Trends of Ultra HNI Wealth Management

Posted on: Thursday, May 24th, 2012
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The community of Indian Ultra HNIs (UHNIs) is growing fast. According to Forbes, in 2010-11 India was home to 57 billionaires and as projected by Swiss private banking group Julius Baer, India’s HNI population will be more than double to 403,000 by 2015. Interestingly, while UHNIs’ asset worth is growing, they are getting younger. The average age of Indian HNIs has fallen to the mid-40s from the early 50s in just five years. And it’s not just the UHNI numbers that are growing, the Indian UHNI today is experimenting with a gamut of investments, from fixed income instruments, commodities to art and private equity firms.

Ultra HNIs Classification
Wealth managers broadly classify UHNIs into three categories – Inheritors (those having inherited high net worth); the Self-made rich or first generation entrepreneurs whose success in business has made them wealthy and Highly-skilled & qualified professionals who became wealthy as the companies they worked were successful. Each of these groups has unique wealth dynamics. Inheritors are averse to risk when it comes to investment and distribute their investments across asset classes with emphasis on real estate and equity. The Self-made entrepreneurs take calculated risks with their investments. They are likely to have the highest proportion of their investments on alternate assets such as private equity stake in businesses, balanced with relatively less risky instruments such as fixed deposits and real estate. Highly qualified professionals, numbers have grown significantly in the last couple of decades, having worked their way to wealth in industries such as information technology and financial services or due to their expertise as doctors, lawyers, and accountants. They tend to invest majorly in equity and debt. They also try to inject more safety in their investments and diversify risk by investing across a variety of asset classes.

Investment Trends
However, with increased exposure to variety of investment products available today, UHNIs across all categories are becoming more sophisticated in terms of their investments and are willing to take more risks in lieu of better returns. The noteworthy trends in UHNIs wealth management include a move away from equities and increased exposure towards less traditional asset classes such as hedge funds, private equity, and derivatives. More recently, enterprise and business ownership has also emerged as the dominant wealth source In India.

Co-investment
Co-investment which is a minority investment, made directly into an operating company in a leveraged buyout, recapitalization or growth capital transaction is one of the latest trends. Sectors like infrastructure, real estate and healthcare as well as sunrise sectors like IT, telecom and retail are witnessing remarkable activity. Interestingly, rather than investing in private equity (PE), UHNI wants to understand the business before investing in it. They have started taking direct exposure to unlisted companies. They are into seed-stage investing rather than putting growth-stage capital as the investment requirement at seed-stage is lower. There is also a desire to invest in niche segments such as sports, entertainment, renewable energy, and boutique restaurants. Alternatively, Ultra HNIs are looking at investing in businesses that are scalable and sectors like education, hospitality, real estate and e-commerce. The UHNIs are as also participating in the financial success of international companies and are buying equity in these firms through international broking houses.

Commodities
Another wealth investment trend is the managed commodity futures which play on commodities such as crude oil and base metals. As a matter of fact, managed commodity futures, is the preferred wealth creation instrument in the international market. Many UHNIs in India too are taking exposure to some complex arbitrages, largely through trading in equity derivatives. While gold continues to be a preferred investment vehicle because it serves as a hedge against equities and inflation, silver is emerging as a new investment option along with gold. Gold has already hit its peak compared to 1980 on a non-inflation adjusted basis, but silver still has a long way to go. Silver can be bought in India as physical commodity, or in Futures or as ETFs in international markets.

Real Estate
Traditionally, real estate has a significant allocation within UHNIs portfolios in India. However, there has been a paradigm shift now, in the way realty investment is being approached. With the retail sector boom, UHNIs are now setting sight on commercial properties and semi commercial properties in residential areas as more viable financial investment option. Moreover, as many UHNIs have expanded their businesses internationally, they are evaluating options of purchasing real estate either for investment purposes or for leisure in global locations such as Dubai, Singapore, London, and New York. These exotic real estate investment demands are being addressed by proliferation of International Property Consultants (IPCs). According to them, apart from US & UK, UHNIs are tapping opportunities in the realty space of countries like Spain and Greece too, since post-meltdown, properties abroad have become cheap.

Passion Investment
A fresh development seen in the investment pattern of UHNIs across all hues is the increased appetite for passion investment in categories like luxury automobiles, jewelry, art, artifacts and yachts. Till now, these acquisitions were considered more as passion buys than investments. However, the attitude is changing and products like gems & jewelry followed by expensive art and artifacts are now being counted as wealth creating propositions. This demand for passion investments is expected to increase as financial markets further stabilize. Indeed, Ultra HNIs growing tendency to acquire passion investments have considerations that are not necessarily traditional but are certainly healthy financial investments that will play a role in their portfolios going forward.

Financial Outlook
Going by the recent industry reports, net worth of India’s UHNIs will grow five times to Rs. 235 trillion by 2015-16. Not surprisingly, wealth managers are confident that India’s UHNIs investment story will only get better as the risk appetite of UHNIs is expected go up. The Indian market is poised for growth over the medium/ long term which will help create opportunities for building a high-quality portfolio for long term growth for Indian UHNIs.

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