Family fortunes and future challenges

• Building a resilient investment portfolio doesn’t mean being invincible. It’s about focusing on core investment principles while managing risk effectively.
• Alternative investments can be attractive due to their novelty, but they should only be pursued if they align with your overall investment strategy.
• Balancing individual needs with collective goals will be a challenge for family offices in India over the next 20 years. 

Yash Poddar is Co-Principal and Chief Investment Officer at Vikas Poddar Family Office. Based in Bengaluru, he is an active investor and has led the structuring for his family office for several years now. Particularly interested in new age technology startups in the fintech and consumer products domain, here he talks to CampdenFB about how family offices should navigate the world of alternatives and the challenges that will face Indian family offices over the next 20 years. 

The theme of the 6th Indian Family Alternative Investment Forum in August is “Future investment resilience, diversification growth”. What does that mean to you?

Yash Poddar: In my view, a resilient investment strategy considers the future to a certain extent. A common misconception, however, is that this portfolio needs to be so balanced that it can withstand any possible event. This just isn’t realistic.

The best way to think about resilience is to avoid compromising on fundamental principles. What changes is our perception of risk.

To break it down further, I would say resilience is a combination of three things. First, self-awareness – looking inward and determining your investment goals; risk management – actively managing risk to protect your portfolio; and future awareness – Not ignoring potential future developments. 

Big opportunities and trends often emerge over time, and as a family office, we need to be able to grasp what might unfold. This doesn’t mean that we have to completely overhaul our strategy today. Instead, we can gradually incorporate future considerations.

How do you see alternative portfolios for ultra-high net-worth individuals? 

Yash Poddar: Alternative investments are undeniably fascinating and generate a lot of buzz. This initial appeal stems from the perceived contrast with traditional investment strategies, which can seem dull in comparison. 

There are three main psychological factors which drive interest in alternative investments. First, the thrill of something new. Investors seek out alternatives because they want something unique and interesting beyond their standard portfolio. Then there is the promise of higher returns. The potential for superior returns compared to existing assets is a significant motivator for exploring alternatives. This often leads to discussions and networking among investors seeking deals. Finally, there is fear of missing out. Seeing others achieve success with alternative investments creates a pressure to follow suit. Investors don’t want to be left behind if everyone else seems to be profiting.

Social interactions also play a role. Hearing acquaintances boast about tenfold returns on investments naturally fuels a desire for similar success within families. This “keeping up with the Joneses” mentality can lead to impulsive decisions.

It is crucial to determine if alternative investments genuinely align with your overall strategy. If your desired return on investment can be achieved through other means, then alternatives might not be necessary. Many families fall into the trap of feeling obligated to invest in this asset class, even if their goals can be met elsewhere.

While alternative investments can be highly rewarding, they require significant patience and knowledge. A lack of transparency can lead investors to feel pressured to enter the market simply to maintain appearances.

I have been swayed by such emotions in the past. While alternative investments can be profitable, the focus should be on achieving financial goals, not necessarily on the excitement of the asset class itself. Learning to control emotions is crucial for making sound investment decisions.

Empathy is crucial. Without it, younger generations might simply view the family fortune as a pool of money to be managed.

India is going through an interesting phase at the moment and the opportunities are definitely there. But valuations are pretty high. Would you steer clear of alternatives at the moment? 

Yash Poddar: The concept of market cycles applies universally, and alternative investments are no exception. In India, for example, a true market cycle for alternatives is only just emerging. It took a significant amount of time – from 2001 to 2014 – to see equity bubbles, debt crises, and other market fluctuations. However, there wasn’t a true private equity or venture capital bubble until the period between 2018 and 2021. This is the first time there’s been a widespread recognition of cyclical patterns within alternative investments.

This recognition underscores the importance of being smart and prudent when investing in alternatives. Any good family office should be aware of these cycles. Knowing you’re investing during a high point in the cycle means conducting even more thorough due diligence than usual. 

There’s a strong possibility that this bubble is already bursting. Layoffs are becoming widespread, and funding for major tech companies is drying up significantly. While new startups are still securing funding based on novel ideas, they’re unlikely to experience the same level of growth observed in 2018. This creates a waiting game.

Understanding the cyclical nature of alternative investments is crucial for family offices. Investors should be aware of these cycles before committing their capital.

Smart and prudent families really need to be on top of that. Where do they get their information? 

Yash Poddar: Family offices typically don’t rely on a single method to find deals; it’s more of a combined effort. A large part of deal discovery comes from leveraging networks. Family offices build relationships with other family offices and experienced individual investors. They rely on each other to share promising opportunities. This network allows them to identify the right person to contact for specific deals in particular sectors. 

Family offices also look beyond their peer group and tap into broader networks. Some large corporations offer consulting services that connect investors with experts in different fields. These services can be helpful, although they often come at a cost.

The due diligence process is another key element in deal discovery. Family offices will often speak directly with people from the relevant domain, including competitors and market channel representatives. They’ll also obtain information from the companies themselves or from dealmakers who bring opportunities to their attention. But regardless of the source, independent verification is crucial. This might involve basic background checks on company founders using online platforms and services. By using these resources, family offices can achieve a level of due diligence comparable to venture capital funds or large private equity firms.

That gives you a sense of how family offices typically find deals. It’s a combination of leveraging networks, conducting thorough due diligence, and sometimes even utilising paid services to gain valuable insights.

To what extent does international experience help? 

Yash Poddar: International experience is undeniably beneficial for family offices, and there are two main reasons why.

Wealth creation in many countries, including India, has happened very rapidly in recent times. This has led to a surge in the number of family offices. Travelling abroad and learning from established family offices with a long history of wealth management offers invaluable insights. These established institutions have been through generations of wealth accumulation and possess tested methodologies for managing risk and generating returns.

Imagine attending an international program and discussing your challenges with experienced family office representatives. They might respond by saying, “We faced similar issues during our first generation,” or “I’ve dealt with this myself, and here’s what you should do”. This kind of shared experience can be incredibly elevating. Family offices in developed economies have already encountered the “first-world problems” that are only just emerging in developing countries. Learning from their experiences, particularly regarding mindset and wealth distribution strategies across family members, is crucial.

How do you handle legacy? 

Yash Poddar: For me, a key element of legacy is ensuring that the second or third generation understands the struggles and sacrifices that went into building the family’s wealth. Empathy is crucial. Without it, younger generations might simply view the family fortune as a pool of money to be managed, overlooking the hard work behind its creation.

I’ve had a front-row seat to the challenges my family faced, both personally and emotionally. Being able to understand and empathise with the sacrifices made by the first generation is grounding. It fosters a sense of risk management, stability, and discourages reckless behaviour. I often use a quote in family office settings: “In [the film] Top Gun, would you rather be a Goose or a Maverick?” Running a family office requires a cautious approach, prioritising stability over reckless risk-taking. That’s what legacy means to me.

It’s about understanding the sacrifices and struggles my family endured to reach where they are today. I’ve witnessed the entire journey, not just the successes but also the hardships. I’ve seen times when things we take for granted financially today simply weren’t possible. This deeper understanding transcends any education or course. It’s also shaped by the values instilled by my parents. We’ve always adhered to a core set of principles, regardless of generation. The rules themselves might evolve as our lives and needs change, but the fundamental values remain constant. We all agree on who we want to be as a family. This might sound profound, but on a deeper level, it shapes our understanding of what truly matters and the meaning of wealth.

Family Offices in India are changing and they’re having to deal with issues like succession for the first time. What do you think the next 20 years will bring? 

Yash Poddar: Applying Occam’s razor to family offices, the most likely threat to their longevity is family size. Large families with diverse needs, conflicting goals, and a lack of unity can be incredibly challenging to manage. We’re already seeing this scenario play out in some families. For instance, some younger family members might choose to live abroad and pursue careers outside the family business. This lack of shared purpose over time can have a compounding negative effect.

Strong leadership and shared goals can have a positive compounding effect. Some families have successfully maintained unity for generations due to mature and level-headed individuals who prioritise keeping the family together. Family offices can play a role in fostering this unity by implementing best practices. For example, Western family offices sometimes organise retreats where family members gather at resorts. While large family gatherings are already common in India, incorporating these events within the framework of the family office could be a way to encourage communication and shared goals.

Looking ahead 20 years, the biggest challenge will likely be the prioritisation of individual needs over collective needs. There’s a growing trend of diversity within families, including spouses from different nationalities. These seemingly personal choices can significantly impact how family members view life and wealth. Additionally, individual goals can vary greatly, with some members wanting to pursue business ventures while others prefer passive investing. Reconciling these differing aspirations can be complex. Finally, there’s the ever-present human factor: greed. Family members with conflicting and potentially negative objectives can be very disruptive.