<p>Alternative investments have experienced explosive growth in recent years. This shift in investment strategy is evident globally, with alternative asset allocation now accounting for 44 per cent of total portfolios. The same trend is occurring in India, where the rise of alternative investments is happening at the expense of nearly every other asset class. Over the past decade, both the percentage allocation and capital invested in alternatives have increased significantly. </p>.<p>Recent data from SEBI, released in September 2024, indicate that India’s alternate investment funds (AIF) sector has gained heightened interest across various categories, including private equity, private debt, infrastructure, real estate, venture capital, and small and medium enterprises. The strength of this asset class is further validated by performance data showing that 75% of AIFs outperform their market benchmarks, contrasting sharply with traditional asset management companies, which have struggled to beat market returns. </p>.<p>The new opportunities in alternatives are highlighting a different set of investment preferences for family offices compared to high networth individuals (HNI) and ultra-high networth individuals (UHNI). While the latter are opting to invest through fund routes, family offices that were early adopters in the alternative investment space have adjusted their strategies based on their experiences and prefer going direct.</p>.<p>Their favourite alternatives include private credit, infrastructure, and private equity. The focus is on themes such as data centres, artificial intelligence, logistics, and warehouses. Family offices are employing a barbell strategy within alternatives, where on one side, they prefer short-tenor high-yield investments (like private debt) or opportunistic deals, such as pre-IPO opportunities. On the other side, they favour assets that are expected to grow over multiple generations and that pay a premium for more patient capital.</p>.<p>Starting in 2024 (calendar year), seasoned family offices have begun to take a more proactive approach for several reasons. The forced selling by other funds and investors has created significant opportunities for them. Their eagerness to invest directly in sectors where they have previously owned businesses is another factor. Most importantly, their experiential learning over the past decade has prepared them for future challenges.</p>.<p>They have recognised the critical need for thorough due diligence and the ability to underwrite unique risks. The challenges posed by information asymmetry and limited bandwidth have been addressed by forming dedicated teams through a single family office (SFO) or a multi-family office (MCFO). They are developing unique methodologies to efficiently assess various components of potential investments, understanding that it is crucial to stay engaged with their investments throughout their lifecycle.</p>.<p>More importantly, they have learned not to be overwhelmed with choices as it leads to a reactive approach, increasing the risk of being distracted by the “next shiny thing.” By recognising this, they can better gauge the market pulse and investment.</p>.<p>Family offices previously operated with loosely defined mandates regarding their alternative investment strategies, but now many have established formal investment policy statements (IPS) or at least developed methodologies to guide their asset allocation strategies, due diligence processes, and overall objectives and constraints. These families are moving away from traditional asset classes as they explore alternatives that reveal a new set of investment preferences. However, those with dedicated research and analysis teams ensure they avoid following the crowd, allowing them to leverage the opportunities in the vibrant and growing alternative investments space.</p>
<p>Alternative investments have experienced explosive growth in recent years. This shift in investment strategy is evident globally, with alternative asset allocation now accounting for 44 per cent of total portfolios. The same trend is occurring in India, where the rise of alternative investments is happening at the expense of nearly every other asset class. Over the past decade, both the percentage allocation and capital invested in alternatives have increased significantly. </p>.<p>Recent data from SEBI, released in September 2024, indicate that India’s alternate investment funds (AIF) sector has gained heightened interest across various categories, including private equity, private debt, infrastructure, real estate, venture capital, and small and medium enterprises. The strength of this asset class is further validated by performance data showing that 75% of AIFs outperform their market benchmarks, contrasting sharply with traditional asset management companies, which have struggled to beat market returns. </p>.<p>The new opportunities in alternatives are highlighting a different set of investment preferences for family offices compared to high networth individuals (HNI) and ultra-high networth individuals (UHNI). While the latter are opting to invest through fund routes, family offices that were early adopters in the alternative investment space have adjusted their strategies based on their experiences and prefer going direct.</p>.<p>Their favourite alternatives include private credit, infrastructure, and private equity. The focus is on themes such as data centres, artificial intelligence, logistics, and warehouses. Family offices are employing a barbell strategy within alternatives, where on one side, they prefer short-tenor high-yield investments (like private debt) or opportunistic deals, such as pre-IPO opportunities. On the other side, they favour assets that are expected to grow over multiple generations and that pay a premium for more patient capital.</p>.<p>Starting in 2024 (calendar year), seasoned family offices have begun to take a more proactive approach for several reasons. The forced selling by other funds and investors has created significant opportunities for them. Their eagerness to invest directly in sectors where they have previously owned businesses is another factor. Most importantly, their experiential learning over the past decade has prepared them for future challenges.</p>.<p>They have recognised the critical need for thorough due diligence and the ability to underwrite unique risks. The challenges posed by information asymmetry and limited bandwidth have been addressed by forming dedicated teams through a single family office (SFO) or a multi-family office (MCFO). They are developing unique methodologies to efficiently assess various components of potential investments, understanding that it is crucial to stay engaged with their investments throughout their lifecycle.</p>.<p>More importantly, they have learned not to be overwhelmed with choices as it leads to a reactive approach, increasing the risk of being distracted by the “next shiny thing.” By recognising this, they can better gauge the market pulse and investment.</p>.<p>Family offices previously operated with loosely defined mandates regarding their alternative investment strategies, but now many have established formal investment policy statements (IPS) or at least developed methodologies to guide their asset allocation strategies, due diligence processes, and overall objectives and constraints. These families are moving away from traditional asset classes as they explore alternatives that reveal a new set of investment preferences. However, those with dedicated research and analysis teams ensure they avoid following the crowd, allowing them to leverage the opportunities in the vibrant and growing alternative investments space.</p>