Indian family office gains on fixed-income bets, eyes private debt

Fixed income investments have paid off handsomely for one Indian family office in a year when many asset owners have looked to increase bond allocations.

Now it's time to look at other related opportunities, a top executive from the family office told AsianInvestor.

“Earlier this year, the focus for us was on quasi-sovereign fixed income. Fixed income as an asset class has delivered,” said Jai Rupani, principal and chief investment officer of the Dinesh Hinduja family office. He is also founder of a single family office network called Aikya Connect.

“We had some great options in India. You could lock in post-tax fixed income yields of about 7.4%-7.5% on a laddered, almost sovereign portfolio [which is golden in my books].”

Now the veteran investor is on the lookout for private market investments.

“We are also looking at some new private credit fund opportunities yielding about 9% post-tax. This is not venture capital debt; these opportunities are with more established companies with solid cash flows,” he added.

INDIA OPPORTUNITIES

Cash flow opportunity hunting has been a recurring theme with asset owners this year. South Korea’s Public Officials Benefit Association previously said it is adjusting strategic asset allocations in favour of more income-generating assets such as bonds and loans.

Rupani is not particularly optimistic about the performance of financial markets in 2023. “The markets will oscillate and likely end up flat, perhaps marginally higher this year,” he said.

"I’m not very bullish.  We haven't lived in a 5% interest rate environment for nearly 40 years, so the system must work through those [interest rate] hikes.  As Aswath Damodaran said in a recent interview on Aikya Connect, inflation is like a genie in a bottle; once it gets out, it takes a while to put it back in [control],” he said.

Damodaran is a professor of finance at the Stern School of Business at New York University.

Rupani believes Indian markets will follow global market cues.

“We have had a strong rally due to several reasons. India is relatively insulated, and inflation is not that much of a challenge either. There are many things in India’s favour right now, including government incentives and the ‘China plus one’ phenomenon,” he noted.

The benchmark BSE Sensex is up nearly 7% this year and has gained 16% and 68% over the past two and three years.

A ‘China plus one’ strategy refers to companies diversifying investments and operations beyond China, rather than relying solely on China as a manufacturing and supply chain hub. 

India is considered an attractive alternative investment destination by many investors as they look beyond China.

The South Asian nation has an opportunity to cash in global companies’ efforts to build factories outside China, new World Bank President Ajay Banga told Reuters recently.

Global pension funds and sovereign wealth funds also told AsianInvestor earlier this year that they plan to increase their bets on India, and find equities, renewables and infrastructure particularly appealing.

Yet if the US and Europe slip into recession, it doesn’t mean India won't face any spillover effects, especially in the tech sector, where unprofitable tech companies have now lost 30% to 50% of their valuations.

“We are already seeing transactions where billion-dollar companies are seeking money [to stay afloat],” he said. “It’s already happening. You need a couple of months to see it reach a point of pain when entities can’t or won't get sold, and that's when you have to be ready to write the cheques.”

The period to do that will be September to December, according to Rupani. “The groundwork is already being done; we are attending conferences, talking to GPs (general partners), mapping out meetings, etc.,” he added.

INVESTMENT APPROACH

The veteran investment professional also shared some insights about how the family offices manages investments.

“It all starts with the needs of the family. What are their liquidity needs (cash flows), risk appetite, and return expectations? Based on that, we decide on what asset classes we go into,” he said.

While each family member may have different needs across these three criteria, all the individual asset allocations need to roll up into one large family portfolio and still makes sense.

“Sometimes, you need to tweak the buckets across members to make that work,” Rupani said.

The family office invests in some venture capital funds as limited partners, but that is money invested for the long term. “As they say, invest and forget. That accounts for typically 10-15% of the portfolio,” he said.

Rupani shared some insights into the asset allocation of the family office, which is mapped entirely to the needs of the family.
Image credit: Shutterstock

It also has fixed-income investments mapped to a hierarchy of needs.

About 40% of the portfolio is also invested in public markets. “Public markets are both strategic and tactical; in the strategic bucket, we invest money in public markets weekly. Tactical allocations are made when we see displacements like COVID-19.”

Stock market investing for the family office is a long-term play, with an investment horizon of up to 20 years. “Of course, depending on when an investor wants to exit, you must also prepare for that,” said Rupani. “So if an investor [family member] wants to exit in the 20^th year, we would move money out of stocks and into safer avenues from perhaps the 15^th or 16^th year onwards, depending on the market cycle. This will help protect the assets at the tail end before delivery.”

The asset allocation approach is not specifically geared towards a target-return investing style, he said. “It is all based on the family’s needs. …and we do ensure we are still making a real return based on the above parameters.”