Family Office

When a family becomes rich enough, managing the money turns into a full-time job. So the family sets up an office to do it. That office is a family office.

It is a private set-up, not a product sold to the public. It answers to the family and to nobody else.

In the workbook's classification a family office is a non-institutional investor. It is not retail, because the sums are large. It is not institutional either, because it is not a mutual fund, a pension fund, an insurer or a foreign portfolio investor. It sits in the middle group.

For an AIF manager, family offices matter for one reason: this is where a lot of the domestic money comes from. After 2012 the Indian AIF industry was led by high net worth accounts, private banking managers, investment advisers and family offices.

And they behave differently from an institution. A family office asks a simple question about every deal. Where else could we get this return for this risk? That is opportunity cost, and it is a harder test than a pension fund applies.

The workbook never gives a one-line definition of a family office. It tells you three things instead: where a family office sits in the investor taxonomy, what it supplies to the AIF market, and how it behaves.

1. Its class. Chapter 1 puts it in the residual class: a non-institutional investor means any investor other than a retail investor, and includes family offices, high networth individuals and ultra-high networth individuals. Since a retail individual investor under the ICDR Regulations, 2018 is one bidding not more than Rs 2 lakh, a family office is never retail.

2. What it supplies. Section 7.1.1.1 lists it among the key investors in the AIF industry. In the years following 2012 the Indian AIF industry was led by HNI accounts under private banking managers and investment advisers, family offices, corporate investors, domestic bank promoted AIF funds and offshore investors. Family office consultants played a vital role in deploying funds to the AIF industry, as a diversification tool. Chapter 11 adds that family offices, along with structured credit NBFCs, add to the supply of private credit, and that institutional investors and family offices have become the primary source of private capital.

3. How it behaves. Section 11.7.7 draws the contrast that gets examined. A family office looks at an investment through the lens of opportunity cost, and checks where else it could get similar or better returns for similar risk. An institutional investor such as a pension fund is more inclined toward strategic and long-term investments, and less inclined towards predictable, short-term deployment of capital. Section 11.3.1 makes the same point about initial screening: sovereign wealth funds and family offices have a different risk-return objective from high net worth individuals.

Where family offices show up in the rules. They meet the same conditions as any other AIF investor — a minimum investment of Rs 1 crore, in a scheme with a minimum corpus of Rs 20 crore and no more than 1,000 investors, raised only by private placement. The workbook names them, along with institutional investors, non-resident investors and ultra-high and high net worth individuals, as the investors for whom Category III AIFs are suited. And in angel investing, angel investors are HNIs who invest in their individual capacity or through their family offices with own funds.

The Deshpande Family Office manages Rs 1,800 crore for three generations of a promoter family. It is evaluating a Rs 60 crore commitment to a Category II private credit AIF offering a target net return of 14%.

The pension fund sitting next to it in the same fund-raise asks: does this fit our long-term liability profile? The family office asks a different question — the opportunity cost question.

On that comparison the AIF wins, and the office commits Rs 60 crore — which clears the Rs 1 crore minimum investment sixty times over.

Now the classification test. The office is a non-institutional investor. Its Rs 60 crore cheque does not make it institutional; the class follows what kind of entity it is, not how much it puts in. Had the same family put Rs 1.8 lakh into an IPO in an individual member's name, that application would have been a retail individual investor bid, because it is under Rs 2 lakh.

And the same money can wear two hats. One member of the family is an accredited investor who also backs start-ups directly. When he writes a Rs 50 lakh angel cheque through the family office, the workbook describes him exactly: an angel investor putting in own funds, in individual capacity or through their family office.

Chapter 7 (Alternative Investment Funds Ecosystem), section 7.1.1.1, lists family offices among the investors and contributors to an AIF. Chapter 1 supplies the classification, Chapter 6 the suitability judgement, Chapter 11 the behaviour, and Chapter 17 the angel-investing role.

Expect a classification question first: a family office is a non-institutional investor. Then expect the suitability question — which investors are Category III AIFs meant for — where family offices are on the list alongside institutional investors, non-residents and UHNIs. The sharpest question is the stakeholder one from section 11.7.7, which asks how a family office evaluates an investment differently from a pension fund. The answer is opportunity cost against strategic, long-term intent.

• A family office is non-institutional, not institutional. The institutional list is closed: mutual funds, pension funds, insurance companies, hedge funds, AIFs and foreign portfolio investors.
• Size does not promote it. A family office running thousands of crore is still non-institutional.
• Family office and HNI are named together but are not the same thing. An HNI is a person; a family office is the vehicle a family invests through.
• The opportunity-cost lens belongs to the family office; the strategic long-term lens belongs to the pension fund. Section 11.7.7 states both, and the pair is examinable.
• The minimum investment is still Rs 1 crore. Being a family office is not a concession; only accredited investor status relaxes the minimum.
• An angel investor investing through a family office is still using own funds. The workbook says so expressly, so it does not turn the angel cheque into a pooled fund.