Why wealthy families are turning to pooled investment vehicles during a pandemic



Wealthy families might increasingly seek to invest through a single entity that manages all their money, rather than through a maze of different entities.

Alternative Investment Funds (AIFs) and Limited Liability Companies (LLP) are among the vehicles of choice, experts say as they seek to streamline processes and facilitate documentation amid the Covid-19 pandemic .

“… during the pandemic, families struggled to assess and execute transactions, due to the complex and elaborate paperwork in a large (number) of entities they had to operate,” Nitin said. Jain, Managing Director and CEO, Edelweiss Wealth Management.

He said Edelweiss has advised his clients to use on-call services to consolidate and manage functions. He also suggested using AIFs, which would allow multiple entities to pool money and invest as a single unit. “It also gives … the status of QIB (Qualified Institutional Buyer) and ensures the confidentiality of the last name for strategic transactions,” he added.

A QIB may participate in certain share offerings which are not open to regular investors. Indeed, they are perceived as particularly competent and capable of evaluating such offers.

Some are also exploring the LLP path, said Nipun Mehta, founder and CEO of the multifamily office BlueOcean Capital Advisors. A family office manages the assets and investments of a single wealthy family. A multifamily office provides the same service to a number of these families.

The use of grouped vehicles is part of a natural evolution as people streamline operations and become more aware of existing structures and how they are used, Mehta said. “It’s getting pretty active, I 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 corporate structure.

According to the Family Wealth Report 2018, published by Campden Wealth and Edelweiss Private Wealth Management, wealthy Indian families have around 645 million dollars (4,700 crore rupees). Data shows that less than a quarter is held in the form of financial instruments. Most of the wealth remains concentrated in operational affairs. Real estate is in second place with 31 percent (see graph).

Legislation has evolved over time to cover these investment vehicles.

The European Union directive on alternative investment fund managers provided for a specific exemption for these vehicles from the standards which would cover other AIFs. The directive covered factors such as remuneration structures, minimum capital requirements and conflicts of interest.

“Investment firms, such as family office vehicles that invest the private wealth of investors without raising external capital, should not be considered AIFs under this directive,” he said.

The Securities and Exchange Board of India’s alternative investment fund regulations cover issues such as the use of leverage, minimum value of investments and employee qualifications. It also mentions an exemption for certain entities managed for the benefit of a family.

“Provided that the following is not considered an alternative investment fund for the purposes of this regulation … family trusts created for the benefit of ‘parents’ …” said Sebi.

The UK Financial Conduct Authority’s Handbook on the Scope of the Alternative Investment Fund Managers Scheme based on the EU Directive as it applied in the UK also spoke of the coverage of these entities.

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

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