Before delving into the rationale for running an Investment office as a business, it’s essential to consider the depth of my experience with some of India’s large business families. My experience has been predominantly with North Indian families, but I believe that the principles and philosophies governing family offices are universally applicable across different regions of India or may be globally as well.
Over the course of 36 years, I’ve had the opportunity to work closely with family-managed businesses, 28 of those years in senior management roles. The most significant part of this journey was my 24-year tenure with the Hero family, followed by 4 years with Ranbaxy. This extensive exposure has allowed me to understand the complexities and nuances of working with large families, spanning across three generations. During this period, I also had the privilege of overseeing key functions such as family office management, treasury, corporate finance, M&A, long-term strategy, project execution frameworks, and wealth management.
At Hero, my primary responsibility was to work with family members, although I also had the opportunity to work in a business/ Profit center with P&L responsibilities. My time at Ranbaxy, on the other hand, was more focused on managing the company’s treasury function and advising the promoters on their private investments. These roles allowed me to build a strong network with ecosystem partners and develop a deeper understanding of how large families operate, align their interests, and navigate business transitions.
The success I achieved while working with these families was largely due to my deep involvement in the decision-making process, often functioning as an extension of the family rather than a peripheral advisor. This approach enabled me to help families achieve remarkable outcomes, which forms the foundation for the rationale of treating a family office as a business.
Key Learnings and Rationale:
- Family Engagement and Accountability:
Family members must be actively engaged in leading their family offices and
take full ownership of their decisions. Just as promoters are fully involved in
their operating businesses, the same level of commitment is needed in the
family office. I’ve observed that when family members disengage from their
family office responsibilities, there can be unforeseen negative consequences.
While it’s true that the identity of many family members is closely tied to
their businesses, focusing solely on the business while neglecting the family
or investment office can lead to missed opportunities and risks.
Initially, the family office requires a higher level of engagement to set objectives, values, and policies, but as these foundations are established, the family’s involvement tends to significantly reduce over time. In an ideal setup, family members should adopt the role of Executive Chairman, while professional managers could act as the CEO of the family office, much like in an operating business. - Informed Decision-Making with Conviction: In my view, when family members are as deeply involved in the family office as they are in their businesses, they are more likely to make informed decisions with a high degree of conviction. Decisions based on well-defined goals, objectives, and investment policies allow families to maintain confidence even in challenging times, such as market downturns. If the fundamentals of the business remain strong, a family might choose to increase its investment during a market dip, rather than retreating, as the price drop may be temporary or sentiment driven. This confidence comes from deep engagement and understanding, much like in their core businesses.
- Absorbing Shocks Like an Operating
Business: Just as businesses experience ups and downs, the investment
journey of a family office will also have its fluctuations. Families are
accustomed to weathering the downturns in their businesses because of their
active involvement and understanding of market trends. If the family office is
run with a similar mindset, it becomes easier to absorb financial shocks and
make decisions based on long-term strategies rather than short-term market
sentiment. A family office allows for more nimble decision-making processes,
with fewer bureaucratic layers and more flexibility compared to institutional
investors.
Example 1: A family may have shown interest in acquiring a company but deferred the decision due to valuation concerns. However, if external factors (e.g., over-leveraging by the promoter) result in a significant price drop, the family can quickly move to buy the business. This agility is a key advantage of running the family office as a business, driven by deeper family involvement.
Example 2: During a review of direct investments, the family office may spend significantly less time compared to mutual fund investments yet feel a higher level of conviction in their direct investments. This is because families often have an “unfair advantage” through their network, allowing them to understand the DNA of other promoters and take entrepreneurial decisions with greater confidence. This information is not insider knowledge but stems from understanding the belief systems and decision-making styles of the promoters involved. - Balancing Operating Business and Family Wealth: Business owners and professionals tend to be more passionate about their operating engagements, often at the expense of their personal wealth management. This misalignment of time and focus can result in negative consequences for personal wealth. My own career offers a case in point: while I generated substantial returns for the promoters and the company, I neglected my personal balance sheet, which resulted in lost wealth. Running the family office as a business ensures that adequate time and resources are allocated to preserving and growing personal wealth, alongside the operating business.
- Recruiting the Right CEO/Advisor for the
Family Office: The success of a family office also heavily depends on the
CEO or advisor appointed to run it. Hiring someone simply because they’ve been
with the family for a long time may not always lead to the best outcomes.
Instead, families should adopt the same rigorous hiring process as they would
for their operating businesses—bringing in professionals with the right
investment experience and soft skills. The trust and respect between the family
and the CEO are critical, as the professional needs to become an extension of
the family, or a dost (friend),
providing candid advice while being independent enough to speak their mind.
The advisor must act as a “go-to” person for the family, someone who can help them evaluate trade-offs and navigate family and business situations alike. They must have the ability to engage with family members on a personal level, ensuring that there’s no communication filter and that all relevant information is shared transparently. - Family Office as More Than an Investment Office: Many families today still view the family office primarily as an investment office, but its role should be much more expansive. A comprehensive family office framework encompasses succession planning, family governance, wealth management, and conflict resolution. In recent years, wealth creation, changing family dynamics, and realignments among family members have driven the creation of family offices. While some of these transitions have been acrimonious, resulting in significant losses of wealth and reputation, large, evolved families have successfully implemented family office frameworks that address these issues and ensure long-term sustainability.
Conclusion:
There are inherent advantages to running a family office as a business. This approach allows families to make better, more informed decisions with conviction, while ensuring that they remain true to their values and consider the softer aspects of family dynamics. A business-like approach to family office management enables families to act nimbly, capitalize on opportunities, and weather market fluctuations with confidence. By staying actively engaged in the family office, members can preserve their wealth, protect their legacy, and ensure the seamless transfer of assets to future generations.
Amended, October 2024