and customized investment solutions keeping in mind the requirement of the specific UHNI.

Hence it is advisable for UHNI to setup their own investment vehicles some of the important reasons why UHNI should setup their own investment vehicles are as follows:

·      Insolation from other investors :

 With the insolation from other investors the setup can be structured exactly how they wish in a much customised format keeping the requirement of that specific family in place in terms of business obligations, family cash flow requirements and expenditures. This would help the UNHNI choose the investment manager , decide the fees depending on the quantum of amount investment and time period for which the amount is given, sectorial preference or any resections required by the client can be clearly specified. Furthermore as far as the outside world is concerned, while the clients affairs are ring fended in a separate fund/vehicle, the clients as investors have the flexibility in decision making on the investment front as well.

·      Confidentially :

The fund would make the investment not the UHNI who is the client as the investment can be made from a holding company which could be in a jurisdiction suitable to the client depending on a number of factors. The use of a separate legal entity to invest may provide additional confidentially, reduce liability and if the fund is regulated it can add a level of sophistication that may speed up the underlying investment process by virtue of a streamlined due diligence

·      Pooling of family wealth :

Pooling of assets / pooling of wealth can result in economies of scale in terms of investment due diligence and operations as the same amount of talent can take care of a number of UHNI’s at a very small incremental cost and all aspects like tax planning and payments, legal advice in terms of structuring and litigation if any all such services when pooled gives that additional purchasing power there by availing such services from industry experts at a much better price point there by resulting in an overall lower investment cost there by resulting in better return on capital employed. Investors can also be given exposure to a diversified portfolio without having to replicate each separate investment themselves. If the fund has ten investments then an investment in the fund gives indirect exposure to the performance of the ten investments.

Investments are bought and sold via a single entity rather than each family member separately. By using a family fund vehicle, a particular member of the   family can be given the responsibility of managing the assets of the other family members. This can be objective particular with families that have adopted one of the forms of Sharia law (where the eldest son is to manage the family assets of his mother and siblings) but can also be used when family members wish to entrust another family member with the assets.

This is works very well in the Indian conditions where in a family is made up of large number of people and each one of them require these services separately as they have their own wealth and requirements which is separate from the combined family wealth. 

·      Distance family members from the assets :

A patriarch or matriarch can enable family members to benefit from economic success of the family but be isolated from the underlying assets. The family members own an interest in the fund not the particular asset. The underlying asset will be freed from the issue that can affect individual family members such as death, divorce and incapacity. If a family trust is used the family members will benefit as beneficiaries of the trust and not as investors in a family fund vehicle. In additional some investors can participate in the fund without having any managerial responsibilities, such as by use of non-voting shares or limited partnership interests. Family members should be given a certain responsibility for the part of family’s wealth so that they feel enfranchised and take responsibility for their own actions. It is also recognized that certain assets are difficult to pool, such as particular works of art, antiques, vintage care etc... With ties to certain family members and properties used by some but not all the family members.

·      Flexibility :

The operations of a fund can be simple or complex as per the requirements of the specific UHNI family. But it is extremely important to have proper documentation Many patriarchs and matriarchs believe that all the family members get along and want what they want which is seldom the case and it is important to have a plan in place should anything happen to the head of the family there arises a lot of issues and complications and is often seen as a major trigger point where in the whole family equilibrium is disturbed and may result in a legal litigation.

When the family fund is put in place at a bare minimum the fund should consider the following:

1.    How will new investors be admitted, if at all? Frequently, investors will want to invest in specie by contributing already held assets. Considerations should be given to transfers by existing investors in whole or part. Regulatory considerations would be necessary if, for example, there is any form of offer or solicitation to invest.

2.    How will the investors be able to exit?

Redemption by the investors, repurchase by the fund and transfers to third parties will need to be considered. Typically these funds are a very private affair but it is essential there are ways to return value to an investor. For example the family members may have creditors (including a divorcing spouse) who need to be paid or the family members or different braches of the family that want to be separated. What begins as co-investment by two siblings initially may result in multiple co-investments by cousins in a generation or so with very different family dynamics. However an exit does not have to result in the sale of the underlying asset, if for example one family member can purchase the interest of another. The most common mechanism to deal with these issues is a combinations of transfer restrictions, pre- emption rights, put options, call options, and drag and tag provisions.

3.    Valuation :

This is essential in respect to the two points above but also in respect of any fees being paid to the fund manager or other service provider. Certain assets are pretty hard to value mainly alternate assets like art, wine and collectables.

4.    Decision making :

Determining which family member will be given which role and whether any external decision makers will be engaged is a key part of the structuring process.

Owing to the growth of the financial markets and complexity of these markets it is extremely important for UHNI families to grow or even conserve capital depending on the time of the economy, there by the need for heights quality of professional advice is extremely important. With the evaluation of culture and values in India most families are together yet separate in many terms as far as business and wealth is concerned hence a family fund approach would be one of the best possible options keeping in mind their unique requirements, flexibility and economies of scale for employment of the right kind of talent.

_Farzan Ghadially