Family offices love investing in private businesses. But in India, public markets are the way to allocate capital

India is a land of entrepreneurs. India is not a macro story. India is a micro story of dreams, hopes, aspirations, and the ingenuity of individuals and entrepreneurs. These individuals and entrepreneurs thrive and survive despite the government and bureaucracy. 

Gurucharan Das, author and ex-Head of P&G India, famously wrote, ‘India grows in the night, when the (government) bureaucracy sleeps’. Since 1980, when India stopped being antagonistic to the private sector and allowed (some) freedom for firms to make, buy, sell, import, export, what they wished, it unleashed the Indian growth story. The Indian GDP growth has averaged 6.3% p.a. in real terms since 1980, 2x the world GDP growth rate. 

Family-dominated firms have continued to play a big part in this growth story. Christina Wing has a recent piece in Family Capital on how the next generation is redefining the family business in India. She quotes an HSBC report in her article, which states that 79% of India’s GDP comes from family-owned enterprises. 

That number seems relatively high and may be due to Agriculture, which is family-driven, and to India’s relatively low public sector share of GDP. It could also be due to a higher share of the unorganised sector or traditional mom-and-pop enterprises, which are usually family-owned.

As India opened, some large traditional families lacked the technological and managerial competence and faded away. At the same time, we still see many of the old traditional families, re-investing themselves and keeping pace with the changing times and generating and creating enormous value. 

Easier access to higher education and institutional capital has also led to the emergence of professionally run start-ups and organisations, rather than just family-run businesses. 

The competitive intensity in India is severe, and that may be one reason why surveys show that the next generation of family owners is less inclined to carry on their family business.

In earlier times, it would have been easier to compound the businesses and grow at high double digits. However, unless it is niche or high-tech, the return on equity for most private firms would not be very different from that available to established public market companies.

As generational wealth is created, many large family-owned businesses are monetising their stakes and setting up their own family offices.

We at Quantum Advisors India thus recently started our ‘OCIO’ service for Indian families. We find that a large proportion of the investable assets are directed towards public market investments. There is a growing appetite for institutional alternative assets, however, a significant chunk is likely to remain in public markets. 

We recommend the same allocation to all foreign investors. 

In India, public equities should be the major share of any portfolio allocation. 

India public markets have consistently delivered low to mid double-digit returns. As the table details, the threshold for returns from private markets is rather high. 

We remain unsure of how many private investments, deals, funds will be able to generate a return high enough after fees and taxes to justify an allocation over public markets.

I wrote a recent piece titled ‘Foreign Investors are ‘Rolling the Dice” on their India investments’, which shows this graph of allocation in India.

We are seeing an increased appetite from global family offices in investing in India. Given the source of wealth, we do see most of them naturally inclined towards private equity, venture capital, and public markets. 

Family Office UBOs may be better positioned to spot and invest in great private businesses than professional investors. What could be considered is to partner and start a business in India given the dynamism and the opportunity as an extension to the family’s existing business interests. However, it is incredibly complex and the number of partners you can ‘Shake Hands and Get All your Five Fingers back’ can be figuratively counted on your (remaining) fingers!

If you can keep your return expectations sensible and are looking to allocate the investable capital from a portfolio allocation perspective, Indian public equities is the way to go.

Arvind Chari is a Chief Investment Strategist and has been with Quantum Advisors India group since 2004. Arvind has over 20 years of experience in long-term India investing across asset classes. Arvind is a thought leader and guides global investors on their India allocation.

This article is for educational and discussion purposes only and is not intended as an offer or solicitation for the purchase or sale of any investment in any jurisdiction.