In any case, success and failure are both two-way streets.
Seventy six per cent of a failed venture doesn’t amount to much anyway, 24 per cent of a successful business is definitely more valuable.
‘If it’s not going to be successful, how does it matter who owns it,’ says Amit. The reason why models such as the one they struck with Jain don’t work across the world is because of a lack of trust. If you can get that trust, which is very difficult to do, being incubated within a larger, parent company is a viable approach — especially when professionals become entrepreneurs.
It has clearly worked out for both parties.
IIFL Holding’s 22-crore ($3.2 million) investment in the wealth subsidiary has multiplied in value to 2,700 crore ($445 million) — more than 125 times in eight years. It has been similarly fruitful for the IIFL Wealth founding team and senior employees as they have been able to scale up a business without having to raise multiple rounds of funding — and, in turn, diluting their ownership.
Fortunately, for them, inspiration had been close at hand as they established the dynamics of a multiple-member founding team being seeded in by a larger parent company.
Back in 2003, as a still-relatively new sales manager at Kotak in Delhi, Karan had met Vineet Nayyar, the vice chairman of Tech Mahindra. At that time, Nayyar, a former IAS officer — who had also been managing director of HCL Corporation and vice chairman of HCL Technologies — was the CEO of HCL Perot Systems, which he had co-founded.
Nayyar became Karan’s client and is someone he has since looked up to as a role model. In 2007, along with his colleagues Sanjay Kalra and CP Gurnani (at the time, the company’s president and head of global operations), Nayyar joined Tech Mahindra in a somewhat similar professional entrepreneurship model with equity ownership for the founding team (each of whom had an almost-equal percentage) plus a pool of equity for employees.
It was similar to what the three entrepreneurs were trying to do with IIFL Wealth. ‘I was quite influenced with the way Nayyar had approached it, with the founders having an equal share irrespective of who the CEO was, and the way they managed to do this within a much larger company, Tech Mahindra,’ recalls Karan.
By early 2008, within two months of the first meeting Yatin had with Jain, the new venture took formal shape on paper; shareholder agreements were signed and IIFL Wealth Management Limited was legally instituted as a fully owned subsidiary of India Infoline.
Eye on the money
When three of them resigned from Kotak, as did the other six who would be joining them, the fallout wasn’t pleasant. Testy, tough conversations took place. There were disappointments and disillusionments, made worse by the fact that they were taking a few other employees along with them.
Also, rumours were rife — as they often are when a group of high-performing employees leave to start a competing venture in the same space — about clients who would follow them out.
In the first year, Yatin says they met each of their clients at least ten times to convince them. He and Karan did a lot of joint meetings — putting up a united front.
Most people were unsure about the success of their venture: A breakaway group, however large and successful, leaving an established player to join what was then a small brokerage firm, didn’t inspire much confidence.
As it turned out, only a handful of clients transferred their assets to IIFL Wealth when it started out. The few, who did, moved at best 5 to 10 per cent of their portfolio, to honour their relationship with the founding team.
They were hedging their bets on whether IIFL Wealth would be able to stabilise. Their wait-and-watch attitude had as much to do with the company, as it did with whether the founders could go beyond being ambitious and driven sales managers — a job that needed smartness, maturity and an entirely different set of skills.
However loyal some clients are, you “can’t poach your way” to assets under management of over 86,000 crore ($12 billion) in eight years, Yatin adds with pride, alluding to the charge he knows comes up against them.
A new firm, especially one without the benefit of a pedigree brand such as a Merrill Lynch (now Julius Baer India), Citibank or Kotak Mahindra — who were the most active wealth advisors in 2008 — could not hope to have a typical, wealthy south Mumbai family with existing advisor relationships give them money.
Even if they had managed to impress a traditionally wealthy family with a passionate, well-researched pitch, they knew that, at best, they would get 2 or 3 per cent of the family’s portfolio to start with. This was nowhere near a meaningful enough amount, in most cases, to build a full-fledged business on.
To grow, they realised that, they needed to look beyond their existing client relationships and bring newer clients into the fold, so to speak. Even more, they had to reach out to people who were beginning to earn wealth, to be there at a time when these new wealth creators began shopping for a wealth manager for the first time.
As it eventually turned out, it was a good time to hunt for new wealth builders. In several cases, this was the first time a lot of these individuals were coming into wealth. IIFL Wealth chased aggressively after this segment.
This strategy came with distinct advantages.
In many cases, the newly-affluent had never used advisors before or even if they had, their relationships were still largely transactional and ad-hoc, limited at best to executing a few mutual fund investments. Because they hadn’t yet built any deep relationships, a new firm could aspire to a fair fight especially if they were quickly at hand, a critical factor in the selection of a wealth manager, like in the case of TaxiForSure’s Aprameya.
Unless a wealth manager or advisor really messes up, people are hesitant to transfer the details of their financial portfolio to new or multiple advisors too often. With old wealth created before a company is even launched, there was a slim chance of a fair fight.
With India minting new millionaires at an unprecedented pace, the field was thrown wide open to those who could swoop in fast and fight hard. In the first four years (2008 to 2012), nearly 70 per cent of the assets they managed (they had 35,000 crore or $5.2 billion in assets by the end of 2013) was first-generation money.
With the competition still focusing on the old suspects — traditional business families — Yatin says they had a clear runway in the early years to convert the emergent rich.
Their acquisition and sales teams zoomed in on websites like VCCircle and DealCurry to eke out any transactions where promoters and entrepreneurs were likely to come into money.
‘We were like bees to honey. Sometimes, we would be at their offices even before the transaction deal was signed,’ Yatin recalls with delight.
In the middle of 2012, Anirudh Taparia, who used to head the North India business for Citi Select — the wealth division of Citibank India — was flummoxed by how his team’s ability to bring in new business had seemed to slow down in Delhi, where he was based.
Peers from other banks like HSBC and Standard Chartered were similarly complaining. Things didn’t add up because the economy was doing well. Where had the clients disappeared, he remembers wondering.
Around the same time, Taparia began to come across Karan, in pitch after pitch. The mystery started to solve itself. The clients he was losing were ending up with IIFLW. Taparia was impressed — not just with Karan’s quick thinking, sharp sales talk but with the firm’s detailed approach. The homework they did surprised him. He knew their thinking would appeal to the savvy entrepreneur who was keen to be on top of all the moving parts of his portfolio.
What they lacked in pedigree, the team believes, they made up in entrepreneurial zeal. In conversations that I had with over two dozen of their clients, the one thing that came up constantly as a vote of confidence for the IIFL Wealth team was their entrepreneurial spirit.
Their competitors are less impressed.
From the conversations I had with other wealth managers and private bankers outside of IIFL Wealth, its aggres
sive, brash selling came up often as a big negative. The no-holds-barred didn’t quite become the restraint and privacy that private banking called for was the gist of the criticism. It wasn’t unlike the cold calls that credit card sales companies are singled out for, said a senior banker from a nationalised bank that has recently upped its focus on the wealth segment.
In contrast, several first-generation entrepreneurs — the client segment they were chasing — say it was the kind of persistent “hustle” that resonated with the way they had built their own businesses.
Smart wealth management firms anywhere in the world try and build niche client segments, like IIFL Wealth did with first-generation entrepreneurs. In fact, a 2011 Bain & Company report says that developing tailored offerings by profession or source of wealth is a superb way to cement good customer relationships39.
‘ Coutts, the London-headquartered private bank and wealth manager, for instance, offers services specifically for landowners (mainly farmers), executives and sports stars. At Coutts, teams that specialise in agriculture and know how that industry works advise landowner clients. Professional athletes receive investment help and advice from former sports pros or team managers who understand their needs,’ the report said.
IIFL Wealth was fortunate to mirror its client experience and journey of building high-potential companies; they were, in a sense, entrepreneurs serving entrepreneurs. It gave them a clearer, more incisive understanding of the entrepreneurial mindset, which came in very handy.
With clients who are inking an engagement with a wealth advisor for the first time, the conversion pitch isn’t about what you do better than others. It hinges on one simple fact: Can you convince them that you will do a better job at managing their money than they can themselves?
Today, it wouldn’t be wrong to say that they have become “stake-sale” specialists — entrepreneurs such as Network18 founder Raghav Bahl and Freecharge’s Kunal Shah, being perfect examples of the rewards of this focus. Both are IIFL Wealth clients.
Their tax planning and investment proposition, the founders say, for a business owner who experiences a sudden infusion of wealth has constantly been refined.
Having worked with several entrepreneurs in those situations, they have developed an understanding of the unique short-term and long-terms requirements in these cases. In the immediate, the newly minted rich didn’t know how to manage the tax obligations that arose from their new wealth. In the long-term, they had to think deeply about allocation, trusts and the objectives of managing the wealth — for example, did it need to be multiplied for future business use or merely protected to ensure a family’s future?
As the firm has grown, it’s been able to win large allocations from the more established business houses and industrialist families as well but, even today, the portion of multi-generational, inherited wealth is less than 30 per cent of its portfolio.
Chapter 16
Chessboard
Certainly, the IIFL Wealth founding team wasn’t prepared for the industry landscape to change so dramatically and rapidly. ‘When we resigned from Kotak on 3 January, 2008, the markets went to their highest-ever that day. After that, they just went downhill,’ Yatin says.
As it happened, the shifting sands of the global financial world gave the team an unexpected shot in the arm. ‘Looking back, instead of 2008, if we had started the company in 2005-06, we probably wouldn’t have been as successful as we are today,’ Amit adds.
For starters, it brought down the cost of getting the business up, at least in the United States. Talented manpower and great infrastructure were available at prices that would have been impossible even up to a few months before they started.
IIFL Wealth’s first office in Manhattan came at 30 per cent of its usual rental price. Also, the carnage in the global economy, Amit says, made them focus on investing in the best-in-class auditors, custodians and guarantors such as Standard Chartered and HDFC Bank. Stability and foolproof compliance became a greater necessity than ever before in a world where chaos ruled and cynicism dominated.
For IIFL Wealth, the newbie tag helped. Being a firm that didn’t carry the baggage of losses or bad memories of poor advice gone wrong became a distinct advantage. In fact, the founders reached out repeatedly to clients they had managed previously but who had suffered losses on their portfolio due to the erratic stock market through much of 2008.
‘We even apologized for the mistakes we may have made,’ the founders recall the difficult meetings through those years.
Several clients I spoke to said that this would happen often: Their relationship managers would do a vanishing act, avoiding them because they were worried about confronting their own failures.
It’s actually easier to build businesses during a slowdown because you can hunker down to work on the basics and get the processes up and running, explains General Atlantic’s Naik. ‘IIFL Wealth was lucky to get some large clients early on who became “referenceable” for them. When the markets picked up, they were able to motor ahead,’ he adds.
But, the initial year was still slow and arduous against these strong currents, the toughest of their eight-year journey so far.
It became important to get some clients on board in those first few months, while making sure their service standards were nothing short of impeccable.
While the focus on first-generation entrepreneurs and new money evolved by the end of the first year or so, their first group of clients came purely on the basis of personal relationships the founders had built in their previous organisations. Whether institutional or individual — and regardless of the quantum of funds they gave them to manage — clients who came within days of them starting out remain most significant to the journey, the founders said.
On the offshore side of things, assets were essentially collected from institutional investors abroad, to invest in India. A large emerging markets investments fund in the US that Amit had been trying to work with for over five years wrote them a cheque for a couple of million dollars right off the bat. ‘This was huge for us as we were starting out,’ he recalls.
Another early win was a Jewish-American diamond merchant who allocated a similar-sized amount of his family wealth. Today, IIFL Wealth’s offshore business, spread across eight centres (Dubai, Singapore, Hong Kong, Geneva, London, New York, Houston and Mauritius) has nearly $5 billion ( 33,455 crore) in assets under management but every bit of that business has its genesis in the difficult period between 2008-2010.
Introspection had set in by then as investors and clients lost money. They were forced to examine the risks they had taken — knowingly or unknowingly — in their hunt for abnormally high returns.
Seismic shifts and an industry in turmoil
In response to some of these setbacks, many countries introduced new sets of regulations to try and insulate their respective economies from the turmoil, and to minimise the damage to their financial systems.
These developments changed the complexion of the industry, making it more difficult for global players to sustain and grow in India. The cost and complexity of compliance, combined with the high price of setting up shop and playing the waiting game for markets to mature in India just didn’t add up to a winning formula for foreign private bankers.
In fact, the new era of wealth management in India would become vastly different from the model that was perfected by Swiss private banks, where the world’s money would move out of the countries in which it was created to the European nation, to escape taxation and be secretly housed.
As regulations in India changed, banks could not take overseas wealth created within the country; currency convertibility norms did not allow it. This made it tougher for foreign players to offer a gamut of their products to an Indian client. Wealth created in India had to be managed in India or onshore as per industry jargon.
‘The new wealth being created by a new group of entrepreneurs, which had to be invested and managed in India is what makes the wealth management i
ndustry in India unique right now,’ says Bharat Parajia.
Once that reality set in, and the options for taking money out to benefit from low-tax regimes outside of India became limited, it was clear that local providers would be able to offer more relevant advice.
Privacy concerns, where Swiss private banks held an enviable edge, became less of an issue for the first-generation Indian wealthy. Not only did regulations make it difficult to evade monitoring, much of the new-generation wealth was being created via deals and transactions that were reported, details of which are in the public domain. This, too, gave local players a fillip.
The Bain report40 cited earlier also said that globally, many wealth management firms are built either for global scale or built for a single country. For the first kind, keeping up with local country trends was difficult and the local players found it difficult to expand outside their home markets. The one-size-fits all strategy made the global players uncompetitive locally.
Atul Singh, managing director and CEO of Julius Baer (India), and one of the country’s most experienced private bankers, says that in the post-2008 period, institutions such as his (he was heading DSP Merrill Lynch before Julius Baer acquired Merrill’s global private banking business in 2012), had to evolve even more stringent processes.
This obviously compromised their speed in offering solutions to clients, especially to the new cadre of wealthy where speed was key to getting their business.
‘If you weren’t able to offer them solutions just when they needed them, because your internal compliances took time, there was no way you could reach out to them six months later. By then, they had probably started working with another wealth manager,’ Singh tells me with a sigh.
In the aftermath of the 2008 crisis, this was true not only for India but for much of Asia too, Michael Stanhope, founder and CEO of Hubbis, tells me. ‘Business models were not just being refined, they were changing quite rapidly,’ he recalls.
The Wealth Wallahs Page 16
