Why rich families are turning to pooled investment vehicles amid pandemic

Rich families might be increasingly looking at making investments through a single entity that manages all their money, rather than a maze of different ones.

Alternative investment funds (AIFs) and limited liability partnerships (LLPs) are amo­ng the vehicles of choice, according to experts, as they look to simplify processes and ease documentation amid the Covid-19 pandemic.

“...in the pandemic, families have struggled with evaluation and execution of transactions, because of complex and elaborate paperwork across a large (number) of entities they have had to operate,” said Nitin Jain, managing director and chief executive officer, Edelweiss Wealth Management.

He said Edelweiss has advised clients to use custody services to consolidate and manage functions. It has also suggested the use of the AIFs, which would allow multiple entities to pool money and invest as a single unit. “This also gives...QIB (qualified institutional buyer) status and provides privacy to the family name for strategic transactions,” he added.

A QIB can participate in certain offers of shares that are not open to regular investors. This is because they are seen to be especially competent and able to evaluate such offers.

Some are also exploring the LLP route, said Nipun Mehta, founder and chief executive officer of multifamily office BlueOcean Capital Advisors. A family office manages the wealth and investments of a single rich family. A multifamily office provides the same service to a select number of such families.

The use of pooled vehicles is part of a natural evolution as people streamline operations and become more aware of existing structures and their use, Mehta said. “That’s becoming quite active, I would think a lot of people are doing it now,” he said.

An LLP structure combines the flexibility of a partnership with the limited liability of a company structure.

Wealthy Indian families have around $645 million (Rs 4,700 crore) in assets, according to the Family Wealth Report 2018, brought out by Campden Wealth and Edelweiss Private Wealth Management. Data shows that less than a quarter is held in the form of financial instruments. Most of the wealth remains concentrated in the operational business. Real estate has the second-biggest share at 31 per cent (see chart).

Legislation has evolved over time to cover such investment vehicles.

The European Union’s Alternative Investment Fund Managers Directive held a specific exemption for such vehicles from norms that would cover other AIFs. The directive covered factors such as remuneration structures, minimum capital requirements, and conflicts of interest.

“Investment undertakings, such as family office vehicles which invest the private wealth of investors without raising external capital, should not be considered to be AIFs in accordance with this Directive,” it said.

The Securities and Exchange Board of India’s Alternative Investment Funds Regulations covers issues like the use of leverage, minimum value of investments, and qualifications of employees. It also mentions an exemption for certain entities run for the benefit of a family.

“Provided that the following shall not be considered as Alternative Investment Fund for the purpose of these regulations...family trusts set up for the benefit of ‘relatives’...,” Sebi said.

The United Kingdom’s Financial Conduct Authority handbook on the Scope of the Alternative Investment Fund Managers Regime based on the EU’s directive as it applied to the UK also spoke of the coverage of such entities.

“Family investment vehicles can be used by large extended families spanning a number of generations and those born, or joining the family, before and after investment arrangements are made. Civil partnership and marriage may be included. A family can include step and cohabitation relationships, as well as blood and other immediate family relationships, such as adoption,” it said.