India’s Family Offices Embrace Alternative Investment Funds: A New Wave!

The family office landscape in India is undergoing a seismic shift, with an increasing number of these financial powerhouses turning their gaze toward alternative investment funds (AIFs). This trend is not just gaining traction; it’s poised to skyrocket in the coming years, as savvy investors recognize the potential buried within these dynamic investment vehicles.

“AIFs in India have experienced remarkable growth lately,” notes a key industry insider. “In fact, overall commitments to AIFs have surged at a staggering compounded annual growth rate of over 32% from June 2019 to June 2024.”

Until recently, the majority of AIF investments flowed in from foreign investors. However, a captivating transformation is underway as domestic players, particularly family offices, are stepping up to the plate.

“India boasts the third-largest start-up ecosystem globally. AIFs, being pooled investments, allow for simultaneous exposure to a diverse range of start-ups, effectively spreading out risk,” the expert explains.

As of June, AIFs amassed commitments totaling a jaw-dropping ₹11.78 trillion (approximately $140 billion), as reported by the Securities and Exchange Board of India.

FAMILY INTEREST

AIFs in India are not just a monolithic entity; they encompass a fascinating array of categories, including private debt, private equity, hedge funds, social impact investments, real estate, and venture capital.

Family offices are relatively new players in this arena, emerging as a significant force in the investment landscape. According to fresh insights, these family-centric investment vehicles are expected to experience a remarkable 14% CAGR in assets over the next three years, as they transition from a focus on wealth preservation to one of aggressive growth.

The surge in family offices is also reshaping investment attitudes. Reports indicate that Indian family offices are increasingly keen on alternative investments, with allocations expected to rise by five percentage points to 18% within the next three years.

This trend aligns with global practices, where family offices allocate more than half of their assets to alternative investments. “Traditionally, families managed their wealth with the aid of a handful of advisors,” explains a leading wealth manager. “Now, there’s a growing recognition for having dedicated in-house experts to oversee these investments and a palpable shift towards alternative strategies.”

“While the allocations may still be lower than traditional portfolios, they are on an upward trajectory,” he adds.

SUPPLY AND DEMAND

The rising interest is fueled by an expanding array of appealing investment offerings tailored for family offices. “In the past, allocations to alternatives were minimal due to a lack of high-quality options,” a leading asset manager states. “Now, larger family offices have the capacity to conduct due diligence and access direct deals, while the next tier of family offices is entering the fray through funds.”

Venture capital remains a hot favorite among family offices, but the appetite for other alternative assets is surging. In fact, assets in India-focused private debt have skyrocketed from around $14 billion at the end of 2022 to nearly $18 billion by the close of 2023—a staggering 29% increase. Data points to India emerging as a regional powerhouse in private debt, surpassing other markets across the Asia-Pacific.

Sophisticated investors are particularly drawn to high-yield debt and structured credit, often yielding mid-teen returns with regular distributions. “Investments in commercial and residential real estate, private real estate investment trusts (REITs), and infrastructure AIFs are becoming increasingly popular due to their high potential returns and ease of diversification compared to single-asset ownership,” shares another industry leader.

There’s also a burgeoning interest in secondaries, particularly now that private equity is facing fundraising challenges, creating opportunities for late-stage growth investments at enticing valuations. “Recently, we launched a $500 million secondary fund, predominantly backed by local family offices and high-net-worth individuals,” the wealth expert revealed.

Emerging asset classes such as roads, warehousing, and data centers are also capturing attention. “Previously, family offices and HNWIs approached these sectors on a deal-by-deal basis through an unstructured market; now, they are seeking to invest through more organized fund structures,” he adds.

RISING RETURNS

The prospect of returns from these investments is undeniably attractive, often falling in the high teens and beyond. For instance, private equity could yield an internal rate of return of 18%-22%, while venture capital investments may generate even higher returns. Infrastructure projects can also provide returns around 15%.

Co-investment opportunities are gaining traction as well. “Family offices and HNWIs enjoy being part of exclusive deals. They prefer to seek investments in tandem with the funds, a trend we are seeing across global markets,” the expert notes.

While private equity and venture capital have captured substantial investment commitments, other asset classes are set to flourish rapidly as well. “We anticipate significant growth for high-yield debt, infrastructure funds, and hedge funds over the next five years,” the investment specialist concludes.