family offices: LTCG tax parity may bring more family offices to the startupland

Family offices of millionaires are likely to increase capital allocation to new-age companies, following the budget proposals to bring parity on long-term capital gains (LTCG) tax across all financial assets and abolish the angel tax.Family offices—about 300 now compared with around 45 in 2018 as per a PwC report—have increased their investment activity in startups over the past year and the budget announcements will give a major boost to it, a senior executive at a top family office fund said. Removal of angel tax will also help these investors come in startups at an early stage, industry executives said.

In her budget Tuesday, finance minister Nirmala Sitharaman said LTCG will be levied at a uniform 12.5% for all financial assets—it was 20% previously for the stocks of unlisted companies, which most startups are.

“This would be a significant attraction going forward to invest in private companies … the disparity between listed and unlisted stocks was a hurdle and now a lot more domestic capital is available to back tech companies with sustainable models,” the executive said.

ET reported on July 24 that this particular change is especially significant given the increase in exits by early-stage investors through secondary stake sales—a growing trend when primary capital funding is still constrained.

“There will be an incentive now on such exits over a period of time, which is typically six to eight years,” the executive said.

Several top internet industry executives—founders and top executives—run family offices that invest in venture funds as well as directly in companies. Premji Invest of Wipro founder Azim Premji is among the first family offices to have started investing in new-age firms. It is now one of the largest in this space.

Ranjan Pai’s Claypond Capital, the Manyavar Family Office and Zerodha founder Nikhil Kamath’s investment vehicle are among several that have accelerated the pace of capital allocation in startups. This in part was led by a valuation reset that occurred in the industry after the 2021 funding euphoria.

Companies like FirstCry, Oyo, Aakash Institute and Bluestone have raised significant capital during the course of this year.

“Among Indian family offices, fintech is a key attraction that raised a total funding of $853.6 million in CY23. Indian family offices are also setting up offices abroad to tap global investment opportunities,” the PwC report said.

“The reduction in LTCG in case of unlisted securities may encourage domestic investors to allocate more capital into the startup ecosystem which can help improve the domestic funding scenario,” Amarjeet Makhija, partner and leader – startups at PwC India said on Wednesday.

Klaas Oskam, CEO of investment banking firm DC Advisory India, said in general, a lot of family offices have started to explore startups (as an asset class). “It is a positive step, but a lot of funds will need to prove they can deliver better returns than the public markets,” he said.

“This might result in some increase in allocation (by family offices), but tax won’t be the deciding factor,” he said. “These decisions will be based more on the performance of their portfolios, their LP (limited partner, or fund sponsor) positions…that is what will cause them to materially change their allocations.”