HNI Investing: The Secret’s Out!
From distressed assets and venture capital to ESG investing and pre-IPOs, here’s how India’s super-rich are deploying their millions
Few things pique the curiosity of lay investors as the topic of how – and where – ‘uber-wealthy’ ultra-high net worth individuals (HNIs) deploy their treasure chests full of money. From industry titans to scions of businesses, to new-age digital entrepreneurs who are magnetising private growth capital and wealthy professionals who have sculpted cash-rich empires around their core-competencies – the jet-hopping beau monde sure are a diverse lot! And whereas it would be a gross oversimplification to assert that they all invest in the exact same manner, we do find that the majority of them exhibit some commonalities when it comes to their investing modus operandi.
There are tectonic shifts under way in the wealth management industry – not just locally, but globally too. Ultra HNIs are no longer content with a one-dimensional approach to private wealth management. They are looking beyond asset allocation; seeking out advisors who can provide them with tech-enabled, holistic solutions that span an entire gamut of financial services, encompassing wealth preservation, portfolio diversification, estate planning and tax planning, alternative investments and even structured philanthropy! And while wealth management from the perspective of ultra HNIs will probably always remain a “high touch” business; digitally enabled advice is sure to influence ultra HNI wealth management business models in the times to come.
Where’s It Coming From?
Fat corporate salaries notwithstanding, most ultra HNIs in India do tend to be business owners. With the investment climate and liquidity improving, a number of them are receiving impressive valuations for their respective businesses; and this is resulting in an unprecedented capital influx into wealth management outfits that specialise in serving this segment.
“We are seeing a trend where, once new-age entrepreneurs exit their start-ups, part of their money is largely used for incubating new business in the related areas. Our job is to help them deal with this transition, and to add value to this whole process by aligning their investment strategies with their cash flow requirements,” says Iñigo Mendoza, Head of Wealth Management, India, Credit Suisse.
Sources of wealth in the ultra HNI space constitute a mix of both generational wealth within business families, and new wealth with entrepreneurs and professionals, says Rohit Sarin, founder director, Client Associates. “Younger first generation UHNIs are more comfortable with risk and are inclined to grow their wealth without losing it. Since they have earned their wealth through risk taking in their entrepreneurial journeys, they are open to look at new emerging ideas in the investing space.”
Winds Of Change
Over the last decade, wealth management experts have observed discernible shifts in the way that Ultra HNIs invest their fortunes. “Ultra HNIs are looking to participate in segments such as distressed assets, infrastructure and structured credit,” says Anshu Kapoor, Head, Edelweiss Private Wealth Management. “Another trend that is emerging is the acceptance of leverage in portfolios. ultra HNI investors are seeking to educate themselves more deeply on the decision-making process, as well as the evaluation metrics involved in designing their portfolios,” he says.
Mendoza also notes that the need for customisation and bespoke asset allocation has gone up heavily, in view of their complex and varied cash-flow and lifestyle requirements. “We deal with a relatively larger number of family offices now, compared with a few years ago. In terms of investment behaviour, a lot of our ultra HNIs are also inclined toward philanthropy and ESG (environment, social and governance) investing, which is picking up in India. They have also become more demanding in terms of service quality and portfolio reporting and a lot more appreciative of digital interfacing,” he says.
It is also worth noting that most ultra HNIs appear to have shifted their approach from “timing the market” to “growing their wealth strategically over longer term”. They have evolved from chasing short term opportunities towards systemically protecting and growing their wealth in a process-oriented manner. Post demonetisation, tempestuous markets seem to have led more ultra HNIs to appreciate the ephemeral nature of speculative returns! “Ultra HNIs are now open to examining new ideas and are ready to invest in them, if they fit in well with their portfolio objectives and financial goals,” says Sarin.
Real estate, once the indubitable darling of the ultra HNI community, now attracts little or no fresh allocations from their bountiful treasuries. It is no secret that most ultra HNIs are mostly already overweight on real estate investments. Given the feeble outlook for the asset class, wealth managers aren’t seeing much incremental interest in that space from an investment perspective; this was exacerbated by the demonetisation exercise that took place in 2016. Mendoza notes that ultra HNIs are now even willing to liquidate their positions on their historical real estate investments subject to appropriate pricing. “The first REIT in India is in the process of being launched. There is certainly a need for products such as REITs that offer cash yields”, he notes.
Vanilla or Exotic?
Do domestic ultra HNIs gravitate towards ‘boring’ vanilla investments such as mutual funds, or are they more inclined towards more exotic investments? The verdict appears to be mixed; with older money preferring the relative comfort of established investment avenues, and the nouveau riche displaying a penchant for alternative assets that satisfy their relatively higher risk appetites. Interestingly, the super rich seem to be disposed towards seeking out new investment managers with fresh ideas – this certainly bodes well for those with entrepreneurial aspirations in the investment-management space! “While there are large Institutions who have various long-only PMS offerings, Ultra HNIs constantly seek out new managers in this space. Theme-based PMS offerings have also attracted a lot of interest from this segment,” says Kapoor.
Sarin believes that the proclivity for non-traditional investments within ultra HNIs is pretty much contingent upon their ability to tolerate volatility. “While equity oriented and risk-taking investors may prefer the PMS or AIF routes which offer concentrated portfolios across 15-20 stocks, conservative to moderate investors prefer equity MFs for a more diversified portfolio across 50-60 stocks”, he says.
There’s another space that’s quietly attracting a consequential sum of money from Ultra HNI’s – that is; early stage investments in the form of seed capital, pre-IPO investments and growth capital investments. Particularly interested are wealthy individuals who possess distinct know-how within a particular domain; for example, e-commerce or FinTech experts. Having successfully monetised businesses in their respective spaces, these Ultra HNIs are comfortably flush with cash - and aiming to support or seed ideas that can benefit not just from their money, but from their mentorship as well. In fact, Wealth Management outfits such as Credit Suisse are quickly ramping up their capabilities in this domain by building teams of professionals who can adroitly advise ultra HNIs on early stage investing. “We have several business owners who have sold their businesses and are incubating new businesses, or are now investing the proceeds into venture capital funds or start-ups,” notes Mendoza.
Kapoor has observed a noteworthy increase in interest towards pre-IPOs and IPOs from ultra HNIs. “Since allocations into quality IPOs are difficult due to high levels of oversubscription, they prefer participating by way of AIFs that either take positions at the pre-IPO stages, or through the QIB or Anchor categories,” he notes.
Industry experts are of the opinion that the Indian market for ultra HNI investments is still very traditional, and requires a significant overhaul in terms of the depth and breadth of its offerings. As fixed income returns plummet and the quantum of outperformance from vanilla funds shrink, ultra HNIs will quickly get frustrated with their lack of capital growth. Global best practices need to be adapted to the Indian context, and more complex and varied investment offerings need to be built; in order to absorb not just the burgeoning levels of ultra HNI wealth, but also their steadily increasing appetite for alternative asset classes. “India is prone to inflation and currency shocks; there is a good opportunity to build products around that. As our investors mature, there will be even higher need for yield based and inflation protection products. These products are very popular abroad and help most of the clients in preserving wealth,” points out Mendoza.
The ultra HNI segment of the wealth management industry in India has its task cut out for its next phase of growth. They collectively need to digitize, adapt to changing expectations, introduce more value-creating and complex offerings ranging from early stage investment vehicles to philanthropic and socially responsible investments, and continue their efforts towards producing a “one stop shop” experience for its ultra HNI clientele. The EY Wealth Management Outlook 2018 predicted that “Wealth managers with traditional business models will largely disappear from the market” – and ruthless as that may sound, there is more than a grain of truth to this prediction. Interesting times lie ahead for the business.