Thoughts on Family Office Construct – Living Document

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The Objectives of the Family may need to evolve around the following:

  • Ensure family harmony, love and affection even if businesses realigned
  • Protect and enhance the family brand and reputation
  • Protect and grow family wealth and seamless transfer of wealth

The family should take complete ownership of their decisions even while they engage Advisors and think of family office as a business.

The construct can be formal or informal or somewhere in between depending on the complexity of interactions, size of the family, needs and decision-making process.

The objectives can be amended based on each family’s goals and objectives.

Broadly the construct can be divided into four buckets:

  • Bucket 1- Alignment among family members on various important and strategic issues 
  • Bucket 2 – Risk and financial planning
  • Bucket 3- Governance
  • Bucket 4 – MIS, accounting and compliances

Bucket 1- Alignment on various Important issues including Code of Conduct

  • Aspiration and values
  • Long term goals
  • Legacy and perpetuity of institution vs monetization
  • Roles and responsibilities of family members
    • Gainful engagement and social status
    • Conflict resolution
    • Exit mechanism
    • Entry and exit from businesses
  • Family members engagement in business
    • Role
    • Succession planning
  • Mentoring family members for seamless transition
  • Wealth preservation
    • Investment philosophy
    • Risk appetite
    • Safety, liquidity, returns in this order
  • Transfer of wealth
  • Brand management and reputation
  • Responsible citizen
  • Smell test and spirit of law

Bucket 2 -Risk and Financial Planning

  • Risk appetite
  • Risk mitigation options
    • Optimize through deeper understanding
    • Diversification
    • Asset Allocation
    • Overseas Investments
    • Active management of foreign exchange exposure
    • Insurance – Assets, Personal
    • Ring fence assets through corporate structure (one layer removed from promoter through trust, LLP, Co etc)
    • Leverage at promoter or Hold Co level
      • Minimize leverage
      • Without recourse borrowing by operating businesses
      • No personal guarantee
      • No PDC at personal level
      • Define rules to give guarantee on behalf of the family or business, as far as possible avoid
  • Cash flows
    • Family Needs
      • Lifestyle
      • Safety Pot
      • Philanthropy/CSR and social impact
      • Existing business needs
      • Strategic and long-term business investment
        • JV: Minority/Majority
        • M&A: Acquisition/ Merger/ De-merger/ Slump Sale
    • Investment objectives including duration and asset allocation based on cash flows needs
      • Safety
      • Liquidity
      • Returns
    • Financial Investment
      • Equity direct and third party: Listed/ Unlisted
      • Debt direct and third party: Credit risk/ Duration/Arbitrage
      • Commercial Property
      • Gold, Precious Stones (Jewellery)
      • Art
    • Process of Investment Management
      • Investment process to include softer aspects during due diligence
      • Monitoring performance of the portfolio
      • Increasing exposure, maintain, exit
  • Hold Co Structure
    • Tax optimization with respect to the following:
      • Income (MAT), separate entities based on class of assets
      • Income and assets distribution
      • GAAR
      • Ease of exit
      • Jurisdiction for overseas investment (avoid tax havens)
    • Compliances
      • RBI
      • SEBI
      • Companies Act

Bucket 3 – Governance

  • Family member to be chairman
  • Role and composition of the Board
  • Role and composition of Investment committee
  • Decision makers
  • Decision process
  • Information sharing
    • What
    • When
    • Whom
  • Brand and IP ownership including monitoring mechanism
  • Agenda and frequency of family meetings
  • Process of engaging with advisors and evaluation of the value-add management

Bucket 4 – MIS, Accounting and Compliance

  • Accounting (including asset records)
  • Audit by third party
  • MIS
    • Framework linked to complying with the following:
      • Code of Conduct and Governance
      • Investment Policy Statement including Asset allocation
      • Brand
      • Performance Investments
      • Cash Flows
      • Taxation (Direct and Indirect)
      • Legal compliances
      • Dos and Dont’s
    • Frequency of sharing different reports
    • Access for different levels
    • Inventory of all tangible (including art) and intangible assets
      • Corporate Structure
      • Location
  • Record of meetings
  • Safe keeping of documents

June 2019