Kotak Wealth Management: Top of the Pyramid India Edition 2016

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. THE INDIAN ULTRA HNI

Optimism Uninterrupted

ForewordWhat an exciting year 2015 has been! India emerged one of the strongest larger economies in the world, despite bumps such as the stress in the banking sector and a choppy stock market performance. For ultra HNIs, last year’s positivity flowed through into this year (Optimism Uninterrupted) with reforms taking root, inflation under control, and economic growth looking up.

Our annual report, Kotak Wealth Management’s Top of the Pyramid (2016 edition), continues to capture the mood of the ultra HNIs in India in the context of the country’s changing socio-economic landscape. Top of the Pyramid remains the last word on the lifestyles, aspirations, and opinions of India’s most wealthy. In addition to analysing the spending and investment patterns of the ultra HNIs, for 2015, Top of the Pyramid also covers their increasing interest in art and collectibles, and their growing affinity for wearable devices.

The edition has looked at the growing tendency among the ultra HNIs to incorporate increasing ‘goodness’ into their lives. Two such inclinations have emerged strongly – their keen interest in renewable energy and their increasing bent towards investing in companies that make a sustainable difference to many people’s lives, also known as impact investments. In this context,

we have profiled four unique individuals whose ventures and investments have set out towards sustainable and positive changes.

Our annual survey delved into the details of another interesting development – from treating death as taboo, India’s jet set has started facing the inevitable head-on and is actively providing for and simplifying the lives of their loved ones, employees, and dependents through succession planning initiatives. Top of the Pyramid looks at the various means that the ultra HNIs employ to plan for progression.

As always, Top of the Pyramid takes you through the extraordinary and remarkable lives of India’s ultra HNIs that continue to stay firmly at the helm of India’s development journey.

Happy reading!

Dipak Gupta Joint Managing DirectorKotak Mahindra Bank Ltd.

Foreword

01

INSIDE THE REPORT 04 About the report

08 Executive summary

12 Optimism Uninterrupted

SPENDS! Income allocation

Areas of spends

! Apparel and accessories

! Art and paintings

Wearable devices

PROFILEMr Nagaraja Prakasam Partner, Acumen Fund

Type of collectibles

Sources of purchase

Key drivers

S P E C I A L F O C U S

43 Succession Planning ! Modes of succession planning

! Activities and time allocation

Implementation


PROFILEMs Shaheen MistriFounder, Akanksha Foundation & CEO, Teach For India

19

Collectibles37

02

TOP OF THE PYRAMID 2016 | Kotak Wealth Management

73 Impact Investment! !Ultra HNI exposure to impact investment

! !Sectors in impact investment

! !Key drivers

! !Investment modes

Importance of renewable energy!

!!Types of renewable energy and

investment patterns

!!Key drivers

55 Renewable Energy

PROFILEMr Vinod Keni Co-founder & Partner, Peachtree Management Advisor


INVESTMENTS Sources of wealth and !

! !asset allocation

!!Commodities!


63

PROFILEMs Roopa Kudva Partner & Managing Director, Omidyar Network India Advisors

03

ReportAbout the

This year saw a 7% increase in the number of ultra HNHs to

about 146,600. This continuing

positive sentiment is captured in the

theme – “Optimism Uninterrupted”

Making of Top of the Pyramid 2016


04

op of the Pyramid is Kotak Wealth Management’s annual publication that covers the spending, investment and lifestyle patterns of ultra-high-networth

individuals (HNIs). Kotak Wealth Management, the private banking arm of Kotak Mahindra Bank, commissioned professional services firm Ernst & Young LLP (EY) for the report.

EY collaborated with market research firm Feedback Consulting for the survey to study and analyse ultra-HNI trends. For its projections, EY used parameters such as GDP growth, savings and inflation rates, past and projected financial and non-financial asset-class allocations, and returns.

With the advent of improved government policies and reforms, both accomplished and planned, India has emerged as a much stronger economy. These government initiatives have influenced the investing and spending patterns of ultra high-networth households in India. This year saw an increase in the number of ultra HNHs to about 146,600 (7% growth over last year). It is this continuing positive sentiment that is captured in the theme of the report – “Optimism Uninterrupted”.

While looking at their spending and investing patterns, the report has explored ultra-HNI

behaviour in apparel and accessories, art and paintings, and wearable devices. The special focus of this year’s edition is collectibles, renewable energy, succession planning and impact investments.

During our research, we observed that emerging cities and small towns continue to form a significant part of the Indian ultra-HNH population. We found that besides the top-four metro cities, non-metro cities such as Bengaluru, Ahmedabad, Pune, Hyderabad, Nagpur, and Ludhiana contribute 45% to the Indian ultra-HNI population.

The current report is a culmination of insights from three main sources that are listed below:

1.A detailed market survey of 225 ultra HNIs by Feedback Consulting. The survey took place between January 2016 and March 2016 in the form of face-to-face interviews. These interviews were conducted over 12 cities to understand the lifestyle of ultra HNIs in India and changes over the previous year.

2.A series of interviews were conducted with ultra HNIs to understand their patterns and

201320122011

Covers of the last fi ve editions

2014 2015

05

About the Report

preferences in impact investments, renewable energy, collectibles, and art and paintings. In addition, their spending patterns in apparel and accessories and preferences in wearable devices were also studied.

3.Secondary research and additional analysis by EY. EY extensively analysed the results of the

survey and validated its conclusions through primary interactions with service providers.

This report would not have been possible without the cooperation of all the survey respondents and the interviewees. We thank them for their invaluable support, the time they put at our disposal, and the insights they offered.

About Kotak Wealth Management

About Kotak Mahindra Group


06

The Kotak Mahindra Group has come a long way since its early days and caters to diverse financial needs of individuals and the corporate sector, nationally as well as internationally. With its understanding, experience, infrastructure, and most importantly, its commitment, the Group consistently delivers pragmatic solutions.

Kotak has consistently pursued opportunities and capitalised on them in a rapidly changing economic and business landscape.

In the early period of Kotak’s journey, one particular day stands out – 21, November 1985. On that day, Mr Uday Kotak identified an opportunity in the bill-discounting market. With a seed capital of less than US$80,000, borrowed from family and friends, and a small team of three that has grown to over 40,000 as on March 31, 2016, he skillfully steered what was initially a bill-discounting startup into a giant financial services conglomerate with assets of US$19 billion.

In February 2003, Kotak Mahindra Finance Ltd., the group’s flagship company, received a banking license from the Reserve Bank of India (RBI), becoming the first non-banking finance company in public to convert into a bank – Kotak Mahindra Bank Ltd.

Kotak Group’s solutions are technology driven, contemporary, and comprehensive, and they span consumer, commercial, corporate and investment banking, wealth management, retail and institutional equities, asset management, life and general insurance. The bank is channelising its industry experience and capabilities to cater to its changing customer aspirations.

Effective April 1, 2015, ING Vysya Bank Ltd. merged with Kotak Mahindra Bank Ltd. creating a

`2 trillion institution (consolidated). As on March 31, 2016, the merged entity – Kotak Mahindra Bank Ltd, has a significant national footprint of 1,333 branches and 2,032 ATMs spread across 674 locations, affording it the capacity and means to serve its customers even better.

Kotak Wealth Management is Kotak Mahindra Bank’s private banking arm. It provides financial advice to some of the most distinguished high-networth families in the country. It is one of the oldest and the most respected wealth managers in India with over 16 years of experience. Its client base ranges from entrepreneurs to business families and employed professionals, including over 40% of India’s top-100 families (as per the Forbes India Rich List, 2015).

07

We believe that no single asset class tends to perform consistently over a long period and that an HNI needs to have access to various asset classes, investment styles, themes, and tenures. With this philosophy, Kotak has built a formidable suite of products and services for this specific audience.

Our offerings are customised for the client’s profile and investment objectives. With an in-depth understanding of the client’s requirements and of various asset classes, Kotak offers the widest range of financial solutions through a transaction-based investment approach or the asset-advisory approach. Our truly bespoke banking solutions also include one of the most premium credit card propositions offered, by invitation, to eminent clients.

We also offer ‘Family Office Services’ to ultra-high-networth investors, providing comprehensive financial solutions that go beyond investments. Through ‘Kotak Mahindra Trusteeship Services’ we offer estate planning services that deal with succession planning by creating private family trusts.

We have maintained our leadership position due to our in-depth understanding of our clients' requirements and the macro environment, and our prowess over various asset classes.

Kotak Wealth Management has been adjudged the Best Private Bank - India for the 7th year in a row, by FinanceAsia Country Awards 2015.

About the Report

they treasure the absolute pleasure of owning a beautiful and timeless creation, but also because owning art has started making sound business sense due to its manifold value appreciation. In this light, ultra HNIs are increasingly treating art and paintings as an integral component of their portfolios. Even so, our survey shows that for 68% of ultra HNIs, art and paintings are impulse purchases; only 32% engage in research before buying.

If e-commerce was the buzz last year, this year wearable devices are gaining ground from a technology perspective and have become very popular. Ultra HNIs have followed and adopted this trend keenly, so much so, that these devices now form a part of their daily lifestyle. Popular devices include smart watches, fitness bands, smart glasses, virtual reality headsets, and sleep headphones – to name only a few. These wearable devices are carving out a niche for themselves in catering to specific needs – such as fitness bands for health-conscious individuals and smart watches to aid convenience.

Another area of passion for the ultra HNIs continues to be collectibles. They do not leave any stone unturned to collect items that add to

SummaryExecutive

Optimism about growth boosted both spends and investments

n FY16, India emerged as one of the strongest economies the world over, because of robust GDP growth and reduction in both inflation and current-account deficit. This translated into

improved ultra-HNI sentiment, which is reflected in their increased spends and investments.

We estimate that the number of ultra HNHs grew to 146,600 in FY16 from around 137,100 last year, a moderate growth rate of 7% over one year and 16% compounded growth over five years.

Optimism about economic growth has motivated ultra HNIs to increase their investments into their primary businesses as well as to boost their spends. Most of their spending categories have seen an increase. Jewellery, apparel, and electronics continue to be at the top, accounting for nearly 50% of total spends. In our interactions, we found that 64% ultra HNIs are impulsive buyers when it comes to apparel and accessories. Despite the allure of foreign destinations, many of them prefer to shop within India, as most major foreign luxury brands are now available locally.

There has also been increasing awareness about art among the ultra HNIs, not only because


08

Optimism about economic growth has motivated ultra HNIs to increase their investments

into their primary businesses as well as to boost their spends

the grandeur of their living rooms, office spaces, or atriums. Passion is a major factor in pursuing collectibles – 70% of ultra HNIs that we interacted with confessed that their passion for owning a collection of exotic and interesting items drove their purchases.

Renewable energy has been an important component of India’s energy planning process for more than four decades and ultra HNIs have always been enthusiastic about adopting and promoting renewable energy.

Most of them strongly believe in an eco-friendly lifestyle and strive to re-use resources, to plant trees, and to use electric / alternate fuel cars. Socially conscious and environment-friendly ultra HNIs are increasingly adopting ‘green’ building practices to minimise the footprint of their homes on the ecology while maximising comfort. This sector is also seeing investments

towards solar rooftops and boilers and wind-driven machinery, mainly because of government incentives. This is likely to be a big focus area for ultra HNIs.

As their wealth continues to grow, it becomes very important for ultra HNIs to pass it on to upcoming generations in a systematic manner, which ensures sustainable growth. Today, most ultra HNIs understand that succession planning is a continuous and proactive process, and their plan involves identifying potential leaders, grooming them, and encouraging them to look beyond their immediate responsibilities.

Our survey revealed that 43% of ultra HNIs prepare for at least five years to put an efficient succession plan in place, while another 35% take anywhere between two to five years. When it comes to a successor, over 90% of ultra HNIs choose from their children and high-

Executive Summary

09

performing family members, while less than 10% choose outsiders.

However, this trend is likely to change in the future because of the increasing need for professional management from a good governance perspective. Even today, most ultra HNIs (73%) prefer planning for succession with their close confidants; a few look for advice from external sources such as chartered accountants, consultants, and wealth managers. People are also gradually relying on professional estate planners, trustees, and wealth advisors.

The bullish trend in equity markets saw a reversal this year with a near-20% fall, mainly due to global events such as a sharp plunge in the Chinese stock markets and a drop in foreign fund flows. This led to a realignment of the investment mix – with real estate (mainly commercial), debt, and alternate assets gaining ground at the cost of equities.

As part of alternate assets, commodities attracted ultra-HNI interest this year. Our survey revealed that 72% of ultra HNIs invest in commodities; of these, 40% have invested about 5-10% of their total assets in commodities, with gold and silver continuing to be the most preferred. This trend is likely to continue until equity markets start picking up.

The philanthropic interest of ultra HNIs has seen a change over the years; the need to build enterprises that not only create a positive difference in society, but ones that are self-sufficient, economically viable, and lasting, essentially ‘sustainable social enterprises’, is very strong. This has led to the emergence of impact investing – a growing trend among the elite. While the general interest for impact investments is high, professionals seem to have the highest inclination – 67% have an exposure to these investments. Key sectors attracting impact


10

Increased spends are a good proxy for rising optimism and are likely to continue

with steady economic growth

investment include financial services, clean energy, and affordable housing.

The impact-investment space is receiving traction from the ultra HNIs, mainly based on the attractiveness of the sector and stability of returns. In addition to the existing Indian funds focusing on the segment, there is also a trend towards impact-investment-focused global funds setting up shop in India, which will give further impetus to this sector.

The economic scenario has remained steady and the mood of ultra HNIs is buoyant based

on better government and private consumption and spending outlook. Increased spends are a good proxy for rising optimism and are likely to continue with steady economic growth. Higher propensity towards spending also brings good tidings for the luxury goods market, which seems to be getting stronger in India and is spreading out its reach to capture smaller towns and cities.

Executive Summary

11

As their wealth continues to grow, it becomes very important for ultra HNIs to pass it on to upcoming generations in a systematic

manner, which ensures sustainable growth

The government’s flagship policies – Start-Up India

Action Plan, Make in India, Smart Cities, and

Swachh Bharat – are gaining traction both in

India and abroad

OptimismUninterrupted!

The ultra HNI mood has been upbeat because of strong economic growth


12

Y16 was one more step towards a stronger India. Stability in GDP growth seen this year (7.6% in FY16, 7.2% in FY15),

even as other BRICS nations and major economies struggled, was a strong indicator of sustained progress. India’s GDP growth surpassing China’s was another milestone, one that India should be able to sustain. The quantum and magnitude of the government’s reforms, both accomplished and planned, are also indicators of a stronger economy.

Other factors that contributed to India’s progress were a fall in crude oil prices and inflation coming in below the target range, which allowed the RBI to reduce its repo rate twice in FY16. This move is likely to reduce cost of borrowing and stimulate growth by encouraging investment in the corporate sector.

Falling oil prices also had a positive impact on the current account deficit, which was at 1.1% of GDP for FY16.

The government’s flagship policies – Start-up India Action Plan, Make in India and Smart Cities are gaining traction both in India and abroad. These initiatives intend to strengthen India’s infrastructure; they have already translated into

2010-11 2011-12 2012-13 2013-14 2014-15

Growth of Ultra HNHs in IndiaWe believe there were 146,600 HNHs in FY16 with an

62,000 81,000 100,900 137,100117,000

2015-16

accumulated net worth of `135 trillion

Number of Ultra HNHs Combined Net Worth

`45trillion

`65trillion

`86trillion

`104trillion

`128trillion `135

trillion

146,600

Source: Top of the Pyramid 2016, Kotak Wealth Management

Introduction

13

on-ground investment and led to the country becoming an attractive FDI destination. While India still has a while to go before being counted among the best economies, strong signs are emerging.

With rising pollution levels, especially in metro cities, there is an increasing awareness about the environment. The government has launched several initiatives to tackle this issue, which has also prompted interest from the private sector. Ultra HNIs have evinced interest in investing into sectors focused on tackling social and environmental issues.

On the global front, the Chinese market crash was a result of perceived weakness in the Chinese economy, which in turn was interpreted as a sign of an impending global downturn. The Indian stock markets also suffered from the effects, with a sharp correction and general cautiousness in sentiment through the year.

The US Presidential election due this year, and the Brexit, are something that India is following closely; both events have a considerable bearing on global economies, especially India’s.

Compounded growth of the

number of Indian HNHs

over the last five years was 16%

with 146,600 such households

in FY16

We expect these to touch 294,000 by FY21 with a combined net worth of `319 trillion

Growth in the Number of Ultra HNH Households

146,600

294,000

Number of Ultra HNHs Combined Net Worth

2015-16

2020-21


`135

`319trillion

trillion


14

India’s Ultra High Networth HouseholdsOur current edition of ’Top of the Pyramid’ follows the previous editions’ methodology. We define an ultra HNI household (HNH) as one with a minimum net worth of `250 million, mapped over 10 years. Growth in the number of ultra HNHs was a bit slower this year.

We estimate that there were about 146,600 ultra HNHs in FY16 vs. around 137,100 last year, a moderate growth rate of 7% over one year and a 16% compounded growth over five years (corresponding growth rates last year were

higher at 17% and 22%). These HNHs represent an accumulated net worth of `135 trillion, which is a 5% growth on last year’s wealth and 18% compounded growth over the last five years.

We project that the number of ultra HNHs will increase to 294,000 by FY21 with a combined net worth of `319 trillion driven by new ultra HNHs from emerging sectors and new avenues for investments that give higher returns. Smaller cities will also contribute to this growth in the number of ultra HNIs and their wealth.

Small centres such as Surat, Indore and Jamshedpur continue to create new ultra HNIs, mainly in the inheritor and entrepreneur categories

Introduction

15

The business and investor-friendly approach of the government will help nurture and sustain a start-up ecosystem in the country, and propel the growth of ultra HNHs.

As predicted in previous editions of ‘Top of the Pyramid’, we believe emerging cities and small towns will continue to form a significant proportion of the ultra-HNH population-

The Geographical Spread of Ultra HNHs in India


While metros continued to hold 55%, emerging cities and small towns stayed at a significant 45%

55%

17%5%

23%

Top 4 cities: Mumbai, Delhi, Chennai, Kolkata

Next 6 cities: Bengaluru, Ahmedabad, Pune, Hyderabad, Nagpur, Ludhiana

Next 11-20 cities: Chandigarh, Surat, Jaipur, Lucknow, Kanpur, Jamshedpur, Amritsar, Raipur, Indore, Aurangabad

Rest of India

Indianisation of their brands has been tried earlier by

international luxurycompanies to increase

their appeal


16

we estimate 45% coming from these non-metro centres. The penetration of the digital phenomenon is influencing and changing the way people in India buy not just common goods, but also luxury items. Until a few years ago, luxury retailers thought that selling these exclusive goods needs a personal touch at their outlets, but they are slowly warming up to the idea of an online marketplace.

In fact, the difficulty in establishing a connection with the non-metro customer base is the primary reason that luxury brands are turning towards the fast-permeating digital phenomenon. A few retailers are also adopting models such as ‘on-demand home shopping’ for customers from non-metros and small towns.

The quest to reach a wider population is also aided by start-ups with innovative models, which are introducing ‘experiencing’ luxury and

exclusivity – this helps address key imperatives for luxury brands operating in India, which are to increase the awareness of the brand and establish brand credentials.

While Indian luxury private labels are known to have product lines that are largely ‘Indian’, there are a few instances where international luxury brands have ‘Indianised’ their product lines, commonly seen in the food industry.

This is not a new phenomenon – even earlier, international luxury brands have tried this approach to increase the appeal of their products in smaller cities, but it has not gained the traction and the attention it deserves. It would be interesting to see if international luxury brands are able to successfully employ Indianisation as a way to increase their reach and capture traditional Indian ultra HNIs.

The subsequent chapters of ‘Top of the Pyramid’ will take you through the current lifestyle trends and investment patterns of Indian ultra HNIs.

The report this year covers unique themes such as collectibles, renewable energy, succession planning and impact investment capturing the dynamic lifestyles of ultra HNIs.

Introduction

17

The Key Attributes of Ultra HNIs in the Indian Context

The following table gives the key attributes across three categories of ultra HNIs – entrepreneurs, inheritors, and professionals – in the Indian context

Entrepreneur Inheritor Professional


Sources of wealth Motives for wealth creation Attitude to perpetuation of wealth

Drivers for spending Attitude to charity Approach to investing

Entrepreneurship

Self-recognitionand achievement

Wealth is strictly forthe immediate family

Attainment ofluxurious lifestyle

Provides mainly monetary support, less time

More opportunistic,informal

Inheritance,entrepreneurship

Wealth preservationand growth

Wealth must remainwithin the family

Maintaining a luxurious lifestyle

Compassionate,provides money

Organisedand planned

Selfactualisation

Wealth is for family,

Attaining valuefor money

Important part of the

Disciplined and planned with systematic goals

but they must striveto earn it

spending, provides time and money


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The average age of an Indian ultra HNI is reducing, and nearly half of them are now less than 40 years old. Increasing number of start-ups have aided this fall in average age. Good performance of the Indian economy, as evident from high GDP growth, is reflected in rising ultra HNI spends this year.

Increasingly younger ultra HNIs, with high disposable incomes and an ample choice of luxury options, are usually high spenders. They are also the ones who are largely responsible for bringing in concepts such as ‘experiential luxury’ into the limelight.

The recent ecommerce and technology boom has created many relatively young ultra HNIs who have sky-high aspirations and desires when it comes to luxury in their lifestyle. Luxury retailers have recognised this opportunity, and are already aiming to capture the mind space of these young guns by engaging in targeted marketing. This is one of the reasons for the rapid expansion of these retailers into smaller centres to leverage, on the increasing ad-hoc spends of these ultra HNIs.

LUXURY FOCUS ON

The celebration continues

SPENDHOW THE ULTRA HNIs

UNABATED!

Spends

19

Ultra HNIs Choose Investments over Savingsinvestments into primary businesses. This year, 59% of the ultra HNIs we surveyed increased their investments into primary businesses and 43% saw a decrease in their overall savings, which they substituted with investments.

Non-discretionary expenses continued to dominate their income allocation, except in the case of entrepreneurs, for whom investments into businesses became a priority. For professionals, the proportion of savings reduced over last year, with a commensurate increase in their investments for personal wealth.

In FY16, India recorded the highest GDP growth among major world economies, thereby incentivising various stakeholders to increase their investments into the economy. Inflation saw a downward trend – with June 2015 recording the lowest monthly CPI of 3.69% since FY14’s high of over 11%. Consequently, the RBI cut rates twice in FY16 (cumulatively by 0.75%), even after it had already effected two rate cuts of 0.25% each, just before the start of the financial year.

The rate cuts led to a fall in lending rates and ultra HNIs turned to substituting savings for


Expenses

Savings and Investments

55%

45%

How Ultra HNIs Allocated their Income this YearPrioritised investments into primary businesses and personal wealth over savings

Others Charity

Investment forpersonal wealth

Savings

Investment intoprimary business

Discretionaryexpenses

Non-discretionaryexpenses

15%

25%

2% 5%

16%

14%

23%


20

Family-Centred Expenses see a SpikeJewellery and apparel continue to remain ultra HNIs’ top-spending categories, followed by holidays. Family-centred expenses – spending on jewellery, holidays, apparel, automobiles, home décor and events – continue to dominate by contributing to 68% of overall spends, a slight increase over 67% last year.

A higher proportion of ultra HNIs compared to last year are now considering these family-related expenses (except home décor) as non-discretionary.

In the jewellery space, Indian boutique jewellers are becoming popular. Recently, a prominent Indian jewellery designer’s collection of customised diamond cuts was worn by a Hollywood celebrity at the Oscars, making it so popular with the ultra HNI that his company is coming out with a `1000 crore IPO.

Apparel and accessories are the second biggest spending avenue for ultra HNIs, and one of the primary ways that they showcase their wealth and

A renowned Hollywood actress wore the collection of a

prominent Indian jeweller at the Oscars — this boosted the

popularity of the jeweller among the ultra HNI. The jeweller is

now planning a `1,000 crore IPO!

Allocation of Income by Ultra HNIsProfessionals reduced savings this year, to choose

investments for personal wealth


Discretionaryexpenses

Non-discretionaryexpenses

Investment intoprimary business

Savings

Investment forpersonal wealth

Others

Charity


24% 27% 23%

15% 15% 16%

5%5%

4%

25% 23% 17%

14% 13% 19%

15% 15% 19%

2%2% 2%

Spends

21

Jewellery and Apparel Retain the Largest Share within Areas of Spending Share of apparel and accessories, holidays, and electronic gadgets increased

Jewellery Apparel

Electronics Home Related

Events

Vintage Spirits

LuxuryWatches

Art & Paintings Automobile

17% 16%

13%11%

9%

5% 4%


5% 5%

Holidays

15%

passions. In an attempt to capture the interests of India’s ultra HNIs, subsequent chapters detail their spending preferences on apparel and accessories, in addition to their interest in wearable devices, art, automobiles, and events. We have also captured their growing interest in a sustainable lifestyle and renewable energy as an investment avenue.

Almost all areas of spends have seen an increase over last year, indicating positive sentiment among ultra HNIs, driven by improved economic outlook.

Luxury companies looking to woo young ultra HNIs and garner a large share of their lifestyle spends are likely to take a cue from this pattern.


22

UPSCALE ELEGANCEDesigner-wear and expensive accessories are haute with the Indian ultra HNI

he ultra HNIs live in a world filled with innumerable business appointments, luncheons, formal dinners, and high-brow events, adorned and embellished by a

landscape of beautiful clothes – elegant business suits, sophisticated foreign labels, and exclusive collections by stylish designers, both from India and abroad.

This section attempts to peek into the glamorous wardrobes of India’s richest, usually filled to

the brim with the latest outfits from premier luxury brands. In their purchases of apparel and accessories, brand value is what pulls at the ultra-HNI heart and purse-strings the most. They cannot resist the tasteful temptation of the limited-edition release of luxury-brand items, and it usually turns into an impulse purchase.

In our interactions with ultra HNIs, we found that 64% of them are impulsive buyers when it comes to apparel and accessories.

When a member of the British royal family wore an outfit by a high-end Indian designer, the designer’s website crashed due to enquiries from all across the globe

Spends

23

Popular Buying Destinations for Apparel and Accessories India is the favourite, followed by Dubai, Singapore and Europe

59% 28 5%

3%

19%%% 28Singapore EuropeDubaiIndia Thailand


Other destinations

Dubai and Singapore have emerged as other popular destinations for apparel and accessory shopping, while Europe is the next most popular. What they really value is variety and exclusivity.

Many Indian ultra HNIs and their family members, particularly women, are true fashionistas at heart. They own exquisite collections of Indian and western wear, which are integral to the various high-profile events that they attend almost daily. Most ultra HNI wardrobes, especially women’s, are sure to include luxuriously embellished Indian-wear crafted by prominent Indian designers and accessories from top-end international brands.

While ‘branded luxury’ was the most important driver in their apparel choices (32% of them said that this was their first priority), weather-specific choices in clothing was important for 26% of ultra HNIs. Interestingly, men were found to be more brand conscious compared to women!

Not too long ago, visiting a foreign location for shopping and other purchases was de riguer for these brand-conscious ultra HNIs because of the limited choice that shopping in India had to offer. However, this is not strictly necessary anymore - we observed through our survey that as many as 59% ultra HNIs now satisfy their apparel and accessory purchase needs in India itself.


24


15%

30%

43%

7%5%

16%

33%

41%

9%

1%

The Frequency of Apparel and Accessory PurchasesOnce a quarter to once a month

9%

33%

29%

19%

10%


More than once a month Twice a year At least once a yearOnce a month Once a quarter

15%

31%

41%

9%4%

Overall

In our interactions, we observed that while professionals tend to have a lower frequency of apparel and accessory purchases, entrepreneurs and inheritors are more frequent buyers. However, most ultra HNIs picked up these items between once a month and once a quarter.

Interestingly, product catalogues of international luxury brands have started showing an inclination towards ‘Indianise, personalise, and customise’. For example, a European pen manufacturer regionalised all its marketing material letterheads, invitation letters, and newsletters; it also altered

other aesthetics such as colours and amount of decoration used to Indian tastes. A Lebanese designer's spring 2016 collection was inspired by Indian looks of the traditional saree and salwar kameez. A French luxury footwear and fashion designer launched a Bollywood-inspired shoe collection which included traditional Indian designs and embroidery.

Past offerings by top brands have set the tone for the future in terms of trends in apparel and accessories, one that is increasingly inclusive of Indian-ultra HNI tastes and desires.

Spends

25

ART AND PAINTINGS

eorge Bernard Shaw is once believed to have said, “Without art, the crudeness of reality would make the

world unbearable.” Indian ultra HNIs seem to be on the same page as Mr Shaw – most have always been passionate about art, but a growing number are now considering it a safe haven for investment and a means to preserve family wealth.

Art and paintings have always been an inherent part of Indian culture, whether it is Mithila Madhubani paintings, Rajasthani miniatures, Mughal, Mysore, Pahari, Tanjore, and Rajput paintings, Raja Ravi Varma’s inimitable style, or Odisha’s pattachitras – they all are an important part of India’s rich history.

With increasing awareness about art, not only for the simple pleasure of owning a beautiful and timeless creation, but also for the sound

For the simple pleasure of owning beauty

Leading auction houses focus on prolific Indian

artists besides other modern figurative and

abstract artists


26

business sense it makes due to its manifold value-appreciation, ultra HNIs’ are increasingly treating art and paintings as an integral component of their portfolio.

Our survey shows that for 68% of ultra HNIs, art and paintings are impulse purchases; only 32% engage in research before making a purchase decision. For more than 80%, passion and status are key drivers for acquiring art and paintings. Other reasons include tradition and networking. Ultra HNIs are combining their aesthetic sense with their financial intuition to broaden and

What Drives Ultra HNI Purchases of Art?Passion and status are key drivers


Passion85%

Status81%

Tradition31%

Networking28%

Resale value26%

deepen the market, thereby making this segment an alternative investment avenue.

Of the ultra HNIs we surveyed, 26% said that they buy art and paintings for their resale value and as an alternate asset-allocation avenue, given that this segment acts as an effective hedge against inflation and weak economic periods. In addition to individual ultra HNIs, buying of artwork has seen heightened interest from the corporate sector and from institutions - in fact, the corporate segment has already amassed significant collections.

Spends

27

Types of Paintings that Indian Ultra HNIs Like64% prefer Indian paintings and 56% prefer western ones


Indian

64%Western

56%Dependent on Historical Importance

35%Contemporary

24%Far Eastern

33%

Indian art and artists have started receiving global recognition; in fact, in the last few years, Indian art has become a common feature in global auctions. Increasing awareness and appreciation

has led to Indian art becoming the first choice for ultra HNIs. Indian contemporary works also sell at record-breaking prices in prestigious auction houses.


28

Sources of Purchases

It is extremely important for ultra HNIs to obtain independent and objective advice while making investments in any asset class, including high-value works such as art and paintings. The art market has grown considerably in recent years, which presents interesting opportunities for providers of art-related services, as well as for wealth-management services that would integrate art in their services and strategies.

Based on our survey, we have found that 71% ultra HNIs prefer to buy art and paintings from art houses, 58% choose exhibitions, and 50% rely on Indian auctions. Online galleries, international auctions, and resale in secondary markets are also preferred ways of buying art and paintings.

Where do Ultra HNIs Shop for Art?Most prefer buying from art houses, exhibitions, and auctions


Art House71%

Exhibitions58%

Indian Auction50%

Online Galleries38%

International Auction 20%

Resale in Secondary Market

16%

Last year, while inaugurating an art museum in Mumbai, a prominent ultra-HNI family displayed 30 paintings belonging to Baroda's royal family

Spends

29

Spending Patterns on Artthem twice a year. Only 10% spend on art at least once in a quarter. While the interest levels in art are high, the actual spending on art, in comparison, is modest among the wider ultra HNI segment; 85% spend less than `10 lakh on art and paintings in a year while only 3% invested more than `25 lakh per annum.

Our survey shows that average spends were `7.5 lakh per year. This spending trend is likely to rise with the growing demand and popularity of Indian art across the globe and as ultra HNIs develop a deeper understanding and appreciation for art.

Driven by high disposable wealth, the growing ultra HNI population has triggered a change in investment behaviour in art and paintings. Prices are driven by a combination of availability, quality, and popularity.

Of the ones we talked to, 61% ultra HNIs purchase art and paintings only once a year and 29% buy

One of the world's largest auction houses

recently made a record for any auction held in India - by selling art worth `100 crore in December 2015, highlighting the appetite

for Indian artSource: Top of the Pyramid 2016, Kotak Wealth Management

How Much do they Spend on Art?Not much; 97% ultra HNIs spend less than `25 lakh per year

85%

12%3%

Less than `10 Lakh

`10-25 Lakh

`25-50 Lakh



30

ACCESSIBLE CONVENIENCEWearable devices becoming very popular

ver the years, the term ‘wearable’ has undergone a dramatic change. New technology and its enthusiastic adoption

have helped to create a whole suite of electronic products that can be worn. Ultra HNIs have followed and adopted this trend keenly, so much so that these devices now form part of their daily lifestyle.

Interestingly, our survey showed that older ultra Indian HNIs, between the ages of 36 and 50 years, were more eager to adopt wearable devices than the younger ones; we saw close to 61% adoption among the 36 to 50-year age group compared to 55% adoption among ultra HNIs who are below 35 years of age.

Increasing Prevalence of Wearable Devices among Ultra HNIs57% of them use these devices in their daily lives


57Of ultra HNIs usewearable devices

%

O

Spends

31

The quest for access to real-time information in an easy and convenient manner has led to as many as 57% of ultra HNIs becoming users of atleast one high-end wearable device. What was once considered fiction has now become a reality; devices of the future are now exclusive and more accessible.

Currently, popular wearable devices include smart watches, fitness bands, smart glasses, virtual reality headsets, and sleep headphones – to name a few. Our survey uncovered that as many as 68% of ultra HNIs have a smart watch – it seems to be one of their most popular wearable devices.

While only 32% of them use fitness bands, we expect this usage to grow as awareness about their advantages increases. Other niche products

like sleep headphones – which block out noise to aid slumber, while being comfortable for the sleeping user – are also gaining popularity.

These wearable devices are carving out a niche for themselves in catering to specific needs – such as fitness bands for health-conscious individuals and smart watches to aid convenience. These gadgets assist users in something as simple as allowing them to answer calls, to something as complex as becoming their personal health assistants for tracking sleep patterns and fitness regimes. We have seen the children of ultra HNIs showing an avid interest in wearable devices such as smart watches, virtual reality headsets, and segues.

The adoption of wearable devices has led to an increase in interest in this sector, which is giving rise to new start-ups; this, in turn, could make way for ultra HNIs that are both young and tech savvy.

For 81% of ultra HNIs, wearable devices serve as additions to social status. For an equally high proportion (73%), passion for these devices drives their purchases.

These hands-free devices are beginning to act as virtual assistants to ultra HNIs and provide them with customised recommendations – such as a fitness band that prompts an optimal workout regime allowing the users to set targets as per their capability and stamina. At least 70% of ultra HNIs in our survey believe that the high degree of customisation offered by wearables has led to a marginal-to-positive change in their lifestyles.

Most Popular Wearable Devices Smart watches are the rage; fitness bands are fast catching up


32%

Smart Watch Fitness Bands VR Headset SleepHeadphones

31%

17%

68%

Smart watches are the new

rage among the ultra HNIs and

fitness bands are also becoming

increasingly popular


32

Luxury wearable devices also provide options for personalisation such as name and date engravings. Not surprisingly, a few luxury jewellery and watch brands have taken the concept of a wearable device to a different level with the introduction of ‘smart jewellery’ for the ultra-rich– diamond studs and 18-carat gold, combined with cutting-

edge technology. These devices enable contactless payments, gesture recognition, and remote access to cars and homes.

The jet-set will increase their wearable-device usage, as these gradually cater to every aspect of their lifestyle.

Hands-free wearable devices are already acting like virtual assistants to ultra HNIs; their customised recommendations should lead to higher adoption

Reasons for Using WearablesMost common reasons include social status and passion


Social Status Passion

Convenience

Health & Fitness

Personal Safety

Innovation

81% 73% 45%

36%

33%

31%

Spends

33

P R O F I L E

If the impact is more with

low profit, it is better to be

an NGO

PRAKASAMNagaraja

r Nagaraja (Naga) is an angel investor, impact-investment specialist, and a member of the Indian Angel Network.

He spent 16 years (1996-2012) with CDC Software, most of it in the US, from where he left as President, South and Southeast Asia. In 2012, CDC was sold to a private equity firm, and Mr Naga

M decided to take a break from a flourishing career and do something completely different. The seeds of this ‘something different’ were sown almost 13 years ago; in 1999, he and his team had raised money for a group called Association for India’s Development, which was used to support NGOs in India.


34

more time and effort, it has good potential. This led to the launch of IAN Impact, which is focussed solely on impact investments. Its first venture was GoCoop, India's first social marketplace to buy and source handmade apparel, home furnishings, fabrics, and crafts directly from co-op weavers and artisans.

Initially, only 40-50 IAN members supported the GoCoop concept, but ultimately all 350 came on board, which eventually fuelled investments in Uniphore (company that allows software to understand and respond to natural human speech in many languages), Saahas (organic waste management, collection and recycling of packaging waste and e-waste), and Freshworld (a farm to home FnV using electric smartcards).

In fact, Saahas, he recalls, was an NGO. It took a push from Naga and his portfolio consultant company for Saahas to realise that it did not have to remain an NGO – it could become a sustainable social enterprise rather than depend on donations for growth – and perhaps make a bigger difference to people’s lives.

All his investments are in the impact space right now in the `50 lakh to `6 crore bracket with the average investment ‘sweet spot’ at `3 crore. He calls this space “high risk and high return”.

Naga has invested in 18 companies and is sitting on a 4X appreciation right now while some are at 5X-13X return. 15 are doing well and 3 are not doing well. He reinvests his returns, he says. He believes that there is ‘political will involved’ in renewable energy in India and sees a bright future for this sector.

He served as the group’s president for a while and spent time in India, particularly in India’s villages when he realised that he fervently wanted to contribute to the country’s social upliftment. However, it was not until 2012 that he could whole-heartedly pursue his heart’s desire.

From 2012, he has been a partner at Acumen Fund, which invests patient capital in businesses whose products and services enable the poor to transform their lives. This US-based company was started by entrepreneur and investor Jacqueline Novogratz in 2001. Acumen has invested more than US$88 million in 82 companies across Africa, Latin America, and South Asia. Mr Naga joined Acumen with the idea of bringing in the efficiency of a corporate into the heart of an NGO.

Besides Acumen, he is a part of the Indian Angels Network, and the founder Chairman of Native Angels Network, a board trustee of Nativelead Foundation, a non-profit organisation promoting innovation-based New Age entrepreneurship. He is also on the board of several social-enterprise companies.

In his career as an angel investor, he has invested in 18 startups in the impact investing space. His investment philosophy rests on what he calls the 3Ps – profit / planet / people. “As an investor, my main interest is profit. But as this is an impact investment, there is a longer grace period – so this is called patient capital,” he says.

Mr Naga was instrumental in making the Indian Angel Network look at companies other than IT for investments. As part of IAN, he urged fellow investors to look at companies in the social space- he believed that even though this space requires

The challenge is to get wealth into the social ecosystem

Spends

35


36

COLLECTIBLES

n the past, maharajas, royal families, and landlords lived opulent lives and loved to surround themselves with beautiful objects – commonly called ‘collectibles’. These collectibles were often their pride and joy and were

proudly displayed for their aesthetic and monetary value. These collections have included vintage cars, gems and jewellery, paintings and sculptures, and curios.

Snap to the present and the zest for collectibles is equally visible in ultra-HNIs’ collections. Ultra HNIs have varied tastes – from the quaintest of objects to the most stunning, ostentatious jewels.

These collectibles not only define their quest for luxury and power, but also their desire to be exclusive and distinct. This section explores the drivers for collectibles, various categories within this segment, and their purchasing trends.

Defining the quest for luxury and power


Spends

37

Our survey revealed that 65% ultra HNIs prefer collecting electronic gadgets and about a third have developed this interest over the last one year. Luxury cars account for 63% of ultra HNIs’ collections, followed by investments made in art and paintings.

In fact, collecting cars that are antique or fashionably modern is an established purchase trend among this community over many years. These car collections are extremely opulent,

depending on individual eclectic leanings. All latest luxury / sports car models launched in India – from coupes to caravans – are generally pre-booked, showing the passion that ultra HNIs have for cars as collectibles.

Ultra HNIs that invest in art / paintings for their collectibles tend to invest in the most expensive paintings by world-renowned artists, making their homes veritable museums – almost an intimate haven for art aficionados.

Most Preferred Collectibles that Ultra HNIs Invest In

A Kolhapur-based ultra HNI's enviable car fleet

is maintained by a team of

mechanics daily

What Kind of Collectibles do Ultra HNIs Covet?Most-owned are art and paintings, cars, and electronic gadgets


Electronic Gadgets

Luxury / SportsCars

Art / Paintings Sports / CruiseBikes

Antiques Currency Other Memorabilia

Stamps

65% 63%

56%

40%35%

30% 27% 21%


38

An ultra HNI we met is big into scripophily –

he collects antique stocks and bonds. His collection

totals more than 1,000 cancelled share and

bond certificates

It is not just their homes that they adorn with these artifacts – they are very visible in their work places too. Modern sculptures and contemporary art is the latest flavour for the wealthy. Structures and sculptures made out of waste and recycled material are also becoming highly prized among ultra HNIs.

The charm of letter writing is fading, but philately (stamp collecting, once perceived as a hobby that kids indulge in) has now become an investment mechanism for ultra HNIs. Many of them look at stamps known for their antique value and history as an alternate investment avenue.

Collectibles are not always conventional. For example, having a passion for carpets is fairly

Sources of Purchases

Ultra HNIs do not leave any stone unturned in their quest for collectibles that add to the grandeur of their living rooms, office spaces, or atriums. These purchases are traditionally known to require the collector visiting, examining, and then estimating the value of the article being purchased.

Even now, most collectibles are purchased through physical channels (not online ones) with 63% through special stores or institutions.

Of course, technology is augmenting traditional physical purchases of collectibles; online channels as a source of collectibles are evolving. Our interactions revealed that 47% of ultra HNIs are considering online channels for their purchase of collectibles.

While special shops and old markets of cities are famous among ultra HNIs for their collectibles shopping, the increasing interest and growing awareness of niche collections is also providing

unheard of in India. Nevertheless, an ultra HNI from Delhi has several rare, characteristic specimens of many varieties, some of them going back 200 years! He collects these carpets from around the world and exhibits them in metro cities such as Delhi, Mumbai, and Bengaluru.

Spends

39

opportunities for specialised outlets, mobile apps, websites, and communities that are emerging and shaping up the collectible marketplace in India.

Special institutions and communities provide ultra HNIs the chance to pursue, purchase, and showcase their collectibles.

For example, because of the interest displayed by the Indian ultra HNI community, one of the world’s most prominent and oldest auction houses

One of the world’s oldest

auction houses recently opened

an office in India with a preview

of some of its works for the very wealthy

opened an office in India recently and even announced an exclusive preview of some of its works that would subsequently go under the hammer.

These auction houses do not just engage in vanilla auctioning of collectibles, but work towards kindling the interest of the ultra-rich community through educational events that keep them well-informed on current trends and concerns in the global collectibles market.

From Where do Ultra HNIs Purchase their Collectibles?While mall displays and special stores are high up in ranking, online is making rapid inroads


Collected by SelfMall Display

Special Stores / Institutions

Online Purchase Auction

Museum Passed on as Heirloom

65%

63%

47% 34%

21%

14%

8%


40

Key Drivers for Collectibles: Led by Passion

Passion is a major factor in pursuing collectibles – 70% of the ultra HNIs that we interacted with confessed that their passion for owning a collection of exotic and interesting items drove their purchases. This passion has made them take steps towards setting up communities to promote art and to collect exotic items. For example, a prominent Mumbai-based family has set up a foundation to promote art and has opened up their entire collection to the public. Not only this, they provide assistance in developing art galleries in the city. It would not be long before they pursue professional courses to take their interests to the next level.

About 63% of the ultra HNIs we surveyed consider it a matter of pride to own and display collectibles. Many prominent personalities have long collected (sometimes for generations) artifacts that represent India’s magnificent past and its rich cultural heritage. In fact, for 28% of the ultra HNIs we talked to, traditional values drive their purchases.

It is time that these collectibles – from exotic wine collections, to expensive paintings, to classic cars – are looked at as ‘passion investments’. Worldwide, wealth managers and consultants track the value of these investments for their clients. Although these are not a prominent asset-class in India yet, they are likely to become one, very soon. Rising interest in collectibles among India’s ultra-rich could open up these passion investments as a new asset class.

A Mumbai-based family has set up a foundation to

promote art and has opened up their entire collection to the

public apart from providing assistance in developing art

galleries in the city

What Drives Ultra HNIs’ Purchases of Collectibles?Most are driven by passion and consider these status symbols


70%Passion 63%Status

28%

Tradition

Investment

20%Networking 20%

Spends

41


42

onflicts relating to succession are almost as old as recorded history. Most famous Indian epics have an undertone of problems related to, and the

importance of succession. Even as literature and reality demonstrate how important this area is, Indian business families have not really given this issue its due. Wealth can grow manifold and be preserved for many generations if a well-defined and well-thought-out succession plan is in place.

Problems in succession planning take many forms – ‘The Aurangzeb syndrome’ is a classic case of the potential heirs of the family fighting over the succession of the family estate – something that recurs fairly regularly in corporate India. All too often, we also come across the ‘Dhritarashtra complex’ where the patriarch or matriarch has a clear preference for one family member, leading to problems among potential heirs. In the past, we have seen cases where such a preference has even taken precedence over merit.

As the concept of succession planning has moved far beyond just dividing the gold amongst family members, and as meritocracy plays a vital role in the right fit, finding the right successor is becoming very important. In this section, we explore recent trends and changes in succession planning among India’s ultra HNIs.

c


98%of Ultra HNIs believe in Succession Planning

PLANNINGDeciding the next in line

81% of them give it high importance

SUCCESSION

Spends

43

Passing the TorchAs ultra HNIs move through various stages of their life and build growth strategies to deal with the changing business environment, the issue of succession becomes critical to ensure smooth functioning of their businesses, and for the financial security of their family members.

Today, most ultra HNIs understand that succession planning is a continuous and proactive process, rather than a reactive one. Their plan involves identifying potential leaders, grooming them, and encouraging them to look beyond their

immediate responsibilities. This translates into vision-building, better teamwork, and effective performance — both for the successor and the business.

Recently, a north-based industrialist went through a feud over the family’s wealth and business due to lack of a proper succession plan leading to misunderstandings between family members. Such episodes serve as a wake-up call for ultra HNIs and push them into planning for succession well in advance.


Motives of Succession PlanningWell-being of the family remains a major driving force

35%30%

Ensure well-being of immediate family

Make family capableand independent

Contribute to growth and ringfencing family business

Reduce family / internal disputes

15%

12%

8%

Ensure the well-being of other stakeholders


44

Methods of Succession Planning: Investing on the Future With the changing education paradigm in India, ultra HNIs are making way for the next generation in their enterprises quite early on. Successors are being inducted in businesses at an early age; they are getting involved across functions to understand nitty-gritties, and to build relationships with key people in an organisation.

We have seen this in the past – successors joining in as management trainees in prominent business houses in India, receiving insight into functions, and working their way to the top. This makes the transition smooth for key parties involved – employees, family members, investors, and other stakeholders.

During our interactions, we noticed that a few ultra HNIs are even working on a blueprint to get all stakeholders on board to understand the succession exercise. There are many factors that affect ultra HNIs in the process of succession

22%

1-2 years

Time for Succession PlanningUltra HNIs take about five years to plan efficient succession

Over 5 years

%4335%

2-5 years


planning, including the type of business, size of company, and existing leadership structure. These factors affect the organisation, as they influence productivity, reputation, brand image, and employee morale. Our survey revealed that 43% of ultra HNIs prepare for at least five years to put an efficient succession in place, while another 35% take anywhere between two to five years.

Preparation for succession planning happens majorly through a formal education – seen in 45% of ultra HNIs. For 22%, strategic involvement in business decisions serves as a means for grooming

The son of a leading industrialist completed his technology management course from a leading university in the

United States of America while undergoing hands-on training in

their organisation

Spends

45

the next generation. Other ways include – demonstration, exposure to business scenarios, and formal and informal mentoring.

Leading universities in India and abroad have started offering entrepreneurship and family-business-management programs and a growing number of ultra HNIs send their children and family members to these programs. For example, the son of a top industrialist completed his technology-management course from a leading university abroad while undergoing hands-on training within their company.

These programs help participants understand their businesses better, prepare them to sustain through phases of transition, and enable them to grow their businesses in an environment of increased competition.

Importantly, these programs benefit not just the participating students, but also their family businesses. This is because through these students, other members of the family are able to learn and understand from each other, thereby enabling continued success and reducing conflicts in a family-managed business.

In ‘successor induction’

they join in as management trainees and

work their way to the top

How do Ultra HNIs Groom Potential Successors? Educating and strategic involvement in business decision are the most prevalent methods


45%Education

22%Strategic Involvement

24%On-groundMentoring

6%Documentationof best practices

3%Informal

Mentoring


46

Identifying the Right Candidate

Traditionally, succession planning among ultra HNIs largely meant dividing assets among the next generation, but it is not that simple any more. The phrase is gaining a wider role and significance in the current scenario. To find suitable successors, ultra HNIs are making concerted efforts with sophisticated methods and strategy. They are devising elaborate models to sharpen their succession and development practices.

Broadly, there are two approaches for succession planning – one, where ultra HNIs look at harmonising expectations with the family

members before drafting a succession-planning blueprint; two is more about dividing the empire.

Daughters are becoming an integral part of succession planning. The daughter of a leading industrialist recently

played an active role in business expansion through acquisition and has also led the company’s

foray into new sectors


The Pool of Potential SuccessorsUltra HNIs often choose children and ‘high-potential’ family members

54%

Kids

39%

High-potential family members

High-potential external candidate

Non-immediate family

Friends

4%2% 1%

Spends

47

The first approach, while superior, is a difficult one due to the struggle involved in bringing all stakeholders on board; however, if successful, it leads to finding wider acceptance, an undivided group with higher resources, a bigger balance sheet, and eventually, a bigger impact on the marketplace.

For instance, an infrastructure heavyweight recently took this approach to establish a ‘family constitution’, and to make each member of the family understand relationships within the group. He hopes that these moves will eventually lead to effective succession.

Succession planning is becoming increasingly gender agnostic – a major shift among ultra HNIs is that they are trying to include their daughters in their succession discussions. Previously largely ignored, daughters are now seen taking on active roles in their family businesses. Ultra HNIs

Finding the right person for the job, even an outsider with professional skills and necessary education, is

taking precedence over keeping control within the family

are training their daughters and handing them crucial roles. For instance, the daughter of a leading industrialist played a very active role in business expansion through acquisitions, and also in her company’s foray into new sectors. Another example is one of India’s richest families involving their daughter in the telecom business.

With changing times, business families are becoming keener on finding the right person for the top job. This would mean opening up to the idea of finding this person even outside the family – someone with professional skills and necessary education.

Although currently, successors from non-immediate family and professionals are less than 10%, the trend is likely to pick up. Recently, one of India's leading consumer-goods companies with a long family history appointed an outsider to lead the group.


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Implementation of Succession Planning

Assessment is a key practice in effective succession planning. There is no widely accepted formula for evaluating the future potential of leaders, but there are many tools and approaches that continue to be used today, ranging from personality and cognitive testing to team-based interviewing and simulations.

Mode for Succession Planning Wills are the most common instrument

Will8218% Private Family Trust


%

How Ultra HNIs Plan their Succession Most prefer planning for succession themselves

Involve External Agency

27%

Close Confidants73%


In our survey, 73% ultra HNIs said that they prefer planning their succession with close confidants. Others look for advice from external sources such as chartered accountants, consultants, and wealth managers. People are also gradually relying on professional estate planners, trustees, and wealth advisors.

In a country where discussion of death was virtually unheard of, Indians have now started writing wills. The well-heeled, especially the new ultra HNIs, have become savvier about preparing for the inevitable – and their favourite instrument of choice for bequeathing their riches has turned out to be the simple will. Trusts are now gaining traction with many large corporate houses going down this road.

Spends

49

Counterintuitive as it may sound, Indian ultra HNI families are involving younger members of their family right at the onset of succession-planning discussions.

The younger lot is more educated and open to ideas and concepts. Our survey disclosed that 70% of the ultra HNIs have commenced planning of succession at least two years ago, while 62% of them revisit it at least once in five years with the aim of incorporating the latest changes in the family. As SEBI ushers in a new regime of corporate governance, it has asked companies

to put in place succession planning for top management and board positions – in line with best global practices. With the regulator taking a keen interest in succession planning, global best practices in this segment will soon be adopted in India.

Succession planning is not just being treated as an insurance policy for ultra HNI families focusing on the continuity of their business – it is slowly turning out to be a retirement plan for them. Today, they are not waiting to turn 60 before they retire. In the past decade, we have seen a

Early Planning = Early Retirements

How Long Ago did they Initiate Succession Planning?Many ultra HNIs have initiated planning for succession

24%10 years

agoWill start later

17%

19%

5%


10%

5-10 years ago

2-5 years ago

2 years ago

Will start now

25%


50

With a focus on corporate governance, SEBI has

taken an interest in making companies have succession

planning in place for top roles

number of ultra HNIs retiring early and choosing alternate paths for their future. Most of them are working on succession and retirement plans simultaneously. They are keen to ensure that their life after retirement is not dependent on others. They are opting for various post-retirement funds

and insurance schemes to secure the future for themselves and their families.

Many are seen working even after retirement, and in some cases, their risk appetite and business sectors undergo a change. Take for instance an ex-head of India’s top conglomerate – after retirement, he has invested his personal savings in ecommerce start-ups.

Some ultra HNIs prefer to enjoy the post-retirement phase in pursuing their hobbies and passions – for example, an ex-banker from Kolkata turned to freelance photography and has exhibited his works at various national and international forums!

How Often do they Revisit their Succession Planning?Most ultra HNIs visit their succession planning at least once in five years

38%Never

19%1 year

3 years


27%

5 years16%

Spends

51

Education is a long, hard, and human process

and it’s really important that

we give kids the opportunity and

time to be able to meet their

potential

s Mistri is a well-known social activist, educator, founder of the Akanksha Foundation, and CEO of Teach For India.

Her dedication to her cause is awe-inspiring and she strongly believes that quality education is the only way forward for a better tomorrow for India’s underprivileged children.

Akanksha is a non-profit organisation, which provides children from low-income communities with a high-quality education, enabling them to

maximise their potential and transform their lives. Currently, it reaches out to over 5,000 children through two models: the after-school model (where centres support each child by providing a strong educational foundation, help them have a good time, inculcate self-esteem and values, and assist in planning for a steady-income livelihood) and the ‘school project’ model (opening high-quality schools for under-privileged children in partnership with local municipalities).

M

P R O F I L E

Shaheen MISTRI


52

Our goal is to reach a million children in five years, which is a massive jump, but we do not want to compromise the quality of what we give our children in that process

Growing up, Ms Mistri went to 10 different schools in five countries. This kind of exposure perhaps gave her a very early insight into exactly what she wanted to do with her life. Even as a young child of 12, Ms Mistri spent her summers volunteering with disadvantaged children. As a teenager, she was already looking for volunteering opportunities to work with children. When she visited her grandparents in Mumbai, she was appalled by the sharp contrast in the living conditions of the rich and poor in the city – and decided to do something about it. The best way to bridge this gap was to educate children, she decided. In her own words, “My first organisation Akanksha started as a college project and a belief that education is important, kids are important, and because I just enjoyed being with kids. Slowly, a community and classrooms with disadvantaged children grew around me.”

In 2007, Ms Mistri met Wendy Kopp, the Founder of Teach for America, and was inspired to start a similar initiative in India under the ‘leadership at the core of the solution’ model. Her Teach For India initiative, which she began after Akanksha had already flourished for almost 17 years, was a result of her desire to scale Akanksha’s model.

Teach For India's mission statement is that every child deserves to attain an excellent education. It's aim is to prove that no child’s demographics should determine their future. It has grown from 2,000

children in its first year to 38,000 children today. In terms of employees, Akanksha has 200 and Teach For India has 250 and growing. Teach For India is present in seven cities (Mumbai, Pune, Bengaluru, Delhi, Chennai, Ahmedabad, and Hyderabad). Akanksha has eight centres and 16 schools in Mumbai and Pune – the organisation celebrates 25 years of existence this year.

Besides working for children, Ms Mistri says she is ‘obsessed’ with animals, especially stray ones. She is also very passionate about creativity and art – from film to music to fine arts to painting. She loves travelling and is an author. “I have written a book for Teach For India last year called ‘Redrawing India’ and published a couple of children stories about a little crocodile called Miss Muglee, which were illustrated by Akanksha kids,” she says with an indulgent smile.

While Akanksha is not an impact investment, Ms Mistri has valuable words of wisdom for the education sector. “Organizations becoming more professional and being able to tell their story and operate at a scale – this is a big opportunity, as it resonates with what investors want,” she concludes. In this sector, making an investor or donor a partner in the larger vision and giving them an opportunity to actually engage is a great idea, she says and adds that 2% CSR is a really good opportunity for the sector.

Just seeing our children grow and change, and then going out there and wanting to change the society – that to me is really

where the power of the movement is. Our children as young as 5th, 6th, and 7th graders say that I will change my community –

this is just incredibly fulfilling.

Spends

53


54

RENEWABLE

or more than four decades, renewable energy has been an important component of India’s energy

planning process. Social and economic growth are top-priority for the government, and it is increasingly seen

using renewable energy to drive this agenda.

Ultra HNIs have always been enthusiastic about adopting and promoting renewable energy. Their various initiatives have made them frontrunners in adopting renewable-energy technology; many have effectively integrated renewable energy into their lifestyle and businesses. Popular programmes include water and energy conservation, recycling and reusing plastic bags, and waste segregation.

Committed to a greener lifestyle


Energy efficiency has been included as one of the eight missions in

the Prime Minister’s National Action Plan on climate

ENERGY

Spends

55

Ultra HNIs have a positive view on moving towards the usage of renewable energy, both inside and outside their businesses. Most of them strongly believe in an eco-friendly lifestyle and strive to reuse resources, to plant trees, and to use electric / alternate fuel cars. They also often assist in preserving non-renewable energy sources for emergencies / better uses.

Socially conscious and environment-friendly ultra HNIs are increasingly adopting ‘green’ building practices to minimise the footprint of their homes on the ecology, while maximising comfort. Beyond the latest luxury bathroom fittings, marble floor tiles, and technology time-savers, the wealthy are also investing in insulated roofs, automated sensor

The Importance of Renewable Energy

lights, water-conserving fixtures and fittings, rainwater-harvesting technology, and external solar lighting.

Ultra HNIs have long realised the importance and relevance of renewable energy as a sustainable option to cater to rising energy demands. They majorly focus on initiatives such as preserving and maintaining non-renewable energy sources, reducing and controlling pollution, and improving the environment.

They are also increasingly tying up with commercial and residential high-rises to install solar panels on rooftops, thus encouraging the usage of alternate sources of energy. This has not only turned into a viable business model for ultra HNIs, but has also made the ‘go green’ lifestyle a coveted and fashionable one.

A few examples – a Pune-based ultra HNI family is marketing a line of highly energy-efficient pumps, while a leading developer in Gurgaon is focused on making energy-efficient buildings by using wood instead of aluminium for doors and windows that reduce CO2 emissions.

Energy efficiency is being recognised as a ‘low-hanging fruit’ in the country’s pursuit of energy security, inclusive development, and transition to a low-carbon economy. To fulfil this, ultra HNIs are investing in employee-focused activities, such as campaigns to increase

90% agree that this is important for sustainable development

How Many Ultra HNIs Believe in Renewable Energy?

35%

Neutral

Somewhat Agree

Agree

StronglyAgree

55%

%28%


Two renowned ultra HNIs adopted a

tribal village in Odisha; they

installed solar units with two home-lighting

systems in each of the 61

households there


56

awareness, motivation, and involvement in energy-management activities – with an ultimate aim of reducing the company’s energy costs.

Major states in the country have recognised the need for renewable energy and have set-up large solar parks. Punjab, for instance, has setup the world’s largest single-roof-top solar plant at a cost of `140 crores. Ultra HNIs find such projects good avenues to increase their exposure to renewable energy and usually form groups to invest in such initiatives.

They are also implementing operational and maintenance practices that take into account the

Types of Renewable Energy Investments by Ultra HNIs60% would like to be or are already engaged in initiatives such as solar power, bio-energy, and wind

Wind Power

53%Solar Energy

Bio Energy

Heat Pump17%30%

51%

26%

23%

60%

25%

15%

70%

18%

12%


Direct Investment Impact Investment Evaluating

energy-efficiency impact. Many of them have moved towards making office buildings energy efficient and retrofitting business processes. State governments and mobile-app companies are coming up with car-pooling features, which are backed by ultra HNIs implementing similar systems in their offices.

An ultra HNI, who recently completed the construction of his independent bungalow along the East Coast Road in Chennai has installed features such as insulated roofs and walls to reduce heat ingress, automated sensor lights, water-conserving fixtures and fittings, rainwater harvesting technology, and external solar lighting.

Spends

57

Investment in Renewable Energy: Trailing GrowthOn an average, ultra HNIs invest `15 lakh on solar energy per year; their bio-energy investments are a close second at `12 lakh. These investments are primarily towards solar rooftops and boilers and wind-driven machineries.

Ultra HNIs are also giving up their rooftops to install solar power systems. This model is being used by many solar power companies to increase their rooftop installation capacities. Industrial establishments, commercial buildings, malls, and large gated communities are key targets for such installations.

The government provides several benefits for investments in renewable energy – it permits 100% Foreign Direct Investment in the sector and allows a tax holiday for 10 years for generation and / or distribution of power from renewable energy plants – this has attracted many ultra-HNI investors to the sector.

Specialised financing agencies are also promoting renewable energy projects, while the government provides operating subsidies, accelerated

A leading FMCG company has tied up with a

Jabalpur-based cement tycoon for burning its solid waste in the kilns of his cement plant to

generate energy

Drivers for Investments in Renewable EnergyMain reasons include upcoming sector, energy preservation,

stability of returns, and sector growth

Upcoming Sector Energy Preservation

Level/Stability of Returns


Philanthropy

Impact on Local Communities

34%

14%15%

Rank 1 Rank 2 Rank 3

28%

27%18%

15%

31%

29%

20%

15%

15%

3%

13%

23%


58

High Earnings: Renewable Energy is the Next Big Thing

As India’s renewable energy sector marches from the fringes to the mainstream, ultra HNIs are spoilt for choice by the numerous opportunities that it presents, all of which will multiply their wealth and benefit the environment.

Besides renewable energy as an investment and business opportunity, ultra HNIs are avid followers of cost-effective technological innovations and often actively collaborate with academic institutes that specialise in these types of advancements.

Exciting business models are sprouting in this field as the market potential grows with enough room for established inheritors and fresh entrepreneurs. For example, a Delhi-based organisation started by two young ultra HNIs is providing solar-powered water-pumping solutions to meet agricultural irrigation, aeration, fisheries, and drinking-water needs in off-grid areas.

In five years, they have expanded to 14 states, have 2,200 projects on the ground, and are generating revenue in millions each year already.

One of India’s largest automobile companies has installed ‘energy saver’ units along with ‘feeder pillars’ to reduce its energy consumption

depreciation, and generation-based incentives (GBI). These incentives have been one of the most critical factors in driving investments, especially into sectors such as solar and wind power.

States, such as Punjab, have inked MoUs worth `13,500 crore for investment in solar projects and signed pacts for setting up bio-ethanol plants worth `6,000 crore. This trend is spreading to other states such as Gujarat, thus providing

multiple opportunities for ultra HNIs to contribute to this ‘green cause’ while also making it a viable business model.

In January 2016, Indian Renewable Energy Development Agency Limited (IREDA) came out with tax-free secured redeemable non-convertible bonds. Ultra-HNI buyers displayed massive interest and the issue was over-subscribed to almost double the allocated value.

Spends

59

P R O F I L E

r Vinod Keni is the co-founder and partner at Peachtree Management Advisors. He is also on the board of

Indian Angel Network. He is a man who wears many hats (impact investor, angel investor, and management consultant). Surprisingly, he says his journey into impact investing wasn't planned. He was working for a large donor institution

As there are more success

stories in impact investing, its

familiarity among the investment

community will grow

when he was introduced to this space and soon joined a firm that was looking at a new fund in this segment, which eventually ended up raising US$ 100 million. After this, Mr Keni started looking at impact investing mostly from an angel-investing perspective because he realised it was not just about raising capital, but more about the expertise provided to the entrepreneur and

M

KENIVinod


60

he puts it “You need to pick it up carefully – is it solving a larger problem or need? Something that people really want? Then the next question is if this is practical and commercially viable? Is it sustainable?” He admits to shelving many ventures because they qualified mainly as philanthropic. He is not overtly optimistic about renewable energy in India – “It will take some time, it still has significant challenges in terms of scaling up.”

He believes that impact investing funds should have returns of high 20s to mid-30s in four years (minimum holding period), but there are instances where he has landed up with high teens or even single digits. As he puts it succinctly, “This is like any other venture fund – one can have a few ducks, a few singles, and a few home-runs.”

Mr Keni believes that these segments – employability and skilling, financial inclusion, healthcare, sanitation, water, low-cost medical devices, energy – that are leveraging technologies for people at the bottom of the pyramid, are likely to attract maximum impact investment. In fact, his preferred sectors for investing are fintech and financial inclusion.

Mr Keni’s other interests include collecting antique toy trains, travelling, and reading. He likes travelling to offbeat locations and plans to go to Ushuaia, Argentina, for his next big holiday. A large chunk of his investments are in equity currently, but he plans to shift more towards debt as the years go by. His real estate investments are likely to remain steady.

the management team to build a sustainable enterprise.

Impact investing is challenging. “You look for enterprises that you think are going to be sustainable, the attraction for mainstream professionals to join in is limited because of the longer gestation period, and it takes a much longer time to scale these companies up,” he lists. The capital that comes into impact investing is a more ‘patient capital’. “You cannot come into it and exit in two years.” This is where experience and expertise comes in, he believes.

“Earlier, we saw many people who had passion and who wanted to make a difference, but now we are seeing people with passion plus experience to back that up.” Experience and expertise makes all the difference according to Mr Keni. “Today, you are seeing a class of entrepreneurs who are more sophisticated and experienced – it is a big boon. You now see experienced professionals who are stepping in and saying that there is a large enough need and I know it’s a business that I can make sustainable.” Budding entrepreneurs and experienced ones are now actually able to choose between creating another e-commerce company, or an on-demand delivery company, or a social enterprise.

Social investing is still a fiercely debated concept, he reveals. He says he has had mainstream investors tell him that all investing is eventually impact investing. What he is very clear about is the difference between impact investing and philanthropy; in the former commercial returns are very important, in fact, they are a priority – only then does he consider if the venture will make an impact. It seems to be a fine balance – as

The number of companies that would fail will be high and even the money lost in this sector will be considerable, but these are just cycles before the sector matures, and consolidates; eventually, the number of failures will decrease

Spends

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62

ADVANTAGE

Less inclined towards equity

ver the last few years, the government has liberalised foreign investment policies and created a very favourable investment environment across all segments

of India’s economy. Both manufacturing and services have received a boost under the initiatives 'Make in India', 'Start Up India', and 'Digital India'.

In the past year, sentiment towards the government’s performance and policies has continued to be positive. Actions such as RBI reducing interest rates, listing of smart cities, and clearing several road projects have strengthened ultra-HNI investments in the domestic market.

The investment mood has remained positive. While ultra HNIs have been less inclined towards equity this year due to the lacklustre market performance, they have increased allocation to other segments such as real-estate, especially commercial, and debt. They expect the investment climate to remain bullish on strong economic growth.

O

INVESTHOW THE ULTRA HNIs

REAL ESTATE

Investments

63

Primary Business Remains Main Source of WealthOur survey revealed that this year the main source of wealth for almost half of India’s ultra HNIs is the success of the primary business; last year, this figure was 41%.

There was also a corresponding decrease in the number of ultra HNIs whose primary source of wealth is through sale of business. In conjunction, these trends indicate that they are more interested in building long and sustainable businesses.

A quarter of the ultra HNIs we polled have created wealth from the real-estate sector, while for others the primary wealth source is personal income and equity investments.

Entrepreneurs and professionals predominantly have a single source of wealth. However, inheritors tend to diversify from their established businesses, which has led to wealth augmentation from real estate for them.

A new category of entrepreneurs are also successfully investing in social entrepreneurship businesses that focus on sustenance. Due to their passion and vigour, the ‘impact investing’ segment is rapidly gaining ground in India.

10%

5%

14%

42%

29%

Professional

Equity, ESOP

Sale of Business

Real Estate

Success inBusiness

Personal Income

3%

57%9%

17%

14%

Entrepreneur

3%

48%

8%

25%

%

Overall

16

41%

10%

39%

9%Inheritor 1%


Wealth Sources of Ultra HNIs Across CategoriesExcept for professionals, the primary business is the main source


64

Real Estate and Debt Investments see an IncreaseIndian ultra HNIs broadly invest across equity, real estate, fixed income, and alternative investment assets. This year, the trend of increasing equity portions in ultra HNIs’ investment portfolio saw a reversal mainly due to the near 20% fall in Indian equities. Small-cap stocks, which were among the top picks and performers in the previous two years, took a hit this year.

The stock markets dipped due to a variety of reasons including global events such as a sharp fall in the Chinese stock markets in just three months, and a drop in foreign inflows into Indian stocks. While increasing participation of domestic institutions countered the fall to an extent, the stock markets still saw a negative trend.

Realignment in the equity portfolio of ultra HNIs led to a corresponding rise in the other three

asset classes – real estate, debt, and alternate assets – lending stability to returns. In the debt market, tax-free bond issuances by public-sector undertakings elicited a positive response from ultra-HNI investors.

Real estate investments, which fell last year, saw an increase this time. The Real Estate (Regulation and Development) Bill of 2015, which came into force this year, is widely expected to ease concerns around project development and delivery and bring about transparency and accountability.

Commercial properties are the biggest and most-stable attraction in the real-estate market for ultra HNIs, as they are proving to be more profitable than residential ones. Cities such as Mumbai, Bengaluru, Hyderabad, and Delhi NCR are

Certain series of tax-free bonds issued in FY16 such as from HUDCO, NHAI, and NABARD

offered a yield of 7.00-7.04%, which translates into a pre-tax yield of 10.5%

Investments

65

the hubs for commercial properties, with major domestic corporate offices and multinational companies opening their branches there. The residential segment is also expected to pick up but with a lag as the demand in small centres picks up on increased interest from ultra HNIs.

Commodity investments are also gaining the confidence of the ultra-HNI community. Impact investments (as part of alternate investments) have also captured their imagination. With strong economic growth expected in India over the next few years, the investment mood continues to be bullish.

FY 2015

Equity Real EstateDebt AlternateInvestments

FY 2011FY 2012FY 2013

FY 2014

35% 32%

29%4%

38% 24%

29%9%

34% 20%

37%9%

34% 29%

30%7%

45%

Ultra HNI Investments Across Asset ClassesEquity allocation decreased, alternate investments rising


26%9%

20%

FY 2016

39%

28%11%

22%


66

COMMODITIES ommodities are among the world’s

largest financial markets. Initially conceived as a hedging platform for producers and consumers in local

markets, these markets now provide sophisticated investment and risk-management opportunities for ultra HNIs. Globally too, commodities such as oil and gold have become favourites amongst institutional investors.

Most ultra HNIs invest in commodities, gold is a favourite

Government of India started Gold Monetisation

Scheme under which resident Indians can deposit gold

and receive gold bonds. This scheme has piqued the interest

of ultra HNIs

Investments

67

Exposure to CommoditiesOf the five BRICS economies, four slowed or even contracted in 2015. China’s economy continued to slow down and its move away from commodity-intensive activities weighed on global trade and commodity prices.

Brazil and Russia, two large commodity exporters, are in deep contraction that is also accompanied by currency depreciation, above-target inflation, and deteriorating public finances. In order to counter this volatility in raw material input

prices, Indian ultra HNIs are using the commodity markets to limit their exposure, and also to make gains.

Our survey revealed that 72% ultra HNIs invest in commodities; of these, 40% have invested about 5-10% of their assets while 39% have 11-20% exposure. The commodity markets in India are growing, which means their potential is huge, particularly because commodities are very relevant to India’s economic growth.

How Much do Ultra HNIs Invest in Commodities?49% of ultra HNIs invest more than 10% of their assets


5% 10%

40% 15%11%

20%

20%

16%

20%

10%11%

5% -

- -

19%

Less than

More than


68

Allocation of Investment in Commodities

According to our survey, 78% ultra HNIs prefer gold and silver for their commodity investments; out of these, 59% consider gold a good investment opportunity, also because it is traditionally regarded as auspicious.

Investment in gold varies – from jewellery, coins, bars, to ETFs. Gold certificates and bonds are the

Investment Allocation by CommodityGold and silver command large chunks at 59% and 19%


Gold

59%

Silver

19%

Energy

6%

Agri Based Others

4% 3% 9%Metals

latest additions to this list. Apart from gold, 19% ultra HNIs allocate funds to silver and 6% invest in energy commodities, which is the next emerging sector globally. In line with this global trend, commodity exchanges in India are also offering energy products as a trading opportunity to which the ultra HNIs are warming up and taking restricted exposure.

Investments

69

Sources of Commodity PurchasesTo attain better returns from commodity markets when multiple avenues are available for purchasing them, ultra HNIs are taking more informed decisions about performance and investments. The introduction and evolution of a strong regulatory oversight and framework in commodities has provided a fillip to the sector and boosted ultra HNI confidence levels.

Physical buying is the preferred purchasing method for 80% ultra HNIs investing in gold and for 74% of those investing in silver. However,

when it comes to energy-based commodities, more than half invest directly through exchanges, online portals, and brokers.

For agri-based commodities, 48% ultra HNIs prefer instruments that have an underlying commodity as the driver while 39% prefer direct investments through exchanges; the latter ratio is lower than the former because of the relatively lower trading volume of exchange-traded agri commodities and trading restrictions often imposed to curb price inflation.

Gold

80% 13% 7%

Silver

74% 11% 15%

23% 53% 24%

Energy

Metals

24% 38% 38%

Agri Based

13% 39% 48%

Physical Buying Direct Investment through Exchange / Portal / Brokers Commodity Stocks

Where do Ultra HNIs Purchase their Commodities?More physical buying in gold and silver; energy investments are mainly through exchanges



70

Future Investments: CommoditiesWith the merger of FMC (Forward Markets Commission) with SEBI (Securities and Exchange Board of India), the future of Indian commodity markets is likely to be bright in terms of both investments and returns.

SEBI has initiated a number of measures to streamline the regulatory structure and processes in these markets, all of which are towards increasing market integrity and liquidity, thus helping the growth of the commodity derivatives market.

As the number of commodities traded is increasing, ultra HNIs are diversifying their investment risk by participating in different segments. This is an evergreen market, as it involves trading of products that are as varying as precious metals and agri products.

In our survey, 34% ultra HNIs believed gold is a good investment opportunity for the future too, while 25% picked silver.

Energy-based commodities (such as crude oil) and agri-based commodities (such as soya, cotton) were preferred by 12% ultra HNIs each. Introducing index derivatives and commodity options would be a great step towards broadening the market. Potential participation

from foreign investors, once permitted, will also boost market liquidity. With India set to become one of the fastest-growing economies, ultra HNIs will continue to view commodities as a good investment opportunity.

Preferred Commodities for Future InvestmentsPrecious metals, for both current and future investments


Gold 34%

Silver

Energy (Crude Oil)

Agri Based

25%

12%

(Soya, Cotton, Jute, etc)

Metals

Others

9%

12%

8%

Commodities

(Nickle, Lead,Copper, etc)

Investments

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72

IMPACT INVESTMENT The Fortune at the Bottom of the Pyramid

he ultra-rich have almost always been great philanthropists. Their desire to share their bounty and to do good for the greater society is ingrained and deep-rooted. However, for the last few years, mere charity has

not been enough to satisfy their altruistic propensities.

They want to build enterprises that not only create a positive difference in society, but ones that are self-sufficient, economically viable, and lasting; essentially, sustainable social enterprises. This is the cornerstone of impact investing, which is a growing trend among the elite.

Through impact investing, ultra HNIs derive twin benefits – one, investing in ventures that provide good returns (albeit over a longer timeframe) and two, the satisfaction of having created enterprises that will make a lasting social difference, a feeling that is hard to put a price tag on. This section explores the trends in ultra-HNI impact investments.

Investments

73

Almost Half are into Impact InvestingThe impact investments segment, almost unheard of until a few years ago, is receiving close scrutiny of late. It seems to have become very popular among ultra HNIs; nearly half of the ones we surveyed had some exposure to this novel investment arena.

This segment not only satisfies the ultra HNI’s quest for new niche avenues for investment, but also delivers the satisfaction of wealth creation while making a progressive difference to society. Though the sector is at a nascent stage in India, it has seen fast-paced growth over the last few years. While the general interest for impact investments is high, professionals seem to have the highest inclination, with 67% saying they

have exposure to these investments. This could be primarily because of their experience working in or being associated with some of these sectors.

Among inheritors, 50% said they have an exposure to impact sectors, mainly as a diversification avenue from their core businesses that also gives them high returns.

Among entrepreneurs, only 37% had an exposure; they said it was difficult because these kinds of investments might require their involvement (in addition to capital), which proves cumbersome. However, established entrepreneurs are likely to show inclination towards such investments, our survey revealed.

Impact investments is at

a nascent stage in India and

is seeing fast-paced growth

due to interest from ultra HNIs

Nearly Half of Ultra HNIs have Exposure to Impact InvestmentsMore professionals tend to have exposure to these investments


Entrepreneur Inheritor Professional Overall44%37% 50% 67%


74

Sectors in Impact InvestmentImpact investments target companies catering to basic needs in an effective way, which would otherwise have remained unfulfilled.

We saw in our survey that most ultra HNIs are inclined towards three main sectors within impact investing – financial services, clean energy, and affordable housing. This preference also translates into on-ground investments, with microfinance in financial services being the hottest sector within impact investing.

Successful exits in microfinance coupled with good returns have added to the sector’s allure. The Reserve Bank of India’s recent mandate to a few microfinance institutions to set up ‘small-finance banks’ has translated into renewed vigour and interest in the sector with prominent Indian family-owned companies actively investing in the sector. Additionally, as seen in the lifestyle section, the interest of ultra HNIs in clean energy reflects in their investment preferences – this is also among the top sectors for impact investments.

Our interactions revealed that most ultra HNIs that already have an exposure to impact investments end up increasing their exposure. Typical investments in this segment were below `50 lakh for financial services and clean energy, but up to `1 crore for affordable housing.

RBI’s recent mandate to set up ‘small finance banks’

has translated into renewed vigour and

interest in the sector

Sector-Wise Preference for Impact InvestmentsFinancial services, clean energy, and affordable housing are favoured


Financial Services

Clean Energy

Affordable Housing / Sanitation

Affordable Health

Affordable Education Sector

Rural Supply Chain

Technology Services targeting BoP Space

49%

85%

82%

82%

64%

49%

47%

Investments

75

Drivers of Impact Investments

Capital pumped into ventures that created a social change or into social entrepreneurship ventures was once considered ‘not-for-profit’; however, this view is gradually changing. The impact investments space is receiving traction from the ultra-rich in recent times – key drivers for this are attractiveness of the sector and stability of returns. Other drivers include the social and environmental impact that these investments create. While impact investments are expected to provide stable earnings, they typically have higher gestation periods and are turning out to be medium to long-term investment avenues for ultra HNIs. Given their prolonged

nature and relatively small size (of the investee companies), efficient use of capital and efficiency of the investee company is becoming a major consideration. Due to the level of interest from ultra HNIs in this segment, wealth managers have started incorporating impact investment in their suite of products.

The policy push from the government in terms of National Solar Mission (to promote solar energy) and ‘Housing for all by 2022’ (to provide affordable housing) are also likely to have a positive bearing on the interest levels of ultra HNIs in this space.

Major considerations

for impact investments

included efficient use

of capital and efficiency of the

company


Sector Attractiveness

Stability of Return

Social Impact

Energy Preservation

Environmental Impact

27%

23%

21%

16%

13%

34%

31%

13%

16%

6%

First Sector Preference Second Sector Preference

Key Drivers for Impact InvestmentsThe ultra-rich mainly look at sector attractiveness and stability of returns


76

Investment ModesImpact investments predominantly happen through three key routes – private equity, venture capital, and hedge funds. Our survey showed that 54% of ultra HNIs preferred the private-equity route for making impact investments (an established mode), while 32% preferred the venture capital route for making bets on new initiatives.

Interestingly, they favoured the private-equity route for investments in financial services and clean energy (where companies have some vintage), while the venture capital route was popular for affordable housing (where entrepreneurs’ fresh approaches towards providing such housing took precedence).

Our survey revealed that ultra HNIs expect investments through both venture capital and private equity routes to pick up in the future. The hedge fund route was not popular – very few were looking at that option.

Another avenue that was rising in popularity among ultra HNIs was direct investments through their ‘family offices’. These family houses independently scout for opportunities and conduct their own due diligence before investing into ventures.

Global funds that have an impact investment focus

are setting up shop in India and bringing in their

expertise in managing these companies

Impact Investment ChannelsPrivate equity is the most common mode


Private Equity

Venture Capital

Hedge Fund

54%

32%

14%

Investments

77

edicated, passionate, enlightened, driven, and visionary – these are just a few of Ms Roopa Kudva’s best qualities, all of which

are currently focused on her latest undertaking – impact investing.

Following a 23-year career with rating agency CRISIL – including eight years as CEO, during which she successfully grew the rating agency into a diversified analytical company, including proprietary research outside India – Ms Kudva

has chosen to enter the relatively new impact investing sector. Since 2015, she is a partner and Managing Director of Omidyar Network India Advisors, the India arm of the Silicon Valley-based philanthropic investment firm.

Her transition to impact investing after such a long stint in a ratings and analytics firm stem from her desire to make a meaningful and sustainable difference in people’s lives. As she puts it, “I knew it was time for me to do something different, and

I am deeply inspired by the entrepreneurs

we fund and work with every single day. They

are young, idealistic, and know no fear,

deviating from past generations in their altruism

and single-minded focus on improving

society”

P R O F I L E

KUDVARoopa

D


78

I hoped to find a position where I could leverage my skills and capabilities to make an impact on the world.”

Before assuming this new role, Ms Kudva was not very familiar with impact investing, but the more she learned about Omidyar Network, the more she realised that this was the model she had been seeking. The organisation leverages both for-profit investments and non-profit grants with an ultimate goal of driving sector-level change. “This gives us the flexibility to support the best entrepreneurs and organisations, no matter how they are structured,” she says. Ms Kudva says this model is incredibly powerful, and she is confident that it will provide her with the platform that she desires. “I was impressed with Omidyar Network’s team of incredibly accomplished and driven people – if they chose to dedicate their careers to impact investing, I knew it had great promise.”

She believes that impact investment is coming of age in India. “I can confidently say that impact investing’s time is now – especially here in India,” she reiterates. “We have an incredibly favourable ecosystem for entrepreneurship: funding availability for start-ups has increased, government policies are encouraging innovation and entrepreneurship, and our best and brightest students are choosing entrepreneurial paths. We also have significant drivers of social impact that are gaining momentum: more and more people opening bank accounts, increased opportunities for skills training, and perhaps most significantly, a remarkable penetration of mobile phones that connect people.”

She believes that growing smartphone penetration and innovative business models

enable greater access to basics such as jobs, education, healthcare, transportation, and financial services. This combination of momentum and a supportive environment makes it a phenomenal time for impact investment and offers huge opportunities – both for Omidyar Network and other such companies. Her company follows a flexible capital approach. She says, “We use commercial investing instruments when they are appropriate and more ‘patient’ vehicles for problems that don’t lend themselves as well to traditional instruments.” It focuses on investments in five areas: emerging technology, education, financial inclusion, governance and citizen engagement, and property rights.

Ms Kudva believes that as the industry continues to gain momentum worldwide, not only will India receive more impact investing interest from foreign entities, but there will be a considerable increase in domestic investments as well. In her opinion, sectors that are likely to benefit most from this growth include property rights, mobile money, financial inclusion, and education and skilling. “The proliferation of smartphones in India has been remarkable, and has dramatically improved access to education, jobs, and healthcare, offering incredible opportunities for investors looking for business models that have a clear social benefit,” she says. Her firm, Omidyar Network, is committed to doubling its India investments to US$350 million by 2020. “We encourage other HNIs and families to join us in deploying their capital in investments that produce financial returns alongside significant social impact,” she concludes.

“Impact investing is at a tipping point. India already leads the region in number of impact investments, and we believe that trend will continue

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this report has been obtained from sources which are considered reliable. By accessing and/or using any part of the report, the user accepts this disclaimer

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Kotak Wealth Management: Top of the Pyramid India Edition 2016