Family offices: An untapped investment vehicle in Nepal

What is a family office?

Family offices are private family-owned wealth management advisory firms that serve ultra-high-net-worth (UHNW) investors. In a simplistic manner, the concept of the family office is prevalent in some form, where a family has employees dedicated to helping the family manage their financial wealth and affairs. However, with the rise in wealth accumulation by high net worth individuals and business enterprises, over time family offices have evolved into a complex full-fledged service. People relatively new to the concept of family offices often confuse it with traditional wealth management firms. Nonetheless, they are different from the latter as they offer a complete solution to managing the financial and investment side of an affluent individual or family. As compared to pension funds and hedge funds, family offices are not pooling third-party capital to invest. They are operating with a single – or multiple – family’s assets. In addition to administrating financial and corporate affairs, a family office can provide other services, like estate management, philanthropy and impact investing succession planning, and lifestyle management.

The emergence of family offices can be traced back to the sixth century but the modern concept of the family office developed in the 19th century. In 1838, the family of financier and art collector J.P. Morgan established the House of Morgan to manage the family’s wealth and assets. Similarly in 1882, the Rockefellers founded their own family office which is still in existence and provides services to other families.

Over the years, various types of family offices have emerged but the prominent ones include Single Family Office (SFO), multifamily office (MFO), and embedded family offices (EFOs).

• Single-family office (SFO) – An SFO is a separate legal entity serving one single family. It manages the financial assets, which are the family’s own wealth, often accumulated over many family generations. The family owns and controls that provide dedicated and customized services for one particular family.
• Multifamily office (MFO) – A multifamily office will manage the financial affairs of multiple families, who are not necessarily connected to each other. Mostly MFOs are commercial in nature, as they provide services to other families. Very few MFOs are private and they are exclusive to a few families only. Over time owing to their success, some SFOs converted to MFOs. This is also done to achieve economies of scale.
• Embedded family office (EFO) – An EFO is an informal structure that exists within a business owned by an individual, or a family. Usually, a Chief Financial Officer (CFO) of the family business and his team are entrusted with the duties of a family office. As this structure lacks efficiency, more wealthy families are separating their private from business wealth and establishing separate family offices.

Services of a family office

The scope of a family office ranges from financial administration to lifestyle management and succession planning. Few services of a family office include:

1. Administration and governance
2. Asset Management
3. Property and Leisure Assets
4. Philanthropy and Impact Investing
5. Risk Management
6. Family events and lifestyle management
7. Succession Planning

Overview of business houses in Nepal and their characteristics

The private sector in Nepal which accounts for 58% of the gross domestic product (GDP) of the nation, is dominated by trade-oriented family-owned, and operated businesses. Small businesses have evolved into large business houses and conglomerates today, with a foothold across industries including FMCG, financial services, construction, trading, hospitality and entertainment, IT, energy to name a few. Certain ethnic/ caste groups—namely Marwadis and Newars—are highly represented in Nepal’s business houses.

Business houses in Nepal can be characterized by a few salient features which are as follows:

• Closed family enterprises

Business houses in Nepal are synonymous with family businesses, with family members from different generations occupying key managerial positions. Leadership is passed down from one generation to the next with individuals outside the family having little or no opportunity of entering senior management positions.

• Trade-oriented conglomerates

In the country, business houses are generally trade-oriented rather than aggressively involved in manufacturing. They have branched out to various diverse industries, thereby consisting of various subsidiaries and divisions, mitigating their risks.

• Easy access to finance

Banks and financial institutions in the country make loans easily available to big business houses due to their extensive portfolio. This holds back these business houses from going public as they have no difficulty in accessing funding, that too at cheaper rates. In fact, several business houses have made investments in banks, financial institutions, and insurance companies and have significant ownership in such institutions.

• Lack of transparency and accountability

As these big business houses are private companies, not listed on the stock exchange, disclosing their financial position is not mandatory. They are also conservative while sharing internal financial information and business plans. Along with this, most business houses operate two different bank accounts- actual accounts and one for tax purposes. They also often resort to malpractices like bribery to get rid of taxes and other hurdles. The conglomerates also enjoy a certain extent of protectionism where they tend to lobby for favorable policy changes that protect them from international competition, through numerous associations.

Family offices as the need of the hour in the nation

Family offices are considered to be the fastest-growing investment vehicles in the current world, as more and more families with substantial wealth are increasingly seeing the virtue of establishing one. There are at least 10,000 single-family offices existing globally today, with the majority of them being set up in the last 15 years. Wealthy individuals and families have discovered that they can operate at a significantly lower cost than the traditional vehicles accessible to them while maintaining strong performance that aligns with the family values and morals. That leads me to question that despite having affluent business houses which are family enterprises with family members occupying key positions and leadership being passed down from one generation to the next, why is the concept of family offices so alien in Nepal? The informal structure of embedded family offices may be existing without being termed, but vastly family offices are unheard of and an untapped market.

The population of wealthy families in Nepal has been on a rise in the past couple of years. The explosive growth of wealth opens up a plethora of investment opportunities for these family offices in the country. Paired with direct access to investment opportunities due to the extensive network, the option of making direct investments and providing funding through a chunk of their assets is now an attainable reality. Also with the combined purchasing power, the family office structure translates into cost savings, along with maintaining confidentiality and discretion over the family’s wealth. Also as compared to traditional funds in the country that have a time horizon of 5-7 years when looking to exit, family offices look across generations, even targeting third generations. This elongates the holding period of an investment opportunity, proving to be beneficial even for the investee.

Along with these factors, there is a dire need to separate or create a distinction between the family business and the family’s wealth or surplus holdings in Nepal. This would ensure transparency in operations as well alignment in interests amongst family members. The culture of wanting the next generation to continue the business is deeply embedded in Nepali society. A family office is a good way for the next generation to learn how to manage the family wealth business and a safe way to make mistakes because they’re not touching the operating business yet. The establishment of a family office also conveys a very important message to the younger generation that the wealth is a long-term legacy for current and future generations and not an expense account to be depleted, enforcing discipline.

Looking at the status quo and the benefits, there is a suitable climate for family offices in Nepal, which will also in return nourish the economy. But certain factors result in a lack of, or non-existent per se, family offices in the country. The majority of the business houses are unaware of such a structure for managing family funds. Even if they are aware, the time and effort required to scavenge for investment opportunities incline them to store the family wealth or plow it back into their businesses, wiping away any distinction between the two. There are high costs of setting up the offices, and the bureaucracy in Nepal simply adds to it. The legal structure and corporate governance are ambiguous.

But as wealth grows, particularly in the emerging markets, there is no doubt that family offices will play an even bigger role in the management of substantial wealth in the years ahead. It’s only a matter of when Nepal, with its big business houses and affluent families like Chaudhary Group, Panchakanya, Vishal Group, Khetan Group, Kedia Group, IME Group to name a few will adopt this growing practice and push the Nepali economy on the road to prosperity.