This month’s interview is with Vikash Gupta. Vikash Gupta is Co-Founder and Managing Director of VAR Capital, a financial advisory firm offering asset management, debt finance and investment banking services to private clients and institutions. VAR Capital was named Investment Team of the Year 2020/21 by STEP Private Client Awards.
Do next-gens have a different investment outlook?
Vikash: In some respects, yes. The next-gen wants to see more wealth deployed in new technology-based opportunities. They are less concerned about traditional methods of valuation for the right opportunities. They are also keener to create impact from their wealth and avoid companies which are creating a negative impact on society and the environment.
This obviously creates a challenge when picking the right opportunities and not getting influenced by the latest fad or by “friends” who have vested interest in the investment opportunity.
Are next-gens becoming more involved in family office investment decision-making?
Vikash: Definitely. The next two decades will see the largest transfer of wealth between generations in our history. And that trend has already started with the next-gen getting more involved in decision making and influencing the way wealth is being deployed.
Families are increasingly delegating investment responsibilities to the next-gen — particularly when it comes to matters of ESG. Usually, this is because younger members of HNW families are more tuned in, aware, and concerned about the social and environmental problems that occur globally.
Are there disagreements between generations on investment decisions?
Vikash: There are certainly differences in attitudes towards investing. For example, the older generation invest based on cash flows of an opportunity employing traditional valuation methodologies. However, the new generation are more focused on growth and innovative tech opportunities which do not require old school analysis principles.
Also, the second generation are more open to using advisors, paying their fair share of fees and profits and using professional outfits to help make their decisions. Another area of difference is on measuring the impact of investments. Rather than measuring the returns as pure profits, the next-gen are also concerned by the impact of their investments on the community and the environment. That is all good news for the world.
Are there trends in family offices that are driven by the next-gen?
Vikash: There are a few trends in family offices, which are largely driven by a new set of thinking by a new generation of younger investors. Amongst this generation, there is a strong emphasis on Environmental, Social and Governance driven investing. Increasingly, families are shying away from high carbon and “sin” industries and embracing companies which contribute positively to the environment. They are also considering alternatives such as Bitcoin in favour of traditional gold and more passive investments.
In the illiquid space, more family offices are investing in “New Age” Data and AI driven startups to capture the next Google or Amazon! Lastly, families are tending to divert their money from expensive PE funds to direct stakes in operating companies, especially if the sector is known to them from their past experiences.
Why should family offices manage their reputation?
Vikash: There are three key reasons why family offices need to manage their reputation. Firstly, family offices are operating increasingly like institutional investors. In order to access interesting deals and investment opportunities, they need to maintain a strong reputation. Secondly, financial institutions, employees and business partners often “google” people before they deal with a family office. Again, reputation is critical in this regard.
Lastly, in today’s age of digital media, if reputation is not managed proactively, it can easily lead to unintended consequences. For example, an off-the-cuff remark by a family member in a social media channel can lead to a loss of reputation of the family if not closely monitored and managed.
How has the global pandemic impacted family offices?
Vikash: The pandemic has changed many things. Health and well-being concerns have been brought to the forefront of people’s minds. Property investments, which were once a key part of family office investment priority, have either lost their value or have become less attractive going forward. Typically, family offices were investing in more traditional asset classes such as hotels and offices, and viewed these as lower risk, longer term, income producing assets. These asset classes have been challenged by the pandemic resulting in families re-evaluating the assets they hold in the long run. Conversely, it is also presenting some great opportunities for family offices who have the capital and patience to buy businesses at attractively discounted prices.
Lastly, the government quantitative easing intervention has resulted in a fall in interest rates and reduced yield on fixed income assets. A considerable number of family offices are therefore realigning themselves, taking a more holistic view of yield to find the optimal combination of capital gains and income to meet their wealth preservation goals. Portfolio cash holding allocations have also increased even though it means a lower return in the short term.
What are some challenges family offices face when trying to secure deal flow?
Vikash: A key challenge that family offices face in securing deal flow is their reputation. Traditionally, family offices have maintained a confidential or low profile. In more developed economies, this is counter-productive when it comes to attracting deals.
A family office combining both a strong media presence and strong reputation tends to have better access to deal flows. Also important is the team of advisors they use. A family office who collaborates with leading professional advisors such as lawyers and accountants has a greater chance of success when it comes to accessing deal flow. Collaboration and networking are also crucial. Many single and multi-family offices now collaborate increasing their chance of accessing attractive deals. Regular networking with PE and VC firms, along with other advisors is certainly key to securing deal flow.
Do family offices need an online profile and some sort of digital presence?
Vikash: Family offices have a higher profile than ever before. As more business is conducted virtually, a digital presence is vital to maintain a high level of trust and credibility in the industry.
It is now an expectation that institutions dealing with clients maintain a comprehensive digital footprint. Otherwise, a perception could be portrayed that the firm is trying to hide something or conceal their source of funds which, whilst incorrect, is detrimental to the reputation of the firm. Family offices should not be afraid of a digital profile. On the contrary, they should promote, manage, and control it. Without it, especially in countries like the U.K. and other advanced countries, they may find it difficult to deal with larger institutions.
Rising anti-wealth sentiment on social media is an example of the ever-present online risks. Families are rethinking what is posted online and crafting policies designed to protect individuals and employees. Anticipating public reaction and developing plans to address criticism and any adverse feedback online can help family offices manage potential reputational risks.
How can family offices take advantage of the opportunities presented by the pandemic?
Vikash: A key outcome and opportunity presented by the pandemic is the increase in the availability of talent. As large investment banks and private equity funds reduce their staff, it presents a golden opportunity for family offices to add to their bench strength of talent.
There are also other tremendous opportunities presented by the pandemic. Real estate assets such as offices, student accommodation, and certain companies in retail and hospitality industries are available at significant discounts. However, families should evaluate these with their eyes wide open to avoid getting stuck with the wrong asset. As mentioned earlier the key is to partner with experts and have the right advisors to assist with the transactions.
Vikash Gupta is Co-Founder and Managing Director of VAR Capital, a financial advisory firm offering asset management, debt finance and investment banking services to private clients and institutions. VAR Capital was named Investment Team of the Year 2020/21 by STEP Private Client Awards.