Rationale for running Family Office as a business

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Before I share my thoughts on the rationale for running a family office as a business, it is important to understand my experience and depth of engagement with some of the large business families. While my experience has been limited to North Indian families, but I do believe at a philosophical level there may not be much difference in the construct of the family office even if the families are from different parts of India.

I have had the opportunity to work with family managed businesses for close to 36 years, 28 of which were spent in Senior Management roles, the longest stint of 24 years was with Hero family, and 4 years with Ranbaxy. It has been an amazing journey and I learned a lot about the complexities involved in engaging with large and small families. I worked with family members across three generations. 

The role at Hero was predominantly working with the family members, except for a couple of years during which I led a Business with P&L responsibility, while the role at Ranbaxy was primarily engaged with Treasury function of the company and some time was also spent in offering advice and execution with regards to private investment of promoters.

The experience spanned across realignment amongst families, the realignment with business partners (Japan, Germany, and UK), expansion into new business opportunities including diversification away from automotive and cycle business, managing treasury and investments, fundraise, corporate finance and M&A, long term strategy and executioncreating Frameworks for project executions, leading a businessmanaging wealth and heading family office. During this journey, I built a great Network with Ecosystem partners spanning across different operating roles. 

The reason for achieving great outcomes for the families I worked with is a result of my deep engagement with the promoters in the decision-making process more like an extension of the family and not just engaging at the peripheral level.  

Below are a few key and relevant learnings based on my experience:

  • The family members must be engaged and enjoy the journey in leading the family offices and take responsibility for their decisions, which is what the promoters do when they are engaged in running an operating business. While I do understand that running a business is important for a family member as their identity is because of their business, but not focusing on the family/investment office can have some unknown and negative consequences. 

In any case, there are much lesser moving parts in the family office construct, and it is only in the initial days of setting up, that there is a much higher involvement of the family member/s in order to define the objectivesvaluesgoals, and policies but over time the engagement tends to taper off depending on family members’ other commitments. The role of the family member/s should be that of the Executive Chairman and the Professional Manager could be the CEO of the family office. 

  • It is my personal view, if the family members’ engagement is as deep as in operating business, they will make informed decisions with high conviction. If decision making is based on goals, objectives, investment policy, etc., it is very likely that one may actually choose to increase investment and not reduce exposure, despite a market fall, so long as the fundamentals of business continue to remain strong and the price drop is a result of a change in market sentiment or some external events. 
  • The investment journey, like any operating business, will always have ups and downs. We easily accept the downturns in operating business because of our deeper engagement with the business and business trends. Similarly, if the family office is run like a business it will be easy to absorb such shocks and decisions are taken, not just based on what people think about the investment, but understanding on why the family took the decision and if some factors have changed that require altering the decision. A couple of examples to substantiate this point:

Example 1: Family may have been interested in buying/investing in a company but the valuation may not have been right as a result of which the decision got deferred. However, as a result of certain external factors (which could be because of over-leveraged promoter) the price of the company came down, the family can move fast enough in buying the business. The decision process in a family office can be more nimble and flexible both in terms of process and boundary conditions because of the deeper engagement of the family.

Example 2: While conducting a review of all direct investments made by the family office it took less than an hour to arrive at certain decisions, however for a similar size of investments through mutual funds it took a few days and yet the conviction around direct investments was very high despite spending much lesser time compared to investment in funds. 

Most large Indian families understand the DNA of other promoters through their network and ecosystem, this I would say is an unfair advantage that a family has in their decision-making process vis-à-vis the funds. The information arbitrage has nothing to do with insider trading but just knowing the belief systems of the promoter of the business, whose stock is being bought or debt being provided, helps the family to take an entrepreneurial call with this additional data point. Another advantage that a family enjoys vis-à-vis the funds is that the family is neither under time pressure to invest nor it has peer pressure, unlike a fund that has peer pressure and has no option but to invest the funds received, as they are expected to retain only small cash. While funds have the best research and experience but due to the above factors, it is likely that direct investments may, at certain times, outperform the investment through funds.

In conclusion, deeper engagement leads to better decision making as it is not driven by emotions or unwanted advice from external advisors but after giving due consideration to both the soft aspects and business logic

  • Most of us whether business owners or professionals are more passionate about our operating engagement (P&L) and tend not to focus on our personal wealth (Balance Sheet) even though the adverse impact on our balance sheet may be relatively large. We tend to spend disproportionate time on the operating role (given that this gives us our identity) even though risk and reward may not warrant this. My personal example, while I made fantastic returns for both promoters and company, but I lost wealth in personal capacity as I did not pay any attention to my balance sheet in large part of my career 
  • The success of family office to some extent is also dependent upon the CEO/advisor of a family office, therefore in order to create success; the family must recruit the CEO not just because he has been with them for long, which is contrary to the accepted norm of hiring the best talent for the role. It is therefore important that family should run a similar process for hiring, as in operating business i.e., hiring the right person who has the requisite soft skills and investment experience. The professional must win the trust and respect of the family members. Family members should as far as possible be able to share information and expectations without using any filters. In fact, the family may need to share much more information than they would be sharing with the professional CEO of the operating business. 

Connect amongst the promoter and advisor/professional needs to be both from the heart and the mind, and this may imply the advisor becomes the extension of a family or Dost (friend). The advisor should not just be independent but also be able to speak his mind and needs to be seen like that. He should be the Go-To Man for family and help them think trade-offs both vis-à-vis the family or business situations. 

  • Family office construct is much more elaborate than currently perceived by most of the families/advisors as a family office and investment office are used interchangeably as the family office construct is a very recent phenomenon. Some of the factors that may lead to the creation of family office where investment will be a subsection are wealth creation/monetization of assets in recent times, changing aspirations of some family members and realignments amongst families in the recent past, some of which have been very acrimonious resulting in huge destruction of wealth and reputation.

There are however some large and evolved families that have been able to adapt and implement a comprehensive family office framework including dealing with the issues of succession, the role of the family in the business, realignment process, etc.  

In conclusion there are inherent advantages of running a family office as a business, this helps in making the right choices and taking right decisions at right time with conviction while staying focused on values and keeping in mind softer aspects of family dynamics.

Further Reading:

Framework for Investment Office (read more)