As recently as a decade ago, it was common to find ultra high net-worth individuals (UHNIs) and well-known business families without a comprehensive plan for their personal wealth, often with unfortunate consequences. Thankfully, the tide is shifting, says Zia J. Mody, co-founder and managing partner, AZB & Partners. Not a day too soon. India is, after all, home to 13,637 UHNIs. In 2021, the number grew 11% year-on-year, the highest growth in Asia Pacific region, shows Knight Frank data. The number of UHNIs — individuals with net assets of $30 million or more — in India grew a whopping 84% between 2016 and 2021. The big question is, where do these uber-rich invest? What are their investment objectives? Which are the new assets they are dabbling in? Here's a glimpse.
UHNIs, who used to rely on a mix of equity, fixed-income instruments and gold, have shifted towards alternative asset classes, with preference for later-stage private equity (PE) to avoid start-up risks. Over 40% family offices have doubled their allocation to private markets in past five years, says a report by Trica, a private market platform. With total commitments of ₹6.4 lakh crore, assets under alternative investment funds (AIFs) are expected to cross ₹50 lakh crore by 2031, as per a PMS Bazaar Report. AIFs are privately pooled investment vehicles that raise funds to invest in unconventional categories such as venture capital, real estate and SME funds. The age-old passion, luxury real estate, has also gained traction as economies open up after the pandemic. E-commerce boom, express delivery and 'same-day return' policies have attracted UHNIs towards warehousing as well.
No long-term portfolio can be complete without equities. But here, too, the rich are switching to passive funds as returns are not very different from what active funds are delivering. However, their debt or fixed-income allocation looks completely different from that of a typical retail investor. Apart from liquid and credit risk funds, they are also investing in debt deals in real estate and market-linked debentures, considered comparatively conservative investment avenues. Structured debt deals form 40-50% of their debt portfolio, says Prashant Joshi, co-founder and partner, Fintrust Advisors, a multi-client family office managing ₹6,500 crore assets. While growing wealth is any investor's ultimate goal, the ultra rich prefer wealth preservation over growth.
AIF Tops Charts
Private market is an alternative investment of choice for the rich with allocations to start-ups and VC funds comprising 18% of the pie, shows Trica's report. This is aggressive compared to 15% allocation to other alternatives (real estate, infrastructure, art, etc.), 20% to fixed income and 36% to listed equities. It is interesting to note that over 83% family offices have a significant 10%-plus allocation to private markets. And this number has been increasing steadily. Direct start-up investments/Indian equities, venture capital, commercial real estate and warehousing are top conviction opportunities for next three to five years, says Prashant Joshi. Some family offices are also examining debt investments, especially in issuers with a good track record.
Commitments in AIFs rose 42% in FY22, says CRISIL. Late-stage AIFs are bagging the lion's share. The proportion of uber-rich and family offices allocating more than 5% of their funds to AIFs has risen from 9% to 45% in last five years. In next five years, 60% investors are expected to increase AIF allocation from 5% to 10% and 30% from 10% to 15%, says Anand Rathi's Alternative Investment Funds report.
CRISIL says the growth has been led by Category-II, which accounted for 81% commitments worth ₹5 lakh crore in FY22. While Category-I includes venture capital funds, Category-II covers equity funds (listed and unlisted), real estate funds and debt funds. Category-III includes long-only equity funds and long-short equity funds. Private equity, hedge funds and private debt lead the AIF space. About 29% AIF allocation goes to private equity and hedge funds each, followed by 21% to private debt, says a report by Anand Rathi.
In private equity, UHNIs and family offices do not take the lead but follow. Prashant Joshi says mature private equity families prefer late-stage investing. "Companies which have moved past the start-up stage and are rapidly gaining sales are preferred as these are comparatively less risky than start-ups," he says. As these are established companies, the investment can be redeemed easily, says Joshi.
An even better option is participation in private equity via basket or blanket approach. "Investing in a portfolio of 40-50 companies will offer the benefit of diversification," says Joshi.
Exotic Debt Portfolio
The ultra-rich are going beyond bank-fixed deposits and government schemes for their debt portfolio. In private debt space, the biggest allocation is to debt deals in real estate at the construction stage. This comprises 40-50% of their debt portfolio, says Joshi. The deals are done directly with dealers and builders. In order to avoid approval and sales risks, the rich invest at the mid, that is, construction stage. Such deals deliver yields of 12-18%. The remaining debt allocation goes to liquid funds, credit risk funds and other debt funds. The wealthy are also getting attracted to venture debt funds. But allocation is still limited due to long duration of four-five years. Venture debt funds are targeting yields of 7-8%.
Another widely appreciated investment in view of rising interest rates is market-linked debentures (MLDs), says Vineet Bagri, managing partner, TrustPlutus Wealth. An MLD is linked to an underlying index or security such as Nifty or Sensex or 10-year G-Sec. MLD does not offer regular income during its tenure but pays a pre-defined return at the end of the tenure based on how the underlying index/security has performed. MLDs protect the downside. "As debt mutual funds do not perform well in rising interest rates, MLDs have gained popularity among rich investors," says Bagri. We may call these as debt-plus products as they do not guarantee returns, he says. However, you may expect yields of between 7.5% and 9%.
Luxury Real Estate — in Demand
With economy gradually opening up, the ultra-rich have become bullish on luxury properties. One reason is low returns from traditional investments such as gold, fixed deposits and equities, says Suren Goel, partner, RPS Group. Delhi and Mumbai have seen multiple property deals of over ₹100 crore, says Goel. Experts say high-value investors go for established developers with proven track record.
One key trend in luxury property market is investors' preference for the commercial segment, says Goyal. Metro cities are full of commercial showrooms and office spaces in upmarket locations. Investors bought a lot of such properties during the Covid-19 slowdown when prices were depressed.
UHNIs are also showing interest in warehousing projects. Reasons include the huge land play involved and rental yield of 9-12%, says Joshi. Annual transactions will grow at a CAGR of 19% to 7.08 mn. sq. mts. in FY26, from 2.95 mn. sq. mts. at present, says Knight Frank's 'India Warehousing Market Report 2021'. "The warehousing & logistics sector has been one of the primary beneficiaries of post-pandemic market realities," says Shobhit Agarwal, MD & CEO, ANAROCK Capital. "With rise in manufacturing across the country, demand for warehousing and logistics assets has risen remarkably. Expanding economy and changing business models have also been instrumental in the sector's growth." As per ANAROCK Research, pan-India Grade A warehousing stock grew at 16% CAGR between 2018 and 2021 and stood at 140 mn. sq. ft. at 2021-end. The pandemic, by pushing e-commerce, has been a big demand booster. Most consumers forced to shop online due to lockdowns will continue to do so, says the Knight Frank report. Brick-and-mortar stores will also leverage online channels to push sales, it adds. The 3PL (third-party logistics) sector will sustain market share as e-commerce and other sectors increasingly outsource warehousing requirements to specialists.
Top eight cities have over 70% modern warehousing capacity. But e-commerce companies are also betting on growth in Tier-II and Tier-III locations. "Due to greater internet penetration, these locations are becoming preferred warehousing hubs and investment destinations. Demand for Grade A, multi-storey warehouses will spike in these markets," says Rajesh Jaggi, vice chairman, real estate, Everstone Group. Same-day delivery guarantee by e-commerce companies, easy return policies, shorter supply chains and rising popularity of daily online orders are contributing to the trend.
The Equity Story
Most HNIs want to diversify assets geographically to invest in themes such as blockchain, electric vehicles, robotics, artificial intelligence, cloud computing and semiconductors that are not available in India. Earlier, geographical diversification was possible through the LRS (Limited Remittance Scheme) route, but over last few years, people have started opting for Indian funds which invest a part of their money in foreign companies, says Vineet Bagri, managing partner, TrustPlutus Wealth. The preference in traditional equities has also changed.
UHNIs have of late shown great interest in passively-managed funds. Active large-cap funds have not been able to outperform benchmarks, says Joshi of Fintrust Advisors, so investors have switched to funds that track indices like Nifty 50 or BSE Sensex. Close to 52% passively-managed large-cap funds outperformed actively-managed ones in five-year period ended September 2021 when returns were rolled on a daily basis, as per a 2021 study by Union Mutual Fund. Another reason is interest in new themes like Shariah through Nifty 50 Shariah index. Shariah Index includes companies compliant with the Islamic canonical law or Shariah.
Numbers back these claims. Asset base of exchange-traded funds (ETFs) surged from ₹52,368 crore as on March 2017 to ₹4.99 lakh crore as on March 2022, growing at an annualised rate of 57%. Number of ETFs rose from 84 to 228 during the period.
On the equity side, there is a growing sensitivity towards ESG (environ- mental, social and governance) norms. In India, ESG investing is at a nascent stage, though, as it's difficult to pick companies based on ESG compliance.
The rich are also discussing the newest asset, cryptocurrency, but any asset class which can move 30 to 40% up or down in a month is too volatile for a family office, says Joshi of Fintrust Advisors. They invest in asset classes which are established.