One of the few things that arouse the interest of common investors is how (and where) ultra-rich High Net Worth Individuals (HNIs) invest their boundless wealth. From business titans and new-age entrepreneurs who compound their wealth to ultrarich professionals who earn six-digit paychecks around their high in-demand skills, one thing is sure: these HNIs are of a unique kind. And it would be somewhat simplifying to assert that HNIs invest their wealth in the same way, although we find something analogous in their investment endeavors.

Due to changing investor behaviors and market conditions, local and global wealth management industries are undergoing tectonic shifts. Consequently, a one-dimensional private wealth management approach no longer satiates HNIs. Beyond meticulous asset allocation, they seek financial advisors who can provide technology-oriented, holistic investment solutions that span a broad spectrum of financial services. The Financial services focus on wealth preservation, estate planning and tax planning, portfolio diversification, alternative investments, and philanthropy.

Although HNI wealth management will always remain a ‘customer-centric’ business, digital financial services are set to influence HNI wealth management models in the coming days.

The New-Age Source of HNI Wealth

Despite fat corporate salaries, most Indian HNIs tend to be business owners. Therefore, the sources of HNI wealth constitute more of a mixture of both inheritances within business families and newly generated wealth by entrepreneurs and professionals. It has been observed that the younger first-generation Ultra-high-net-worth individuals (UHNWIs) are risk-takers skilled enough to grow their wealth without losing it. They have built their wealth through risky business ventures, so they are open to new emerging investment ideas.

Today, the Indian investment climate is transforming, and as a result, liquidity is improving. Therefore, the valuations for their businesses are impressively increasing, leading to an unprecedented capital inflow into HNI wealth management firms.

It is the dawn of the age of entrepreneurs and start-ups. Once new-age HNI entrepreneurs exit their start-ups, a significant chunk of their investment is primarily utilized for incubating new businesses. A few HNI wealth management firms help the entrepreneurs deal with this transition aligning their investment strategies with their cash flow requirements and adding value to the whole process.  

The Paradigm Shift in HNI Investing

Over the last decade, wealth management experts have observed clear-cut shifts in investing behavior of Ultra HNIs. They have shifted their focus to investing in segments such as distressed assets, infrastructure, and structured credit. They also began to accept leverage in their portfolios. Another trend is the willingness of ultra HNI investors to educate themselves on the investment decision-making process and the change in the evaluation metrics involved in structuring their portfolios.

The cash-flow and lifestyle requirements of HNIs have changed, so do the need for customization and asset allocation in their portfolios. The new trends in the Indian investment sphere – philanthropy and ESG (environment, social, and governance) investing – have gained popularity among HNIs.

One of the noteworthy shifts in the HNI investment approach is their change of focus from ‘timing the market’ to ‘long term wealth building.’ In other words, their investment strategy has evolved from chasing short-term opportunities towards systemically preserving and growing their wealth. As a result, HNIs are now open to new investing ideas and take them up only if they fit in well with their long-term financial goals.

This change of investment perspective of HNIs quietly created the demand for a new asset class: seed capital investments, pre-Initial Public Offering (pre-IPO) investments, and growth capital investments. Mainly, HNIs with specialized knowledge in a particular domain, such as e-commerce or FinTech, have made their businesses successful, looking forward to supporting new investment ideas with their money and mentorship.

A significant surge in HNI interest towards pre-IPOs and IPOs turned the allocations into quality IPOs into a difficult one owing to higher subscription levels. Therefore, HNIs take the route of Alternative Investment Funds (AIF) that either take positions at the pre-IPO stages or through the Qualified Institutional Buyers (QIB) or Anchor categories.

Many Wealth Management firms are rapidly ramping up their capabilities to tap this opportunity. They are building professional investment teams who can advise and guide HNIs on early-stage investing, Venture Capital (VC) funds or start-ups.

Once the darling of the HNI community, real estate is losing its sheen and attracts little or no fresh investments from HNIs. The demonetization in 2016 and the launch of Real Estate Investment Trust (REITs) also exacerbated the process.

‘Boring’ Vanilla Or ‘Risky’ Exotic?

Do HNIs more inclined towards investing in ‘risky’ exotic investments rather than ‘boring’ vanilla investments such as Fixed Deposits? Indian HNIs have a mixed approach: the older HNI generation prefers the relative comfort of traditional investment avenues, while new-age HNIs go for alternative assets that satisfy their appetite for relatively higher risks.

HNIs are in hot pursuit of financial advisers with fresh investment ideas — a call for investment advisors with entrepreneurial aspirations. have also attracted much interest from HNIs.Theme-based Portfolio Management Services (PMS)

Wrapping It Up

Industry experts believe that the Indian market remains traditional for HNI investments. However, the Indian market requires a significant transformation in its depth and breadth to meet the new investor demands. Global best investment practices need to be adapted to the Indian context. In addition, more varied investment avenues need to be created to accommodate the burgeoning levels of HNI wealth and their steadily rising appetite for alternative investment classes.

In India, a country prone to inflation and currency shocks, a more incredible opportunity exists to create financial products around those risks. Moreover, as common investors mature, higher demand for yield-based and inflation protection financial products emerge in India as it did in Western economies.

The Indian HNI wealth management industry is set for its next growth phase. A collective digitalization effort, the adaptation to changing investor behaviors, the introduction of more value-creating investment avenues ranging from early-stage investment vehicles to philanthropic and ESG will culminate in a ‘one-stop shop’ investing experience for its HNI clientele.

Exciting times lie ahead for the wealth management business. Still, it would be sadful to watch wealth managers with traditional business models largely disappearing from the market in the coming days.

– Justin Raj

Alpha Research Team