By Satya Bansal, Founder, Blue Ashva Capital.
Most family wealth has been created by building and nurturing one or more businesses. Having created their wealth, they now grapple with some of the common challenges regarding wealth and legacy: Where and how should I invest? What legacy do I create for my next generation and for the wider society?
While each family has its own mantra for creating wealth, they are continuously seeking new perspectives on how they should invest. They often go through an elaborate exercise of investment management trying to generate alpha by actively managing the portfolio.
In the case of public markets, the performance data shows that the majority of active investment managers fail to deliver alpha consistently and end up closer to market beta over an extended period.
In order to generate that elusive alpha, at times, a portfolio manager may take more risky bets. If large caps do not generate alpha, moving towards mid-caps or small-caps, or taking some momentum bets. A move towards lower-rated bonds with higher yield is equally common. Here, alpha is more often a result of taking increased risk, rather than better active management. When the bull run is over, such risks often come out in the open.
Family investors have come to see this reality and are now reallocating into passive funds to save the fees and costs associated with active management. ETFs and index funds are the boom areas of retail fund management.
An alternative route to generating alpha would be a more refined asset allocation. The solution to this would be to invest in private market assets.
Why private markets?
It feels strange when business families ask, ‘why private markets?’ given that most of their wealth has been created by investing in and building businesses of their own. Possibly, they see the new-age startup ecosystem as an attractive opportunity, yet vastly different to their own family businesses and therefore inherently riskier.
Similarly, there are opportunities to invest through structured debt, based on the cashflows or underlying assets of growing enterprises. Opportunities such as revenue-based financing and Capex to Opex models are great avenues for high yield investments.
One can invest in public markets as well by following a private market approach of long-term investing in a few select businesses (PIPE approach). There are examples of investors who have done this successfully.
It is important to note that private markets do come with their own set of risks related to liquidity, valuation or exit. One has to factor the risks and possibly consider reallocation of risk from active public markets to private market investments to generate alpha.
For private market investment to succeed, one should also be able to attract the best of the technologies/innovations/opportunities; scan them, invest in them and then actively monitor them. This also requires collaboration with other pools of capital and a wider institutional network, so that there can be a shared ecosystem benefit.
Family legacy refers to ensuring that future generations are armed with the knowledge and know-how to take the family success forward. This is easier said than done. Most families struggle with it, particularly beyond the second generation. NextGen may not be interested in the family business, or they may well have a different approach to the business and its work culture. Often, they are the ones who have studied overseas at the best universities. They have formed a different worldview and are trying to find disruptive or new age ideas.
Private market investment could be a good gateway to scan various opportunities and convert some of these financial investments into strategic ones over time. This allows the NextGen to witness the journey of building businesses and surround themselves with the best of founders and entrepreneurs. Private market investment, in that sense, actually plays a complementary role in building family legacy.
In order to do good for society, first let’s understand the challenges and then look for a sustainable and institutional solution to address them. Philanthropical capital plays its part but cannot provide the long-term support required to tackle challenges at scale.
Climate change is a core challenge of this century. There is a significant emphasis on sustainability in every facet of business today. Need for access to affordable health care with greater emphasis on wellness cannot be ignored. Increasing farm productivity through sustainable agriculture and improving the farm value chain for enhancing farmers’ income is required to ensure food security. This is not an exhaustive list.
What if private investment can be directed towards building businesses or enterprises to solve some of the pressing needs of the society? Here we are not talking about a philanthropic or impact type of investment, but a mainstream way of evaluating a private market investment. There is no compromise on return, just an orientation of enterprise selection which is towards solving the core challenges of society.
When private market investments are directed towards solving core social needs, they can meet some of the objectives of building societal legacy. With the right approach, families can build a strong foundation of human and social values for the NextGen to build on.
Private market investment can be a key approach to creating wealth, building legacy and serving society.
Welcome to a new breed of private market investments, where doing well and doing good do not have to be mutually exclusive.
If you enjoyed this article, be sure to read CAIA Association’s new report, The Rise of India’s Private Equity Market.
About the Author:
Satya Bansal is the founder of Blue Ashva Capital, an investment firm based out of Singapore and India, backing sustainable and profitable businesses which are solving real challenges in sectors such as Food & Agri, Energy & Environment, Health & Wellness, Money & Finance.
Satya Bansal is an industry veteran with over three decades of rich experience in the Banking and Financial Services sector. Prior to founding Blue Ashva Capital, he was the Chief Executive of Barclays Private Bank, India for more than a decade and played a pivotal role in setting up the Private Banking business in India. He has also been the Head of Private Banking- South East Asia for ICICI Bank.
Satya is known to be an intrapreneur throughout his corporate career wherein he built standalone sustainable businesses within large organizations. He has been an active investor in the startup ecosystem for more than a decade having invested in both mainstream and impact startups globally.
Satya is a Chartered Accountant and has also undertaken Advance Management Program at Harvard Business School.