Fresh, new species of animal spirits

Uday Kotak knows his business - and business. This week, he shared his concern about depleting 'animal spirits' among business families, where a new generation is more interested in managing investments rather than creating 'real-world businesses'. The idea that 'business owners should only focus on core business' is rather anachronistic, especially in the day and age of private equity, and if the business is already mature. Capital is better allocated among next-gen entrepreneurs if it's free to range wider than among family members. A higher velocity of money is broadly supportive of economic growth and employment. Cost of capital also decreases if it's not locked into sectors, particularly capital-intensive manufacturing.

Globally, business has evolved distinct roles for investors and managers, with a delicate interplay between the two. Investors manage investment risk; executives manage business risks. Indian business has lumped the two together. But as its family-run businesses evolve, it's a natural progression for family members to gravitate towards one or the other end of the spectrum. There is also a growing supply of professional managers capable of running business ops. This creates a need for specialisation and pushes family members towards managing wealth.

India's economy is going through an unprecedented phase of intergenerational wealth transfer that needs active management through family offices operating as PE firms. This is the most unencumbered form of equity with the highest impact on wealth creation. It also has the managerial bandwidth for business operations. Principally, though, PE has a vital role in incubating new enterprise that's unobtainable to other forms of capital committed to seeing a business mature. The 'animal spirits' Kotak referred to exist whether or not one section of the economy continues in its traditional dual role of investor-manager. These spirits will be reinforced if the roles are separate. It's welcome that the process has begun internally within Indian business families.