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The recent collapse of several of the world’s most venerable financial institutions and the concomitant loss of trillions of investment dollars have sobering implications for investors of every type and size. The financial industry’s upheaval, coupled with the dramatic downturn in the overall market which has sent the S&P’s trailing 10-year returns into negative territory, have advisors and their clients seeking information to better understand the current environment and its impact on various investor segments, particularly the very wealthy.
As a provider of comprehensive portfolio reporting information exclusively for the ultra-high-net-worth market, my company is uniquely positioned to observe investment performance and behaviors across numerous high wealth investors and their advisors. Hence, the question I have been most frequently asked in recent months is, “how are these economic conditions impacting the ultra wealthy?”
For starters, “ultra-high-net-worth” individuals and families — those with more than $30M in net investable assets — are benefiting from two important attributes: patience and diversification. In the midst of the present economic crisis, one of their most critical assets is the ability to look - and invest - beyond the near term by taking a patient, deliberative approach focused on longer term outcomes. But the super wealthy are also helped by having highly diversified portfolios, large holdings in cash, and varied investments in recession- and shock-resistant assets. On average, over 50 percent of their portfolios is in “alternative assets,” including private equity, venture capital and hedge funds, real estate, as well as large private collections of homes, private jets, automobiles, art and other lifestyle assets. As these alternatives have largely held their ground, our clients have generally navigated the precipitous market drop with comparatively minor losses to date.
It is likely, however, that as the recession takes tighter hold it will ultimately push down the value of these alternative assets too — particularly hedge and private equity funds. Yet despite this continued uncertainty and risk, many of our clients are seeing significant investment potential in this tumultuous environment, which is fueling their desire to further diversify. In fact, the increased number of opportunities to buy “distressed assets” has recently provided an incentive for a number of family offices to hire new private equity managers to build their own internal deal teams. The combination of entrepreneurial instinct, available cash, deal flow, and reduced asset prices, coupled with patience, holds real potential for the families to garner substantial future returns.
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