"I've always wanted to help build a better society and build a better company, and I always wanted a healthy, vibrant company, a healthy, vibrant society. We take care of our people, we provide them with opportunity. But I've always believed business is here to serve your clients, your shareholders, your communities. If we do this well, everyone benefits. We have to do a good job for all of them."
Jamie Dimon, CEO, JP Morgan Chase
Privos Global Family Office Outlook (2019)
Privos Capital estimates that today there are well over 15,000 family offices and HNWIs globally managing over $20 trillion of assets. By comparison, the total Assets under Management (AUM) of the entire private equity industry last year is just $2.5 trillion, according to McKinsey & Company; the hedge fund industry total AUM clocks in at $3 trillion spread across approximately 15,000 hedge funds; however, both private equity and hedge funds command far greater media attention than global family offices.
PwC estimates that global AUM will almost double in size by 2025, from US$84.9 trillion in 2016 to US$111.2 trillion by 2020, and then again to US$145.4 trillion by 2025. While active management will continue to grow and play an important role, reaching $87.6 trillion by 2025 (60% of global AUM), passive management will soar to $36.6 trillion by 2025 (25% of AUM). Alternative assets classes, in particular real assets, private equity and private debt, will more than double in size, reaching $21.1 trillion by 2025.
However, while the global banks are fighting over wealth clients, the world’s 2,158 billionaires grew their combined wealth by US$1.4 trillion last year, more than the GDP of Spain or Australia, as booming stock markets helped the already very wealthy to achieve “the greatest absolute growth ever,” according to Privos CEO. For global family offices, wealth is being created around the world in record number, with family offices in the BRIC, N-11, and the 37 Frontier Countries of the Emerging Markets surpassing the wealth of the leading brand name Western family offices. While the majority of the world’s billionaires are in the US and Europe, the number of ultra-wealthy people is growing fast in China, where two new billionaires are minted every week.
Wealth is being created in the BRIC and N-11 countries of the Emerging Market faster than in the West. For instance, In China, a new generation is coming to prominence among Chinese billionaires with assets of 2 billion yuan ($290 million) or more. This year, the number of millennials -- people born after 1980 -- in the Chinese "2-billion-yuan club" is 132, up 32 from last year, according to Shanghai based Hurun Research Institute. Some of the burgeoning corporate giants that have the potential to join the ranks of the most successful Chinese startups, led by the three leading Internet service companies Baidu, Alibaba, and Tencent, are headed by next-generation entrepreneurs in their 30s. The fortunes of today’s super-wealthy have risen at a far greater rate in China alone than at the turn of the 20th century, when families such as the Rothschilds, Rockefellers and Vanderbilts controlled vast wealth.
If you are a global traveler, you understand what is happening in the world. Anyone who has visited recently Sao Paulo, Brazil, the financial center of Latin American, looked up in the sky at the largest fleet of private helicopters in the world while having a steak under the famous fig tree at Figueria Rubaiyat, witnessed Qatari private banks opening offices in London, or watched Chinese family offices create huge liquidity by listing their portfolio companies on NASDAQ, NYSE, FTSE, or AIM, appreciates that global family offices are the most sought after LP investors in the world. And smart money knows that the beauty of family offices is that you can develop a relationship in a fraction of the time that it takes to pitch the Cambridge, Mercer or Wilshires of the World, or wait for an Investment Committee of a sovereign wealth fund or pension fund, like HMC, Calpers, ADIA, Temasek, Mumtalakat, or Ontario Teachers to approve an allocation. Thus, global private banks, asset managements firms, hedge funds, private equity firms, law firms, consulting firms, and investment bankers are all targeting global family offices like nothing we have seen in modern financial history. If you are a global family office, the world is your oyster.
The Big Picture: Our View of the World
In 2019, global family offices will experienced it all: Growth, terror, uncertainty, joy, prosperity, and chaos. Around the world, family offices have experienced economic growth better than last year's performance with some notable twists and turns. Overall Europe is doing better, Macron is thrusting France on the world stage, the Netherlands avoided a difficult election result that lets the EU breathe a sigh of relief; however, Asian, Latin American, and African countries economies have not delivered returns and growth that our family office partners were hoping for last year. China is slowing and becoming politically punitive, resulting in a massive capital export of currency and talent to the west. The US has come roaring back from economic uncertainty following the Global Financial Crisis, despite the fallout from the shutdown in Washington, with America now considered the "New Switzerland."
On February 24, in Hollywood's biggest day of the year, Universal's Green Book won the best picture Oscar at the 91st Academy Awards ceremony. 20th Century Fox's Bohemian Rhapsody won four honors while Green Book, Roma, and Black Panther earned three apiece. In the top categories, Alfonso Cuaron nabbed a win for best director fo Roma. Olivia Colman earned the best actress award for The Favourite, Rami Malek won the best actor honor for Bohemian Rhapsody, Regina King claimed the best supporting actress honor for If Beale Street Could Talk, Mahershala Ali won best supporting actor for Green Book. Spike Lee won best adapted screenplay for BlacKkKlansman, while Nick Vallelonga, Brian Hayes Currie and Peter Farrelly claimed best original screenplay for Green Book.
Turning from the glamor of Hollywood, the Trump trade is causing uncertainty and anxiety in global capital markets, but the US markets are up and consumers are employed again. The US now has a FBI investigation and Robert Mueller leading the Russian investigation, with various legal challenges consuming the news outlets daily. Thus, the US is both booming with low unemployment, fracking and LNG exports and - at the same time - held in limbo by the developments in Washington. January 2019 opened with a massive cold spell and big snow at US ski resorts that many tie to global warming, with New York and New England seeing temperatures in the negative digits.
In 2019, the IMF expects the world economy overall to expand by 3.6 percent inflation adjusted, up from this year’s estimated 3.1 percent growth. Both advanced and emerging economies contribute to the improvement. Europe is slated for moderate growth, 1.9 percent measured by GDP. Given the minimal population growth rate for the Continent, this is pretty decent but not booming. Industrial activity edged down earlier this year but has since recovered most of the lost ground. In North America, look for growth about in pace with last year’s. Canada will grow a bit more slowly than the U.S. due to its concentration in oil and other commodities.
China: Handbags Sales Continue to Soar in 2019
Asia is the wild card for the global economic outlook. China, in particular, is opaque: we just do not know in the family office world what is really happening inside the Chinese economy. The official China 2019 growth rate of GDP is 6.9 percent, down from 7.0 in previous quarters, but no one trusts the official Chinese statistics. We know that U.S. exports to China declined in 20178 but have looked better in recent months. Consumers are helping the economy, good news given weak capital spending. Perhaps the corruption crack down in China is starting to reap benefits. That being said, our view of China is that the economic and family office wealth will continue to boom in 2020. Privos is active in the global fashion industry where we have witnessed first hand in January 2019 LVMH announcing that the firm sales in China grew 9 percent on a like-for-like basis — which strips out currency swings and the effect of store openings and acquisitions — last year compared to 10 percent in the July to September period, and in line with forecasts. LVMH, luxury industry's biggest player and home to fashion brands like Givenchy and champagne label Moet & Chandon, reported revenues of 13.7 billion euros ($15.64 billion) for the October to December period. In Asia, where the group generates the bulk of its earnings, revenue accelerated in the fourth quarter, picking up pace from the third quarter. LVMH and its rivals, including Paris-based Gucci owner Kering have relied on growing appetite from young, middle-class Chinese shoppers in the past two years to lift sales, and they say this trend has legs in the long run. LVMH said its operating income rose 21 percent in 2018 as a whole, hitting a record 10 billion euros. The group, which has grown over the decades with a series of high profile acquisitions, said its free cash flow grew 16 percent last year to 5.5 billion euros. Thus, any financial analysis who questions if the growth in China is still alive needs to go shopping for luxury handbags in Beijing to understand better the true underlying strength of the Chinese economy.
Elsewhere, Japan has relapsed into recession, though unemployment remains very low. Shrinking population and labor force prevent much growth there. India’s growth remains strong, but capital spending has slackened this year. Consumer spending and low commodity prices are strengths that should enable India to continue its strong expansion. The commodity-dependent countries, much of Latin America and Africa along with parts of Asia, are facing difficult times. You must appreciate that with commodity prices 30 percent lower than their 2018 peak, driving cutbacks in mining, petroleum and agriculture, Latin American is hurting, big time. Current price levels are still better than anything seen before last year, but they don’t justify continuation of recent production levels, and certainly not continuation of new project construction, according to Forbes.
16 Year Old Greta Thunberg 2019 Davos Speech That Stunned The World
At the World Economic Forum in Davos this year, the world’s leaders and titans of industry were stunned when 16 year old Swedish Greta Thunberg silenced a room full of global leaders from the financial, political and media sectors. “Our house is on fire,” said the Swedish student activist who has galvanized 100,000 fellow teens around the world to follow her example in striking for the climate. “At Davos, people like to talk about success, but financial success has come with a price tag, and on the climate we have failed. And unless we recognize the failures of our system, there will be unspoken suffering.” Thunberg dismissed the usual admonishments that climate is complex. She has grown impatient when grown-ups explain to her that structural reform is hard, sensitive, intricate, takes time, and that nothing in life is black and white. “That is a lie,” she countered. “Either we prevent temperatures from rising above 1.5 degrees (Celsius), or we don’t. Either we avoid chain reaction of unravelling ecosystems, or we don’t. That’s as black or white as it gets. Now we all have a choice: we can either create transformational action or continue with business as usual and fail.”
Transformational action entails slashing carbon emissions by more than 50% within the next twelve years. “We are less than two years away from being unable to undo our mistakes,” she warned, noting that the most recently reported IPCC numbers, urgent as they are, “don’t even take into account the issue of social equity, nor does it include the tipping points and feedback loops, like the thawing of permafrost.” As reported by WEF, she is too young to vote. She has no capital to invest. She lacks a position of formal power to alter the course of global markets. What she does have is a voice, and a will to make it heard. So every Friday, Thunberg stands impatiently on the threshold of powerful institutions -- whether the Swedish Parliament in Stockholm, or here in Davos at the Ice House – making the nonviolent case for zero carbon, “striking for the climate,” and inspiring students around the world to follow her example.
We are at a time in history, she says, in a calm, flat, yet compelling voice, “where anyone with a conscience,” must recognize their role in a kind of change that affects everything in our current societies. “The bigger the carbon footprint, the bigger the platform, the bigger responsibility to lead.” Thunberg’s message was not all doom and gloom, and she showed glimpses of humour. There is still time, she allowed, for Homo sapiens to reverse the most severe challenge our species has ever faced. But she had no time for more patronizing hot air. “I often hear adults say: ‘We need to give the next generation hope’,” she concluded. “But I don’t want your hope. I want you to panic. I want you to feel the fear I do. Every day. And want you to act. I want you to behave like our house is on fire. Because it is.”
Sustainable Investing: 2019’s Biggest Business Opportunity
Global family offices view Sustainable Investing as one of the biggest business opportunities of a lifetime. Privos Capital, as a leading multi-family office, is dedicated to sustainable, responsible and impact investing (SRI) as a core mission of our firm.
The US SIF Foundation’s 2018 biennial Report on US Sustainable, Responsible and Impact Investing Trends found that sustainable, responsible and impact investing (SRI) assets now account for $12.0 trillion—or one in four dollars—of the $46.6 trillion in total assets under professional management in the United States. This represents a 38 percent increase over 2016. The Trends Report—first compiled in 1995—is the most comprehensive study of sustainable and impact investing in the United States. From the first report when assets totaled just $639 billion to today, the sustainable and responsible investing industry has grown 18-fold and has matured and expanded across numerous asset classes.
The 2018 report identified $11.6 trillion in ESG incorporation assets under management at the outset of 2018 held by 496 institutional investors, 365 money managers and 1,145 community investing financial institutions. The largest percentage of money managers cited client demand as their top motivation for pursuing ESG incorporation, while the largest number of institutional investors cited fulfilling mission and pursuing social benefit as their top motivations. In addition, 165 institutional investors and 54 investment managers collectively controlling nearly $1.8 trillion in assets filed or co-filed shareholder resolutions on ESG issues between 2016 and the first half of 2018. Eliminating double counting for assets involved in both ESG incorporation and filing shareholder resolutions produces the net total of $12.0 trillion in SRI strategies at the start of 2018.
“Money managers and institutions are utilizing ESG criteria and shareholder engagement to address a plethora of issues including climate change, diversity, human rights, weapons and political spending,” said Lisa Woll, US SIF Foundation CEO. Additionally, retail and high net worth individuals are increasingly utilizing this investment approach with $3 trillion in sustainable assets. Global family offices are in various iterations of exploring ways to invest for impact. Many family offices choose to practice sustainable, responsible and impact investing. Motivations include the families’ values; financial motivations, including performance return and risk mitigation; and the positive influence of peers. In addition, the growing availability and variety of SRI investment options are encouraging families to explore investing for impact.
The World’s Largest Sovereign Wealth Fund
Global family offices follow carefully Norway's Government Pension Fund for insight on asset allocations and market performance. The Pension Fund in Oslo returned -6.1% in 2018, as weak equity markets reduced the sovereign wealth fund's assets to 8.25 trillion Norwegian kroner ($945 billion). The return equated to a 485 billion kroner loss for the year. That fund gained 13.6% in 2017. The annualized net return for the five years ended Dec. 31 was 4.75% and 8.3% over the 10-year period. An update from world's largest sovereign wealth fund showed that equities, which accounted for 66.3% of the fund's allocation, returned -9.5% for the year, compared with 19.4% for the previous year. The smallest losses were from North American stocks, which returned -3.7%. U.S. stocks, the sovereign wealth fund's single largest market allocation at 38.8%, lost 5.4%. European stocks lost 13.5%; U.K. equity lost 8.9%; and Asia and Oceania equity returned a combined -13.4%. A fixed-income allocation of 30.7% added 0.6% for the year vs. a 3.3% gain for 2017. The sovereign wealth fund's 3% real estate allocation returned 7.5% for the year, the same as in 2017. "Although performance was weak in 2018, the long-term return has been good and higher than the return on the benchmark index," said Oystein Olsen, chairman of the executive board of Norges Bank, the manager of the fund, in a news release. "The fund bought equities for 185 billion kroner in fourth quarter 2018. Most of this was bought in November and December," said Yngve Slyngstad, CEO of Norges Bank Investment Management, in the release, as reported by one of our favorite publications, Pension & Investments.
Davos 2019 Highlights
Our Annual Privos Global Family Office Outlook kicks off, as we always do each year, with our report from Davos 2019, where the Forum carries the theme of “Globalization 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution”. From January 22 to January 25, 2019, global family offices descended on Davos to meet freezing temperatures and beautiful snowfall.
At Privos, we have found over many years that studying carefully the themes discussed at Davos, in formal discussions and behind the scenes where family offices hold private off-the-record discussions with world leaders and titans of industry, our multi-family office has been successful in framing and anticipating investment trends and opportunities for the upcoming year. While some of the predictions at Davos have missed the mark, like Ray Dalio’s comments last year, or is met with outright scorn by the Times, we have found that overall WEF in Davos always frames successfully the investment themes of the coming year.
This year, the themes at Davos include alarming predictions for a tough economic year, including political gridlock in developed countries, weakened trading links, government shutdowns, the short-term challenges of the major market selloff at the end of 2018, China posting its slowest growth in 28 years, President Xi Jinping staying home, France protests and President Emmanuel Macron has sent his regrets, and President Trump staying home where the US Government is shut down.
Our family offices also reported that the “Dining in the Dark” experience at Davos is the hot ticket of the event, with just 50 spaces each night for a conference with 3,000 attendees, curated by Gina Badenoch, founder of the social enterprise Capaxia. At a similar event in Mexico 12 years ago, Ms Badenoch experienced walking down a street in the dark. She was so moved by how it made her feel she decided she would focus her career on changing perceptions of visually impaired people. She is a photographer, and she decided she would teach photography to people who couldn't see. She knows it sounds "crazy" but it is possible, she says, using sound to locate a subject before taking a picture.
For those of you who have not attended Davos, we have summarized the most important insights, quotes, speakers, messages and information that you might be interested in from this years WEF, as follows:
Every January for almost 50 years, world leaders, the bosses of the world's biggest companies and a sprinkling of celebrities have gathered in a small Swiss mountain town called Davos for the World Economic Forum. Although everyone calls it Davos, the January get-together is actually the annual meeting of the World Economic Forum (WEF). Davos is simply the name of the Swiss mountain resort where the summit is held;
The World Economic Forum is a not-for-profit group with the ambitious mission of improving the state of the world. Its annual jamboree is officially a conference. There are endless speeches and sessions on everything from the outlook for the global economy to managing stress. In reality, most people aren't there for the sessions but to network relentlessly as the BBC has correctly pointed out in their excellent summary of the conference. Being in a relatively tiny space for four days enables corporate bosses, politicians and journalists to have an incredible number of meetings in an efficiently short space of time with no travel required. This networking carries on late into the night with daily dinners, drinks and parties, put on by the firms who are attending.
Forum founder Klaus Schwab started the annual shindig in 1971 to discuss global management practices. Now WEF has a much broader remit, but critics argue that it's still just a talking shop. But the isolated setting of Davos offers politicians a valuable chance to meet away from the public glare. Regular attendee Bono doesn't pay to attend. The only attendees who pay to attend WEF are companies; all other attendees are invited free of charge. The charge for companies is 27,000 Swiss francs (£20,900; €23,800) per person. But that's not all. Attendees must also be a member of the World Economic Forum. There are a number of tiers of membership, starting at 60,000 Swiss francs per year to a whopping 600,000 Swiss francs to be a so-called "strategic partner". It's a pricey business, but top members get access to private sessions with their industry peers and unlike everyone else, slipping and sliding over the icy pavements, they also get a dedicated car and chauffeur. A price worth paying, some might say. In the 49 years since Davos started hosting its annual meetings, men have vastly outnumbered women despite a quota system for large firms who must bring one woman for every four men. "Davos Man" has even become a description in its own right, synonymous with the stereotypical attendee: a powerful and wealthy elite male - whom many see as out of touch with the real world. Of course, this largely reflects the current reality: those at the top in both business and politics are predominantly male. But while photos of the suit-heavy gathering captioned "spot the woman" do the rounds on social media every year, the situation is steadily improving. This year, 22% of attendees will be female. It's not great, but the percentage of women has doubled since 2001. t takes time to claw your way to the top and wangle a Davos invite and the average age of attendees reflects this: it's 54 for men and 49 for women. Of course there are some anomalies. At just 16, South African wildlife photographer Skye Meaker is the youngest participant this year, while the oldest is 92-year-old broadcaster Sir David Attenborough.
This year's attendees include Japanese and New Zealand PMs Shinzo Abe and Jacinda Ardern, as well as Prince William and German Chancellor Angela Merkel. Given the high profile of many of the attendees, security is understandably tight. There are snipers on every roof and a secure zone that you need the right pass to access. Every time you enter the main conference centre you have to remove your coat, scan your laptop and bag and then put it all on again. It's like constantly going through airport security without ever flying anywhere. See BBC’s 10 Facts About Davos for further interesting facts about the event.
2019 Davos Summary: Investment Insights For Your Family Office as Predicted At Davos
1) As business and political leaders arrive in the Swiss Alps for the annual meeting of the World Economic Forum, a surprisingly alarming letter from an influential investor who studiously eschews attention has already emerged as a talking point, as reported by the Times Andrew Ross Sorkin. The letter, written by Seth A. Klarman, a billionaire investor known for his sober and meticulous analysis of the investing world, is a huge red flag about global social tensions, rising debt levels and receding American leadership. Mr. Klarman, a 61-year-old value investor, runs Baupost Group, which manages about $27 billion. He doesn’t make the annual pilgrimage to Davos, but his words are often invoked by policymakers and executives who do. His dire letter, which is considerably bleaker than his previous writings, is a warning shot taken seriously by the attendees at Davos that a growing sense of political and social divide around the globe may end in an economic calamity. “It can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions,” he wrote. Klarman made the remarks in a 22-page annual letter to his investors, which include the endowments of Harvard and Yale and some of the wealthiest families in the world. It was being passed around ahead of the Davos gathering, which draws business leaders like Bill Gates and Sheryl Sandberg, social and cultural figures like Bono, and elected officials like Chancellor Angela Merkel of Germany.
Mr. Klarman expressed bafflement at how investors often shrugged off President Trump’s Twitter outbursts and the retreating American role in the world during the past year. “As the post-World War II international order continued to erode, the markets ignored the longer-term implications of a more isolated America, a world increasingly adrift and global leadership up for grabs,” he wrote. Mr. Trump and the United States delegation canceled plans to attend the Davos conference because of the government shutdown, which will leave Ms. Merkel and Prime Minister Shinzo Abe of Japan with an opportunity to fill the leadership void. Citing the “yellow vest” marches in France that spread throughout Europe, Mr. Klarman said, “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.” He added, “Social cohesion is essential for those who have capital to invest.”
2) The buzz at Davos started with who was not in attendance this year. President Trump and his cabinet remained in Washington to deal with the longest governmental shutdown in history. British Prime Minister Theresa May stayed away, trying to save a deal for the U.K. to leave the European Union in an orderly manner. Chinese President Xi Jinping was absent as his country’s growth rate decelerated to the slowest pace in decades.
3) “It feels quiet,” Mark Wiseman, BlackRock’s global head of equities, told WSJ, who compared this year’s buzz to the period after the financial crisis. “Then it was what was going on with the global economy,” he said. “This time, it’s geopolitics. Many of the protagonists aren’t here.”
4) The highest profile political speech on the first day Tuesday came from new elected Brazilian President Jair Bolsonaro, who cut a different figure from the right-wing populist who energized voters. He talked about lowering taxes, fighting corruption and the benefits of trade. Ning Gaoning, head of Chinese state-owned industrial giant Sinochem Group, said geopolitics is a challenge for foreign investment and for globalization. “The Chinese are getting quite confused. They thought they were welcome to invest in other countries. Now they realize they are not being welcomed all the time,” Mr. Gaoning said.
5) Another theme of discussion among the Davos set was the growing discomfort with corporate influence over society, especially big technology firms. “Are corporations becoming too big for the political system to control and should the political system bring them back in some way? The pace of new startups in the U.S. has been steadily coming down,” said Raghuram Rajan, former head of India’s central bank and a finance professor at the University of Chicago’s Booth School of Business. He said all of this leads to concerns about how big corporations pay taxes and how they influence governments. Microsoft Corp. Chief Executive Satya Nadella acknowledged the tension business faces to spread wealth equitably. “We know the jobs of the future require different skills. So how we equip these people, the youths of the world, for these different jobs?” Mr. Nadella said. “Markets work, but there are limits.”
6) Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge-fund firm, cautioned political and social antagonism. This year, Mr. Dalio emphasized a less optimistic outlook. Politics, he said, are connected to economic issues in a way similar to the late 1930s. “What scares me the most longer term is that we have limitations to monetary policy, which is our most valuable tool,” he said. “At the same time, as we have greater political and social antagonism. So the next downturn in the economy worries me the most. So the next downturn in the economy worries me the most.”
7) “The number one question in the mind of leaders in Davos now is what on earth is Donald Trump up to?” said Tina Fordham, chief global political analyst at Citigroup Inc. and a WEF regular. “We’ve very clearly moved in terms of investor sentiment from the Trump bump euphoria surrounding tax cuts and deregulation to fears of a Trump slump.”
8) Trump’s secretary of state, Michael Pompeo, addressed Davos attendees from Washington on Tuesday and praised the “disruption” in global politics the past two years, citing not just Trump’s 2016 election but Brexit and the rise of Emmanuel Macron in France.
9) Faced with that reality, world leaders are increasingly falling into one of three camps in their approach to the president, according to Stephen Walt, a professor of international affairs at Harvard University: following Trump’s lead, resistance -- however futile -- and trying to make the most of his policy vagaries. Yet lacking any consensus against Trump, Walt sees many leaders as engaged in a waiting game to try and sit him out. “There is no longer this idea that he’d be reined in by the establishment and that you’d have a fairly normal administration,” said Walt. “People are now fully aware that he’s extremely impulsive and erratic and will continue to challenge the status quo. That means something different depending where you are.”
10) Among the forum’s headline attractions is German Chancellor Angela Merkel, who can be expected to build on her New Year’s address denouncing nationalism and populism that reinforced her status as a Trump adversary. Yet she and Macron were unable to prevent Trump from quitting the Iran nuclear deal or the Paris climate accord. Germany is in the firing line if he follows through on his threat to impose punitive tariffs on imported cars. Trump’s attacks on allies and persistent questioning of the value of the transatlantic alliance have accelerated European efforts to gain greater autonomy, including moves to boost the role of the euro and reduce dependence on the U.S. dollar. Until that happens, however, allies in Europe remain vulnerable, said Erik Brattberg, director of the Europe Program and a fellow at the Carnegie Endowment for International Peace in Washington.
11) Then there are swathes of the globe whose leaders are emboldened by Trump. Israel’s Prime Minister Benjamin Netanyahu, who benefited from the U.S. decision to move the American embassy from Tel Aviv to Jerusalem, and Italy’s prime minister, Giuseppe Conte, whose populist coalition government shares Trump’s hard line on migration.
12) Also in town is the new Brazilian President Jair Bolsonaro, the leader of Latin America’s largest nation, dubbed by some the Latin Trump. In Davos, Bolsonaro wants to present Brazil as reinvigorated with a more open economy; his team plans to lay out priorities including privatizations and lower taxes. Still, as the IMF makes clear, increased tariffs are the main drag on the global economic outlook, and an improvement hinges on resolution of the U.S. trade conflict with China, along with “the resulting policy uncertainty.”
13) China’s delegation to Davos this year is led by Vice President Wang Qishan. Trump’s decision last week to pull the whole U.S. government delegation means Wang won’t get to meet with Treasury Secretary Steve Mnuchin and discuss the trade conflict.
14) Trump weighed in on his absence from Davos on Twitter Tuesday morning, saying “Last time I went to Davos, the Fake News said I should not go there. This year, because of the Shutdown, I decided not to go, and the Fake News said I should be there.” For all his bluster, diplomats point to the fact that Trump has not radically altered the American-led web of alliances. He renegotiated trade deals with Canada, Mexico and South Korea that left much of the substance intact, and his complaints about Europe’s defense spending, China’s trade practices and Iran’s regional role could have been championed by other Republican presidents, as reported by WSJ.com. Yet for Russia, Trump’s unpredictability has led to worsening ties. The president’s abrupt cancellation of an expected meeting with Vladimir Putin at the Group of 20 summit in Argentina last year -- the third such snub for the Russian leader in 12 months -- was the last straw, with Russian government officials lamenting that the president’s aides are playing him as they like.
15) The billionaire philanthropist George Soros has used his annual speech at the World Economic Forum, in Davos, to launch a scathing attack on China and its president Xi Jinping. Mr Soros warned that artificial intelligence and machine learning could be used to entrench totalitarian control in the country. He said this scenario presented an "unprecedented danger". But he said the Chinese people were his "main source of hope." "China is not the only authoritarian regime in the world but it is the wealthiest, strongest and technologically most advanced," he said, noting concerns too about Vladimir Putin's Russia. “This makes Xi Jinping the most dangerous opponent of open societies," he said. Mr Soros, a prominent donor to the Democratic Party in the US, also criticised the Trump administration's stance towards China. "Instead of waging a trade war with practically the whole world, the US should focus on China," he said. He urged Washington to crack down on Chinese technology companies such as Huawei and ZTE, which he said present an "unacceptable security risk for the rest of the world". More broadly, Mr Soros cautioned that repressive regimes could utilise technology to control their citizens, in what he called "a mortal threat to open societies,” as reported by the BBC.
16) Former Chancellor George Osborne has said delaying the UK's exit from the EU is now the "most likely" option. The UK has to choose between no deal - which he compared to Russian roulette - or no Brexit for now, he told the BBC. But Theresa May says the best option is to approve her withdrawal agreement, which MPs rejected last week. And International Trade Secretary Liam Fox told the BBC that if MPs blocked Brexit it could have "calamitous" and "unforeseen consequences". Under current law, the UK will exit the EU on 29 March, whether or not a deal has been struck. The decision to leave was taken by 52% to 48% in a referendum in June 2016. Mr Osborne, now a newspaper editor, was chancellor and a key Remain campaigner at the time.
17) The chairman of Chinese tech giant Huawei has warned that his company could shift away from Western countries if it continues to face restrictions. Huawei has been under scrutiny by Western governments, which fear its products could be used for spying. Speaking at the World Economic Forum, in Davos, Mr Liang Hua said his firm might transfer technology to countries "where we are welcomed". He also stressed that Huawei follows regulations wherever it operates. Huawei makes smartphones but is also a world leader in telecoms infrastructure, in particular the next generation of mobile phone networks, known as 5G. But concern about the security of its technology has been growing, particularly in the US, UK, Canada, Australia and Germany. The company is banned from bidding for government contracts in the US, where intelligence services have raised questions about Huawei founder Ren Zhengfei's links to China's ruling Communist Party. Last month, BT confirmed that it was removing Huawei's equipment from the EE core network that it owns. The network provides a communication system being developed for the UK's emergency services.
18) This year at the annual gathering of the political and business world elite, just 22% of attendees are women, up from 20% two years ago. Progress is painfully slow, despite a quota system for large firms that forces them to bring one woman for every four male attendees. It's an imbalance that reflects the situation in the broader corporate and political world. At the current rate of progress, it will take 108 years to close the gender gap and 202 years to achieve parity in the workforce, according to the World Economic Forum’s latest global report.
19) Prince William has said that every celebrity he asked to back his Heads Together mental health initiative three years ago refused. The Duke of Cambridge told the Davos World Economic Forum that "a lot" of stars were approached, but none wanted to be associated with mental illness. He also said the wartime generation may have helped create some of the stigma. People preferred not talk about such "horrendous" events, a stoic attitude passed on to their children. The prince created Heads Together, launched to help combat the stigma of mental health, in 2017 with the Duchess of Cambridge and Prince Harry. The duke told his audience of business leaders about his own struggles with mental health, saying there was one traumatic incident that he didn't think he would "ever get over". He said if he hadn't opened up to colleagues about the situation, he would have "gone down a slippery slope" mentally. Looking visibly emotional, he said he still found the incident "very difficult to talk about" because it was "related very closely to my children", George, Charlotte and Louis. But he said such feelings were "only human", adding: "Yes, you put a suit of armour on… but one day something comes along closely related to your own personal life and it really takes you over a line."
(20) Trump, Macron, May, Modi and Mnangagwa have all decided that to be seen swanning around in the snow while there are crises at home is to rub salt into wounds in society that globalisation of the kind Davos represents is perceived to have opened. The economic backdrop to this year's gathering is also not one to inspire much confidence. The world's biggest economy is entering the fifth week of a government shutdown, the world's second biggest economy, China, has registered its slowest growth in nearly 30 years, the world's fourth biggest, Germany, is stagnating and the world's 6th biggest, the UK, is suffering from the side effects of the Brexit stand off as companies cancel or defer investment.
(21) David Solomon may have been groomed for his role as CEO of Goldman Sachs, but there was one downside that still came as a surprise to him. "I've counseled CEOs for a long time and have had a lot of CEOs talk to me about what it feels like to be a CEO, and you feel a little bit lonely and a little isolated, and information flows are different. I thought I understood that. When you sit in the seat, it's really different," he said in a Squawk Box interview from the World Economic Forum in Davos, Switzerland. He's since been grappling with the deepening international scandal in which Goldman bankers were accused of helping a Malaysian financier steal billions of dollars from an investment fund called 1MDB. Last week, Solomon apologized to the Malaysian people for the role of one of his former bankers.
(22) On the last day of WEF, Chancellor Philip Hammond is one of the last speakers and be discussing the global economic outlook with Bank of Japan Governor Haruhiko Kuroda, in a session chaired by IMF managing director Christine Lagarde. Bank of England Governor Mark Carney said British businesses still face challenges if the nation leaves the European Union without a deal. "There are a series of logistical issues that need to be solved, and it's quite transparent that in many cases they're not," Mr Carney said during a panel discussion at the World Economic Forum in Davos. But he said the Bank had some firepower if needed.
(23) Saudi Arabia is "sad" about the murder of journalist Jamal Khashoggi, according to its Finance Minister. Mohammed Al-Jadaan told delegates at the World Economic Forum in Davos: "We are absolutely sad about what happened to Jamal Khashoggi." He also claimed that the government would make sure justice prevails in the trial of 11 individuals charged in connection with the brutal killing. Meanwhile, Patrick Pouyanné, chief executive of Total, the French oil giant, claimed that if it boycotted Saudi Arabia over the murder of journalist Jamal Khashoggi, “it would hurt ordinary people.”
(24) Poland's prime minister says he wants to see more workers return from the UK to help its domestic economy grow. Mateusz Morawiecki told the BBC that "more and more are coming back and I'm pleased about that because there is a low level of unemployment... Give us our people back". But he said people who want to stay in the UK should be allowed to, "and be treated exactly as they are now". He said Prime Minister Theresa May had given him that commitment. Speaking at the World Economic Forum, in Davos, Mr Morawiecki said there was a low level of unemployment in Poland and 5.5% GDP growth. "So I would hope that many Poles would come back to Poland," he said. Mr Morawiecki is desperate for the UK to avoid a hard Brexit - an outcome he says would be damaging for the UK, Poland and the whole EU. Poland has been critical of the way the EU has handled the Brexit negotiations. Its foreign minister, Jacek Czaputowicz, has recently suggested that the Irish backstop should be time-limited to five years. The backstop would keep the UK in a customs union with the EU until future arrangements are agreed to avoid a hard border on the island of Ireland. This was seen by many in the UK as a crack in the solidarity of the EU27's negotiating position and was dismissed by the European Commission. The Polish prime minister said his minister's comments were an attempt to be more creative in the fight for any compromise that avoided a hard Brexit. However, he told the BBC that the negotiation was now over and the ball was now in Mrs May's court. His comments follow remarks by the former chancellor George Osborne, who told the BBC that a delay of Brexit was now the most likely outcome. However, International Trade Secretary Dr Liam Fox warned that political and business leaders gathered at Davos were becoming far too complacent in assuming that a no-deal Brexit would be averted and that could prove costly for them as well as the UK. "Some countries believe that no-deal is not possible so think - why should I put the work in? It's my job to remind them that it is a possibility and you need to get that work done."
(25) Satya Nadella, the boss of tech giant Microsoft, says the research by Stanford University psychologist Carol Dweck into the power of having a “growth mindset” changed his life. “It changed my life as a parent and a partner and can apply equally to chief executives and companies,” he said, speaking at a breakfast panel in Davos. He summed up Ms Dweck’s theory as the difference between a “know-it-all” and a “learn-it-all”. A growth mindset refers to the underlying beliefs people have about learning and intelligence. When they believe they can get smarter, they put in extra time and effort, and that leads to higher achievement. “Practise your growth mindset, it makes you a better person, a better partner at home and a better parent,” the Indian born chief executive, who took over at the helm of Microsoft in 2014, advises. Finally, Daniel Zhang, chief executive of Alibaba, took part in a session looking at consumption and transformation of digital retail in China and the rest of the world. China remains front and centre in a discussion about whether the country will be shaping the next phase of globalisation. Bill Winters, chief executive at Standard Chartered Bank, will be part of that panel. And just as Microsoft’s Bing search engine stops working in China, chief executive Satya Nadella will helm a conversation about "Digital Trust and Transformation.”
Final Davos Insights
Further insights came from Jack Ma, Executive Chairman Alibaba Group Holding. "When I hire people, I hire the people who are smarter than I am. People who four, five years later could be my boss. I like people who I like, who are positive and who never give up." The best people are optimistic and don't complain, he says. Ma noted that he survived the corporate world for 20 years because he was a teacher in his former life. "You always want your students to be better than you, to be a mayor, not in prison. Rule number one: help people to be better than you are," he said.
IBM CEO Ginni Rometty says that as automation continues apace the skills gap and job insecurity fears are real. “When we talk of a skills crisis, I really do believe that 100 % of jobs will change,” she says. But she argues the crisis is not impossible to overcome. Rometty wants to see the development of a new education and career model: new collar, not blue collar or white collar. This means investing in skills development and responding in real time to the changing skills landscape. It also means breaking free from traditional models of recruiting those with 4-year and advanced degrees. "We as a company are passionate that if we don't fix this issue, to bridge this skill right now, at the rate it's moving, you will have unrest," Rometty said. "And so people have to have a route in."
LinkedIn Co-Founder and Vice-President of Product Allen Blue notes that AI and machine learning are becoming fundamental to how all technology is built, when one considers phones, banking and many other products and activities. “It’s important, as we go forward, that we are designing and building that tech in the right way,” he says, reflecting on the inherent biases that many algorithms have because they were designed and built by white males. Blue argues that technology can positively support flexibility of the workplace. It enables learning via online, video-based, non-real time learning. Certain technology also enables people to balance their lives, by working remotely.
France's Minister of Labour, Muriel Pénicaud, described her re-skilling programme, which includes giving employees 500 Euros a year to choose their own training programme. "Today access to capital is easier than access to skills," she said, noting the need for pro-action. "Many of our citizens think they are victims of globalization and technology. When you are not in the driving seat, change is always a threat. You need to be in the driving seat, you need to be able to choose your future."
Mental health was on the agenda at Davos with a number of discussions on how to break the stigma and create more supporting workplaces. John Flint, the CEO of HSBC, noted that survivors are assets. "Those who have recovered often possess a resilience and resourcefulness," he said. Flint wants to turn the bank into the “the healthiest human system.” He described this not as a fuzzy, feel-good effort, but as a question of performance.
Privos 2019 Family Office Investment Themes - What We Are Watching This Year
Our Privos CEO spoke on stage in October 2018 at a leading private equity conference located at a Ritz Carlton on the West Coast of the United States. Before our CEO walked on stage, a Senior Managing Director from a leading private equity placement agent (a placement firm that has raised billions of dollars of LP commitments) corned our CEO and said, “our hedge fund and asset management friends are all screaming about the upcoming massive correction that is coming year end or early next week, so back at the office we have been having strategy meetings about how to increase our business during the upcoming massive correction - which I’m hearing could be worse than the last global financial crisis (CGC) - we are hearing from our network that even today the trains are starting to fall off the rails in the markets, it’s going to hit private equity exits and performance in 2019 in a big way - so to be opportunistic, our firm is in the process of lining up vulture and distress private equity fund managers who will be ready to pick up the scraps when the world turns upside down, generate returns for multi-family office like yours. May we come talk with you about our new managers?”
That pretty much says everything you need to know about what is really happening in the world, the current state of the market and how your family office might consider working with your financial advisors and fund managers during the next 12 months to plan for potential large correction that many in the financial community are not predicting but taking action steps now to hedge and plan for the worst.
In 2019, family offices will face the difficult challenge of walking on proverbial hot coals, taking calculated bets on where to invest and deploy capital, which risk mine fields to avoid, and how best to deliver competitive alpha. Family office principles, billionaires, tycoons, royal families and their armies of fund managers and investment professionals, armed with the best data, big bank research, proprietary artificial intelligence (AI), and blockchain technology, are all trying to guess and manage the head winds of change.
2019 Privos Thematic Predictions
At Privos, our multi-family office believes that the most critical investment themes and geopolitical issues that global family offices are focusing on this year, include, but are not limited to, the following:
* Britain’s exit from the EU;
* How the defeat of the Islamic State will play out for Iraq and Syria;
* Will the North Koreans slow down growth in Asia, ex-Japan;
* Will central bankers slow down the world economy;
* How will the emerging markets fare a potential global slowdown;
* How we all deal with the fact that India is the fastest growing economy in the world;
* US Government Shutdown and its aftermath;
* Chinese President Xi Jinping and his new second five-year in office;
* Europe as the new economic powerhouse;
* French President Emmanuel Macron’s upcoming reforms;
* Future US presidential elections and how the world economies react;
* Latin American elections in Brazil, Columbia, Venezuela, and Cuba;
* Mexican corruption;
* Japanese Emperor Akihito steps down, making way for new leadership in Japan;
* Family office’s thematic investing in ESG, SRI and the 17 SDGs;
* Canada, California, Colorado and US States cannabis and hemp;
* Elections in Italy;
* How governments tax, fine, regulate the tech giants (Google, Facebook, Amazon, Uber.);
* French Macroism;
* China’s rise in power, Xi Jinping’s relationship with China’s tycoons, cutting the flow of RNB; and
* US, French, Australian, and world protectionism restraining booming China.
Privos 2019 Predictions: Leading Sectors to Watch
In 2019, our multi-family office will also be focusing, allocating, and exploring investments on the following industries and opportunities, including:
* Commercial drones;
* Cloud computing;
* Driverless cars;
* Artificial intelligence (AI);
* Quantum computing;
* Luxury Goods in China
* Genetics and epigenetics;
* Data intelligence;
* battery technology;
* space travel and related science;
* Alternative energy (wind, solar, geothermal, etc.);
* Cryptocurrency and blockchain; and
* Commercial drone deliveries in Japan by 2020 Tokyo Olympics
China and India – 2019
We are asked constantly where our multi-family office is focusing our attention, India or China. The answer is easy, we focus on investment opportunities in both countries. However, in our 2019 Predictions, it may be helpful to share a quick primer on our thinking regarding both important markets.
Any discussion of India vs. China should begin with the understanding that India will be the largest market in the world by 2025. Stop and think about that for a minute; India will surpass the US, China, and the EU as a powerhouse single economic trading country in just seven short years from now. Yet, how many of you are actually doing business in India, setting up offices in New Delhi, sending staff and investment professionals to meet the world-class fund managers who are generating huge alpha investing in their home country.
But first we should discuss China. You should appreciate that in 1890, the US became the biggest economy in the world, but today history is reversing itself. The IMF estimates that China’s GDP overtook America’s in 2014 and will be a quarter larger in 2019. However, in order to buy internationally traded goods, services and assets, China must convert its yuan not a PPP (purchasing-power parity) but at the market exchange rate of roughly 6.6 to the dollar. What this means is that is that although China’s growth has remained robust, averaging over 7% since 2011, the yuan is now weaker, not stronger, against the dollar. Thus, China dollar DGP is still far short of America’s according to Simon Cox, writing in the Economist. What this means is that China’s GDP will eventually overtake, but the real issue is whether it will do so before India’s population overtakes China’s? Some argue that perhaps China will grab the economic crown only after losing its demographic one.
According to the United Nations, India’s population will overtake China by 2024, which gives China only six years to catch America economically before India surpasses China demographically. To close the gap with America in time, China’s dollar DGP will probably have to grow by 11-12% per year, which would be an almost impossible rebound from the disinflation and depreciation of recent years.
For any family office considering investing in India, you should consider joining our firm, and others, in allocating capital to India. Consider the following data on India:
1) India has received billions from foreign investors between May 2014 and February 2018. This amount is 43% more than the funds received between 2010 and 2014 and is primarily driven by a major change in foreign policy and ease of doing business under Prime Minister Narendra Modi;
2) Many experts agree that India is emerging as a global manufacturing and start-up hub and many cars and smart phones are being made in India according to Prime Minister Modi;
3) Samsung recently opened the world's biggest mobile phone manufacturing plant in the state of Uttar Pradesh;
4) In the last four years, 11,000 start ups have been registered in India in the last four years, making the country a land of start-ups;
5) Amazon is going "all in" into India, investing billions into their local Indian operations. During a recent investor call, Amazon CFO Brian Olsavsky had said the company would continue to invest in India as it sees great progress with both sellers and customers; and
6) Walmart India plans to double its wholesale store presence in the next 3 years with 20 new stores in the country. Walmart India currently operates 21 cash and carry stores across 19 cities. Walmart agreed to buy a 77% stake in online retailer and local e-commerce player Flipkart.
Changing of the Guard
Much has been written in the financial press about the various changing of the political guard in the years to come. We mention this fact in our yearly prediction as our multi-family office studies carefully how these political changes will affect investments and risk factors in these regions in the coming years.
In Japan, Emperor Akihito will retire from the throne that he has held since 1989. At 83 years old, the Emperor has declared that he needs a break, opting to bow out watching the rulers of other countries to understand now the new political order shakes out, including rules Robert Mugabe of Zimbabwe, Paul Biya of Cameroon, Teodoro Mbasogo of Equatorial Guinea, Paul Kagama of Rwanda, Yoweri Museveni of Uganda, Raul Castro in Cuba, Nursultan Nazarbayey in Kazakhstan, Li Ka-Shing, Hong Kong’s richest man, King Salman bin Abdel Aziz Al Saud of Saudi Arabia, who will give way most likely to his son, Muhammad, Nicolas Madura in Venezuela, Najib Razak in Malaysia, and Arsene Wegner at Arsenal, Queen Elizabeth II. See generally, Daniel Franklin, Economist Editor, The World in 2018.
On May 7, 2017, Emmanuel Macron was elected France’s youngest head of state since Napoleon after beating his far-Right rival Marine Le Pen in an emphatic result that will have far-reaching consequences for Brexit and Europe. The 39-year-old Mr Macron won almost two thirds of the vote, showing a clear path to the Élysée Palace for the pro-EU centrist who was a political unknown until three years ago and has never held elected office. Addressing the nation, a sober Mr Macron immediately reached across the divide to Le Pen voters, saying he heard the "anger, anxiety and doubts" that many had expressed. But he did not shy away from his internationalist, pro-EU agenda, saying: "I will defend Europe; it is our civilization which is at stake...I will work to rebuild ties between Europe and its citizens."
Later Mr Macron took the stage to the strains of Beethoven’s Ode to Joy, the European Union anthem, in the courtyard of the Louvre museum. He said France was facing an "immense task" to rebuild European unity, fix the economy and ensure security against extremist threats. “Europe and the world are waiting for us to defend the spirit of Enlightenment, threatened in so many places,” he told the crowd, as his his wife Brigitte and their extended family joined him, according to London's The Telegraph.
On May 17, 2017, the New York Times reported that Macron's cabinet is made up of a carefully chosen cast of characters meant to signal how he plans to govern. It has some appointments from the left and some from the right; it is evenly divided between career politicians and those who come from the private sector or nonprofits. And it has equal numbers of men and women. “It is a government of renewal,” the presidential press office said in a statement on Wednesday.
In 2019, the French President plans to do away with the Europe of nations to create something much closer to a nation of Europe, with the EU to have its own finance minister, its own budget, its own economic governance. Macron believes that the EU should have its own army and border police force. He wants a harmonized tax system and, politically, a stronger European Parliament with transnational parties and lists, as reported in CNN.
Aviation Records in 2019
The world is becoming more flat and interconnected. Look no further than last year which marked the debut of the longest flight in the world when Qatar Airways launched its 17-hour, 30-minute flight between Auckland and Doha, Qatar. Not to be outdone, Qantas will begin to fly a 9,000-mile nonstop between Perth and London in March 2018 using the 787-9 Dreamliner, and Singapore Airlines just relaunched of its nonstop Newark-Singapore route, which will take just under 19 hours. Qantas is set to add to its list of aviation firsts, with the national carrier confirming it will operate non-stop flights from Perth to London using the 787-9 Dreamliner. We are all living closer to each other and time zones will disappear over time.
2019 will witness airlines from around the world introduced new routes that pushed the possibilities of next-generation aircraft and connected more people than ever before across greater and greater distances. The year marked the dawn of the super-haul flight, with non-stop routes between the U.S. and Asia, and Europe and Australia, among other milestones.
Singapore Airlines took the prize of world’s longest flight when it relaunched its route between its hub at Singapore Changi International Airport and Newark Liberty International Airport in October 2018, according to Forbes. That flight tops out at nearly 19 hours in the direction from the U.S. to Singapore, and covers a distance of over 9,500 miles. For its part, Qantas began the first regularly scheduled commercial non-stop flights between Australia and Europe with the debut of its service between Perth and London Heathrow in March. That route squeaks in at just over 9,000 miles and over 17 hours. You might also have missed Philippine Airlines quietly beginning non-stop service between Manila and New York JFK, also in October, with a flight that instantly became the eighth-longest in the world.
Many of these new routes have recently become possible thanks to the advent of the next-generation of fuel-efficient aircraft. Jets like the Boeing 787 Dreamliner and the Airbus A350 can not only cover longer distances than their antecedents, but they also field an array of jetlag-fighting features such as higher cabin pressurization and humidity so that passengers can weather such long flights in better spirits and better health.
The Elon Musk Factor
Our Privos CEO was in the audience recently at the Economic Club of New York to listen to Peter Thiel, billionaire tech investor and Facebook board member, warn an audience of mostly New York financial elite that they should "never bet against Elon" in discussing with Maria Bartiromo his view of Telsa and the new world economy.
We have great respect for Elon Musk who announced last year proposals for one of his most ambitious projects to date - intercontinental rocket flights for passengers that will take under half an hour. The billionaire entrepreneur said the BFR spacecraft unveiled by his company SpaceX will be able to fly to most places on earth in under 30 minutes and anywhere in under an hour, with the cost roughly equivalent to an economy flight on a passenger jet. The reusable rockets would apparently have a maximum speed of 27,000 km per hour (16,777 mph), although earth flights would travel at just over 7,000mph, allowing flights of thousands of miles in as little as 22 minutes. Many of us at Privos will be taking these and other international flights, including Elon's BFR spacecraft, and look forward to increased global travel and connectivity to help facilitate the work of our multi-family office. In 2019, we are looking forward to watching Larry Ellison, the founder of Oracle, help Elon steer Telsa through turbulent waters.
2019 Capital Flows
These events and others have changed the world in radical ways for family offices. Global geo-political realities today are causing family offices to rethink their entire portfolio of power, investments, local and regional engagement. Trump's stunning victory , together with the fallout from Brexit in which UK household wealth has plummeted by $1.5 trillion as a "direct result" of the vote to leave the EU, has resulted in global capital flowing into the new safe harbors of the United States, or what our firm CEO has coined as "The New American Switzerland." The appointment of Robert Mueller could mark real change of some sort in Washington, good or bad for the current Trump administration.
International family offices and global investors are pivoting and moving huge sums of capital into the safe harbors of the United States this year. You don't have to look further than at the Singapore sovereign wealth fund, Temasek, who in February 2017 announced the launch of the firm's second office in the States, opening a new investment office in San Francisco to follow up expansions into London, Sao Paulo, Mexico City, and New York three years ago.
Private Equity GP Fund Managers On the Chopping Block: The Mad Search for New LP Capital
It is ironic that while the Singapore sovereign wealth fund is expanding into California, the world's fifth largest economy, CalPERS, the $300B California pension fund, announced last year that it is whacking private equity GP head count, cutting scores of private equity firms as CalPERS moves to cull its list of private equity firms from its old number of 200 managers to today just 60 mangers with the announced goal of just 20 managers by the year 2020. Where will these CalPERS GP "road kill" search for new capital, that is the issue being played out in 2019 in our family office world. The answer, of course, is private equity and hedge funds are all looking to family offices to plug the allocation funding gap.
The collective view, according to Chairmen of several private equity firms we know well, is there is no where to look for new capital except global family offices. Any private equity GP queuing up to try to get pass the consultant community, including Cambridge Associates, Mercer and Wilshire, to win a nod from Texas Teachers, Ontario Teachers, HMC, Calpers, or other institutional investors report massive pain of months and month of a financial proctology exam. Similarly, our family office partners are redeeming en masse from their worst hedge fund managers who are all going under, yet we can report that today the biggest 309 hedge funds increased AUM to $1.88 trillion.
Thus, for smaller private equity firms and hedge funds in the bottom half of the masses, the buzz is that these fund managers days are numbered. Many will stop managing third party capital and turn themselves into "family offices." For the dreaded "new managers," who are typically "old managers" launching new hedge funds, all we can say is good luck to you. Cambridge won't even return your call or take a meeting until you can show a compelling "three year track record" as we all know. Capital allocation has changed substantially. And no one gets fired for pulling the trigger with Blackstone, KKR, Carlyle and the big funds, so that's the rub.
The good news is that in the family office world, it is possible to find a risk taking capital partner who will stand by you in good times and times of stress when you can't get into the doors of Yale's Endowment or their consultant. Doing business successfully in 2019 will look different than in past years. Our family office partners keep on telling us that the world keeps on getting messier and more complicated for them, with interconnected global risk. It is getting harder to make money as the instability in the world is growing, yet such uncertainty has created huge opportunities for family offices with capital to deploy around the world.
Family Offices and New Thematic Investment Trends
For 2019, global family offices are moving towards "thematic investing." ESG, Impact Investing, the 17 SDG are all in vogue. Financial Advisors from the largest banks and asset managers in the world are "re-tolling" their decks and collateral to pitch and reframe their investments into the 17 SDG boxes, as the leading family offices move capital into ESG investment. The conflict is between the old CIO guard, who want returns, and the younger, influential Millenniums on investment committee who are screaming for Impact while global warming wipes entire cities off the map.
This year, if we follow on the themes we are hearing at Davos, family offices will experienced improved growth but well below pre-crisis levels. High debt will harm weaker economies. Inflation will increase following last year's commodity price stabilization. China's crackdown on corruption and its slowing economy will send more RMBs via Hong Kong to the West, particularly the U.S. The US Federal Reserve is likely to raise rates. As in recent years, economic growth forecasts were too optimistic at the start of 2019 and had to be lowered. Thus, we predict that 2019 will only bring a slight acceleration of growth for our global family office partners. The Trump Trade and Brexit will add uncertainty to global growth.
According to Goldman Sachs, the outlooks for 2019 predict global growth will reach 4%, with G7 economies expected to beat projections for the first time since 2010. One economist deemed that optimistic forecast “as good as it gets” for this year. A global growth rate of 4% next year would be the strongest since 2011, and an increase from the 3.7% Goldman Sachs estimated for this year, reports Bloomberg. Most major economies are even running ahead of pre-financial crisis averages.
We certainly live in a world that has become dangerous and fraught with risk and peril. The geo-political volatility is so extreme that one of our billionaire family office partners who runs a leading hedge fund is actually afraid of hosting dinner parties at his private home in New York City for fear that his guests and investors will think that he has taken his "eye off the ball" socializing instead of focusing on running his hedge fund in these highly volatile markets.
Last year, the International Organization for Migration (IOM) disclosed that Europe has witnessed a surge of more than one million migrants and refugees crossing into their borders by land and sea. Refugees are mostly entering Europe via the six EU nations of Greece, Bulgaria, Italy, Spain, Malta, and Cyprus. The EU statistics agency Eurostat reports that more than 942,000 people arriving in Europe have officially claimed asylum. Germany has received the highest number of new asylum applications; however, more than one million have been counted in Germany's "EASY' system for counting and distributing people before they make asylum claims. We have all seen the German press about the country's immigration crisis. Family offices are keeping careful tabs on European's immigration crisis as it impact their holdings and assets from Paris to London.
Investment in Africa
Privos is investing actively in Africa. We believe Africa represents one of the best, long term, investment opportunities to allocate capital across a wide range of industries. Investing in Africa is not for the faint at heart; it takes incredible focus, connectivity, and commitment to get it right. But what family offices see in Africa is an opportunity to enjoy 10-20x, private equity like returns, if you can effectively manage the "Africa risk." By way of example, one of our family office partners won an African timber tender, built a timber processing plant in Africa, exported wood from the continent to Europe and into the hands of the hungry IKEA like manufacturers, then sold his African entire timber operation to a private equity pregnant with ESG LP capital for a 10x exit multiple. As our partners told our CEO, "where in the world can you do that today except Africa"
Turning to the current eco-system of Africa, lat year, we witnessed over 50 African leaders and heads of state fly into Washington D.C. last year to attend the U.S. Africa Leaders Summit with Ebola keeping several leaders at home to tend to the crisis. Family offices are also feeling the brunt of the Turkish lira has taken a bath in light of the corruption allegations.
Africa is the new Silicon Valley for global family offices despite the Ebola situation that had reached critical mass. Today, we have more international family office partners doubling down on Africa, taking advantage of the massive opportunity the continent has to offer. Direct deals are the rage in Africa with huge exits to private equity GPs who are hunting the continent for yield. GE Capital announced at the firm will invest about $2 billion in Africa by 2019 and double its local workforce, with Jeffrey Immelt calling the continent one of the world's most-promising markets. “Africa is one of the most important growth areas, purely from an economic standpoint,”GE Chairman Immelt said at a media event for the start of the U.S.-Africa Leaders Summit in Washington being hosted by President Barack Obama. “It’s early. It’s in very early days for Africa, so there’s still a lot yet to be done and the notion of having the summit here says that it’s important.” According to Businessweek, GE won about $8.3 billion in orders in Africa recently as it accelerates operations in a continent where Immelt said sales were “almost zero” in 2000. GE Africa revenue there last year was $5.2 billion, according to GE, which estimates that Africa’s basic infrastructure needs could generate $90 billion in investment opportunities.
Investors smart about Africa all know about GE's foray into the continent; however, what family offices in Africa see that no one else does is that when the GE's of the world invests billions in their country, city, businesses in Africa, they are creating a massive liquidity event for leading family offices in Africa. It is no wonder that you see in clubs in Washington D.C. African students from leading local universities spending "$10,000 per night clubbing in Georgetown," as reported in the local media.
Adding to the capital expenditures in Africa, shockwaves were felt in Johannesburg and Cape Town recently when it was reported that Nigeria, a country of 170 million people, recently surpassed South Africa as the largest economy on the continent, with the capital Abuja reporting a whopping $510 billion gross domestic product for the African nation, blowing by South Africa's $384.3 billion figure. Put another way, Nigeria, a major oil and gas producing state, is now the 26th-largest economy in the world; Moody's has forecasted exponential growth for the country to $4.5 trillion by 2050, which will elevate the country to one of the largest 15 countries by that time, rivaling top European countries like Holland. With growth comes deal flow, with Marriott International recently announcing, for example, that it is expanding its hotel business in Nigeria with new luxury hotels in Lagos, Nigeria's commercial capital. Of course, there is debate about how Ebola will play into Africa's expansion, but the consensus in our African partners seems to be that Ebloa will result in a slight economic slowdown that over the next 36 months will be a tragic but contained crisis.
Certainly, there are many moving parts in the global economy for a family office to process and make sense of in 2019. Thus, iIn light of the world-wide economic reality, what should a family office do in to achieve its business, capital and strategic objective? That is the question on everyone’s mind this year.
Brexit - UK's $2 Trillion Loss
Shockingly, the world watched last year in utter amazement last year that for the first time in 700 years, Scotland nearly succeeded from England. No one really talks about this stunning turn of events anymore; the British media is now focused on Brexit and the new royal baby; however, Scotland leaving the U.K. is a massive embarrassment for the English, with the British Government left scrambling to keep the country in tact as its leaders failed to appreciate the Scots distain of the UK parliament. Behind the scenes, Scottish succession resulted in family offices selling shares of Scottish companies and placing bearish bets on the British pound. The widespread implications of the Scotland split-off has certainly further damaged the UK - and London - as a world class player on the global stage.
While our London family office partners are reporting seeing less Russian’s “bling” at Lou Lou’s and other high end clubs in London due to the ruble hitting new lows against the euro, and the current price of oil crisis, England has been damages on the world stage by the Scotland crisis. To make matters worse, Brexit has caused damage to almost every sector of the British economy, including energy, retail, financial services, and manufacturing according to a report commissioned by an alliance of Conservative, Labor and Liberal Democrat politicians trying to stop a hard Brexit.
Family Office Wealth in Asia
Turing to Asia, according the Deutsch Bank, China is adding the GDP of Germany "every three and a half years" which, if you think about it, is the justification any family office needs to expand their portfolio companies, funds, foundations and holdings into the Chinese mainland. Then there is Singapore; according to Jim Rogers, George Soros' former hedge fund partner, "Singapore is becoming the new Switzerland as its sits right next to China and has been helped by problems with offshore havens like Switzerland and Cyprus. It will be the fastest growing money center in the next 10 years."
According to Forbes, the number of Asian billionaires has soared; the region has a record 444 members of the New 2019 Forbes Billionaires List, led by three entrepreneurs from Hong Kong: Li Ka-Shing, Lui Che Woo, and Lee Shau Kee. Rather than Japan as the focus of attention, mainland China is out in front with a record 152 billionaire members. Shockingly, China was not represented on the Forbes list back in 1996. We do not need to discuss the Alibabi IPO and the massive wealth that has been covered extensively in the media. Accordingly, any global family office looking to enter the world economy must engage China, Japan, South Korea, KL, and Singapore in a big way or risk becoming irrelevant in the world order.
The world economic forecast for 2019 looks stable albeit subdued, with there are both huge land mines and massive unique opportunities lurking beneath the surface. Recent meetings at the International Monetary Fund called for a coordinated plan to boost world-wide growth potential. Advanced economies are recovering at a stronger pace than emerging markets and are forecasted to outperform their emerging cousins this year. However, global growth is still below the levels in the immediate post-crisis period and in the long upswing before the global recession of 2008-09. And, we know that Putin ordering his troops over the border into Ukraine and the collapse of the Russian currency are causing the markets to go wild and Russian consumers freaking out and canceling Swiss ski vacations, another possible risk factor to consider.
More on China and Japan
In 2019, Japan is "at play" in the family office world. Many family offices are putting their resources into Japan. Private equity is effectively doubling down on Japan. The country, for years the world’s second largest economy, last year witnessed a growth rate of 1.7% together with the birth of the recently re-elected Abe and his “Abenomics,” which today is showing success in boosting inflation expectations. If Japan can manage its tax rise and long-lasting structural reforms, you could see a leading economic giant come roaring to life next year, as many of our Japanese family office partner predict. Whatever the case, Japan is getting much attention this coming year.
China and the Eurozone, however, are causing our family offices much stress and uncertainty. Take China, for instance, with 7.7% growth rate last year but a nationwide crack down on graft and bribery has sent the economic tumbling and massive capital flight as China's leading family offices continue to look for external opportunities abroad, particularly in Europe and the U.S. The Chinese economy today is clearly slowing down as authorities are debating stoking another credit-fueled investment boom and risking a rapid slowdown in growth. Yet, our Chinese family offices, their funds and portfolio companies are experiencing the type of go-fast growth that is truly the envy of the developed world. For Europe, the Eurozone remains a challenge, with negative growth of -0.4% last year alone. While the consensus is that Europe is no longer in intensive care following the credit crisis, it still has chronic problems to fix in its economy. Growth prospects are exceptionally weak, inflation extremely low, and the European Central Bank has been less interventionist than its global peers, much to the dismay Europe’s highly educated albeit unemployed labor force.
2019 Latin America Forecast: Watch Panama, Argentina, Peru, Columbia, and Chile
We predict that all the "action" in Latin America in 2019 will be found "West of the Andes" in rising economic regional powerhouses Chile, Peru, Panama, and Columbia. These countries form the growth engines of Latin America, albeit only at 2-3% due to the application of a modest amount of monetary and fiscal stimulus. Currency depreciations West of the Andes should eventually pave the way for recovery in 2018; however, interest rates are on the rise in these regions.
The story in Latin American today starts with the slowing of China. China's slowdown has decimated commodity prices in Latin America and with them exports and investments in South America. Brazil and Venezuela keep on spending after the commodity boom began to fall and both countries today are suffering and on the verse of civil unrest. From the Panama Canal north, the region's economies are tied much more closely to the United States than China. Mexico, Central America, and the Caribbean are net commodity importers and will hold steady in 2018, but in a most unspectacular fashion, according to The Economist.
The United States and Venezuela are going through a painful divorce that will have sweeping consequences for the global oil industry. US oil prices in January 2019 surged 3% on Tuesday after the Trump administration imposed sanctions on PDVSA, Venezuela's state-owned oil company. The penalties are meant to speed the demise of Venezuelan President Nicolas Maduro’s regime by starving his government of cash. But President Donald Trump's crackdown on Venezuela will also hit close to home because the OPEC nation is America's No. 4 oil importer. The PDVSA sanctions will likely lift oil and gasoline prices. At the same time, they're expected to squeeze American refiners that rely on a steady dose of Venezuela's heavy and cheap crude. “This is certainly an unintended consequence of Trump's foreign policy," said Michael Tran, director of global energy strategy at RBC Capital Markets. Despite soaring tensions between Washington and Caracas, the two nations have up until now been intertwined through the energy market. The United States is Venezuela's No. 1 customer. The Latin American country shipped 506,000 barrels of oil per day to the United States in October, according to the most recent Energy Department statistics. Only Canada, Mexico and Saudi Arabia sent more crude to the United States, as reported by cnn.com
Most of Latin America's currencies and stock markets have suffered a beating. The region will contract slightly in 2019 something that has not happened since 1967. With emerging markets around the world heading south, Latin America will fare no better in dealing with China's slowdown and rising interest rates in the U.S. Recovery depends, too, on a return of confidence. Chile has closed its current-account gap, but investment remains weak because of political uncertainty. Most forecasters expect Brazil, with its new leader, to pick up towards the end of next year after the Olympic games, but that requires a credible fiscal squeeze. Having borrowed to finance expansion in the good times, many Latin American firms must retrench too. The IMF finds that the ratio of debt to equity in a sample of 450 non-financial companies in five of the region’s bigger economies has risen to 6.5, from four in 2011.
Our family office partners in Latin America report that the continent is for the most part taking a hard "left" turn, as witnessed by the recent re-election of Bolivian President Evo Morales, South America's longest serving leader. Morales, 55, an outspoken critic of neoliberal economics and US policies, will remain in office until 2020, but not past 2025 as he lost the February 21, 2016 referendum allowing him to run for another five year term. Morales counts among his close friends and supports the late Fidel Castro, Brazil's former President Luiz Inacio da Silva and the late Presidents Huge Chavez of Venezuela, and Nestor Kirchner of Argentina. Bolivia with its rich resources and captive markets for natural gas exports to Brazil and Argentina is posed to become more of a regional economic player in Latin American in 2019. Our family office partners in Latin America report that Bolivia may be one of the surprise economies in the region to watch this coming year.
The centre-right government of Sebastián Piñera begins the second year of its four-year term in 2019. Signs of waning government support are beginning to show, amid fairly high unemployment and a wavering economic recovery. Growth will slow in 2019-20 as the external environment becomes less supportive, and Mr Piñera will look to bolster growth via economic reforms. However, Mr Piñera lacks a majority in Congress, meaning any legislation will require negotiation with the opposition to pass.
In his first term in the Moneda palace between 2010 and 2014, Sebastián Piñera, a billionaire businessman of the centre-right, oversaw rapid economic growth but failed to inspire popular affection. After an interlude in which Chile swung left under Michelle Bachelet, Mr Piñera has been back as president since March. Second terms often disappoint—Ms Bachelet’s did—but Mr Piñera says he has learned from experience. “There’s no better school for being a good president than La Moneda,” he says. “The second time you know better what you have to do and how to do it.”
What he has to do, he says, is to restore economic growth, improve the quality of Chile’s democracy and promote equality of opportunity “so that nobody is left out”. This agenda is similar to that of the Concertación, the centre-left alliance that ruled Chile for 20 years after General Pinochet’s dictatorship, the last four of them under Ms Bachelet in her first term, from 2006 to 2010. In her second term, between 2014 and 2018, she junked the Concertación, allied with the Communist Party and declared that reducing inequality was her priority. She pushed through reforms, many poorly designed, of education, tax, the electoral system and labour relations. Businesses took fright; partly as a result, economic growth averaged just 1.7% in 2013-17, compared with 5% in Mr Piñera’s first term, as reported in the Economist.
Today, Chile is struggling with the slowdown of China in profound ways despite being a world leading exporter of copper. Gross domestic product will rise 2 percent to 2.5 percent, compared with a previous estimate of 2.25 percent to 3.25 percent, the bank said in its quarterly monetary policy report. The inflation forecast was raised to 4.6 percent from 3.4 percent. Policy makers discussed the possibility of raising interest rates for the first time since May 2012 as inflation remained above the target range for a 16th month.
Chile currently has the lowest real interest rates in the Americas as the central bank tries to revive growth in an economy hit by a slump in copper prices. Investment will fall 1.2 percent in 2019, compared with the previous estimate for an increase of 0.7 percent, policy makers said. In 2018, investment rose 1.9 percent. The central bank has kept its benchmark rate at 3 percent since October 2014. The rate is 1.6 percentage points below inflation, compared with 0.3 point in Peru and close to zero in Colombia. In Mexico, the key rate is 0.3 point above inflation and in Brazil the differential is 4.7 points.
Impeachment and Financial Crisis in Brazil: 2019 Outlook
Brazil has a newly-elected populist President Jair Bolsonaro who addressed the world's business elite in Davos in January 2019, vowing to transform Latin America's largest economy into a more investment-friendly country. On his first international trip since becoming president, Bolsonaro delivered the keynote speech at Davos, the World Economic Forum (WEF). "Brazil's economy is still relatively closed to foreign trade and to change that situation is one of my administration's major commitments," Bolsonaro said, according to a WEF translation.
"You can be sure that by the end of my term in office, our economic team, led by Minister of Finance Paulo Guedes, will position in the ranking of the 50 best countries in the world to do business," he added. His comments are likely to be well received by market participants, after more than a decade of interventionist policies by previous administrations.
According to the Economist, the Brazilian government in 2019 is seeking pensions reform to help stabilise the rising public debt/ GDP ratio, but congressional approval is in the balance. Lower inflation and interest rates are supporting a gradual consumer-led economic recovery. The outcome of the October 2018 presidential election is uncertain, posing risks to our assumption of victory for a centrist candidate who will provide continuity with the sounder, more market-oriented policies ushered in by the Temer government in 2016.
On September 1, 2016, Brazil's Senate voted to remove President Dilma Rousseff from office for manipulating the budget. It puts an end to the 13 years in power of her left-wing Workers' Party. Ms. Rousseff had denied the charges, but with 61 senators voting in favor of her dismissal and 20 against, her rein was over. Michael Temer was sworn into as president and will serve our Ms. Rousseff's term until January 1, 2019.
In October 2017, Brazilian federal Judge Sérgio Moro on Monday said the Car Wash probe, Brazil's largest ever corruption investigation, is nearing completion in the southern city of Curitiba, where it started in 2014.
Economists have lowered their 2019 GDP forecast for Brazil to a 3.22 percent contraction. That, combined with last year's 3.8 percent fall, would be Brazil's worst two-year recession on record dating back more than a century, according to Ipea. This year, Brazil's economy will remain feeble and the road to recovery will be long and painful. Unemployment is rising to crisis levels, despite the economic bump from the Olympics in Rio and the World Cup. Political uncertainty and a massive number of scandals have engulfed the government and led to scores of resignations. The country has seen large protests in recent weeks and the new President Michel Temer’s loss of support bodes poorly for the passing tough reforms next year.
Many local family office LPs blame President Dilma Rousseff impeached less for budget related fraud but being caused, in the end, from the fall out from Petrobras related corruption under her watch. In addition to the impeachment scandal, the country is facing the Zika virus crisis following the Olympics, huge unemployment, massive liquidity crisis, a current recession. Add to the mix the fact that inflation is up and the real is at a 12-year low, plummeting 23% against the dollar. Capital flight has skyrocketed; why do you think the Brazilian bank Itau is enjoying 27% growth at their private bank in Zurich, Switzerland that is going head-to-head of Pictet, Lombier Odier and Quilvest for Latin American billionaire capital?
Mining giants such as Brazil's Vale SA and U.K.-based Anglo American PLC are taking advantage of the political instability in Brazil, increasing their efforts to extract minerals from Brazil's Amazon rain forest, a high-stakes foray into one of the world's most remote and environmentally sensitive regions. Our family office partners also report that the huge infrastructure spending in Brazil for stadiums that hosted the World Cup 2014 and the 2016 Olympic Games, while benefitting a handful of Brazilian family offices.
Brazilian hedge funds and private equity funds are facing investment challenges for actual and prospective investors in terms of the legal, regulatory, cultural and microeconomic environment, according to a recent study by INSEAD and PWC. In fact, according to the influential Emerging Markets Private Equity Association (EMPEA), total PE investments in Brazil are down to US $4.6 billion, representing 69% of the Latin American PE industry, the most attract emerging market for private equity investments. It's no wonder that the "action" that our Brazilian family offices partners are calling us, screaming for us to invest as "Brazil is on sale."
According to Seeking Alpha, this latest downturn in Brazil has been a challenging one for the banking sector, and management at Itau Unibanco (ITUB) has consistently overestimated loan growth and underestimated credit deterioration. That notwithstanding, management has steered this bank well through a tough period, and the shares have done well in 2017 as conditions in Brazil continue to improve. 2018 is likely to be a challenging year for the banking sector, as loan growth is likely to improve but not enough to offset compression to net interest margins. With likely limited options to reduce costs and cost of risk, I would expect earnings growth to be "meh" in 2018, but with a much stronger outlook for 2019 and 2020. Further complicating this outlook is the presidential election cycle in Brazil and its potential impact(s) on the cost of capital. As a quality play on Brazil, and Brazil's return to growth, though, it's not a bad longer term holding to consider and especially on dips/pullbacks.
Latin American Transformation
In Latin America, there is a massive shift of wealth and power that family offices are leading post credit crisis. The huge news is that Columbia will later this year become the third-strongest economy in the western hemisphere, overtaking troubled Argentina that is experiencing soaring inflation, weak currency, horrific economic growth, and questionable global leadership led by its president Cristina Fernandez who is under criminal investigation. Furthermore, Latin America family offices are witnessing the new age of transparency and rejection of cronyism. For example, Panamanians, enjoying one of the fastest-growing economies in the world, just elected Juan Carlos Varela as the new president-elect. Mr. Varela, a well-known politico whose family owns the country’s biggest liquor producer, campaigned against growing corruption and promises for a more transparent government. The Panama election, in which the country's former leadership built the first subway systems in Latin America, managed a $5.2 billion expansion of the Panama canal, and attracted massive global corporates, mattered little to the voters who rejected old world Latin America political ways of the past in favor of a new transparency.
Despite the political uncertainly, we believe that in 2019, we believe that Latin America will be on the best regions for family offices to invest in the world. Peru is on fire, family offices have been exiting agricultural and mining deals, enjoying massive new wealth, investing in the region and moving their capital to Miami and New York. One of our partners called from Brazil excited about their development of a Four Seasons-like brand; they have obtained the land at "prices we have not seen in 40 years ago," they reported. Argentina is "on sale" ad represents one of the best investment opportunities in the world. Panama and the expansion of the new Panama Canal is spuring massive economic growth in the Central American country. Contrary to what is reported in the media and financial press, our Latin America family office partners are enjoying huge wealth and moving their money into the U.S. in record numbers, despite the fact that the world thinks Brazil is blowing up and Latin America is taking a political hard turn left. What is happening today in Latin America is yet another example of how family offices have a unique view and pulse on local markets that are often overlooked by the financial world.
Hedge Funds and Alternatives
Family offices have seen hedge funds shutter their doors en masse.
Hedge funds overall are under pressure. As many are finding it quite difficult to raise money. A percentage of these hedge funds are focusing their capital raising efforts on the wealthy and family offices or other strategies to attracting family office capital. For hedge funds focusing on the wealthy, private placement life insurance (PPLI) can prove quite advantageous, according to Forbes. According to former hedge fund manager and Privos friend, Pete Sasaki: “The rich and more so the super-rich are increasingly gravitating to PPLI. So long as there are taxes on investment performance, PPLI combined with a successful hedge fund can many times produce better results." Single-family offices, for example, continue to invest in hedge funds. Many of them are willing to invest substantial sums with smaller nimble hedge funds. This is a trend that we see continuing this coming year.
In 2019, hedge fund managers are concerned about artificial intelligence, cloud-based platforms that increase mobility, and data governance, according to new data gathered during alternative asset technology specialist Indus Valley Partners' annual Mind Meld Hedge Fund Forum held in late April.
If we view Davos as a predictive lens for 2019, it is our view that this year family office investors will experience both an upheaval in certain emerging markets and, conversely, a huge boom in select BRICS, N-11, and select Frontier markets, particularly those countries that have worked hard in the past to improve their economic policies. Thus, betting on the right emerging market "horses" will be critical. Thus, family offices that pick the right countries to focus their investment and energies will come out ahead this year, leaving those others LPs who follow the herd mentality.
According to Fortune, even with concerns over its economy, China has already surpassed the US in one wealth indicator: the number of billionaires within its borders. A survey conducted by the Hurun Report says that China now has 596 billionaires, surpassing the US talley for the first time (US has 537 billionaires, according to the report). If 119 billionaires from Hong Kong, Taiwan, and Macao are added, Greater China owns 175 billionaires in the Hurun Global Rich List. Chinese billionaire Wang Jianlin of the Wanga Group, a conglomerate with investments in cinema chains and hotels, tops the list with $34.4 billion, just beating out runner-up Jack Ma, Chairman of Alibaba.
What is the significance of this wealth data for our firm other global family offices?
In our view, family offices in 2019 will witness the Brexit fallout, the Trump Trade, and the Eurozone crisis as smart investors leave the emerging markets, Europe and the UK for the safe harbor of US markets. International family offices are now pulling cash out of global stocks and into lower-risk bonds and U.S. equities. In addition, we are seeing an increase in our family office partners this year allocating more to funds and investing in direct deals world-wide across a wide range of sectors, including media (TMT), technology, film, alternative energy, oil and gas, food and agriculture, consumer goods, life science, healthcare, financials, and real estate. We predict that the fund of funds model of investing will see a revival with increasing allocations from family offices, particularly in hedge funds and private equity.
The other big story in 2019 in the family office world will be that the US will continued the trend of become the "safe haven" for capital flight; if you are a Chinese family office, buying a $40 million condo at the Time Warner Center in Manhattan may seem like a "bling move," yet the fact it is smart estate planning as the Chinese government starts to claw back billionaire's wealth from the Mainland. Our family office partners would rather, in the end, have their money in the U.S. than in tempermental and risky post-Brexit UK and Europe, even despite the US tax code issues. Thus, we are seeing for really the first time since the global crisis that the U.S. is becoming more more of a safe harbor for international family offices than at any time since the credit crisis. Our people report a huge uptick in foreign or non-U.S. family offices looking for investment opportunities in the States, whether direct, co-invests, fund allocations or philanthropic activities. We are seeing a surge in interest and global inquires every week from international family offices looking for investment opportunities in the United States and opportunities to partner with U.S. single and multi-family offices.
Yet, despite the uncertainty in the global financial markets, family offices, their funds, and portfolio companies, have historically amassed massive wealth “doubling down” and going against the grain of popular opinion of the 24/7 financial media. Thus, we are already seeing this year increased appetite and family office investment activities in private equity, hedge funds, secondaries, and, indirect and direct investments, across all asset classes world wide. For instnace, Brazil and Argentina is "on sale" and more family offices are looking for opportunities where others are afraid "to hunt."
Further, with inbound investment from global family offices into the US is at an all time high, our family office meetings, which would rarely take place in the States in the past, are now being scheduled all over the US, with our international family office partners flying in to the States to take meetings in New York, Boston, Philadelphia (with its new Qatar Airlines Doha/Philly flight), Washington D.C., Atlanta, Dallas, Houston, Denver, Chicago, Indianapolis, Salt Lake City, Reno/Tahoe, Elko, Seattle, Portland, San Francisco, Orange County, and San Diego. An an American led firm, we are encouraged by the renewed interest in the US as a safe harbor for international capital. That being said, hedge funds have been decimated and are just coming back in 2019, which further complicates US alternative investments.
Globally, our family offices partner are also paying increasing attention to the Latin American countries (as discussed above) with those countries “West of the Andes” such as Peru, Columbia, and Panama (but pulling back from Chile with its newly elected leftist, anti-business leader) getting the most attention. In addition, Hong Kong, Singapore, South Korea, with its numerous progressive free-trade agreements, and Mexico, with its recent gutsy pro-business move to open up its energy industry to foreign investment, are attracting family office attention this year.
Privos Capital 2019 List of Best Global Markets for Family Offices
We are proud to announce our annual 2019 List of Best Global Markets for Family Offices, which includes the following countries that we believe present the best opportunities for family office investments this coming year, as follows:
Privos Capital 2019 Top Emerging Market Pics: China, Taiwan, Mauritius, South Africa, Cameroon, Brazil, Ecuador, Panama, Peru, Argentina, Columbia, Poland, Qatar, Kuwait, Saudi Arabia, Bahrain, Jordan, India, and Malaysia.
Privos Capital 2019 Top Western Market Pics: US, Germany, Canada, Netherlands, Sweden, Finland, Norway, Australia, New Zealand, Singapore, Hong Kong, Iceland, Belgium, Israel, Japan, Ireland, Luxembourg, and Portugal.