"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 (2018)
By way of background, for those of you who do not know what a "family office" is or why you should care, Privos estimates that there are today over 12,000 global family offices and ultra-high-net-worth (UHNW) investors controlling over $27 trillion of assets around the world (yes, you read that correctly, more than $27 trillion - no typo here). So, more than private equity, hedge funds, fund of funds, private equity secondaries, real estate, impact investing, ESG, SDG, gold, art, or even philanthropy, world-wide family offices and UHNWs are clearly the dominant players in the financial universe - the Amazons if you will - and no one even comes close in the private world of family wealth.
Private equity firms - KKR, TPG, Apollo, Blackstone, Carlyle, Ares, Oaktree, Fortress, Bain Capital, CVC, Ardian, Onex, BC Partners, Bridgepoint, Cinvin, Permira, Lone Star, Warburg Pincus, Goldman Sachs Capital Partners, Silver Lake, Riverstone, or Advent - these firms, while world-class, represent just a small fraction of the total AUM of global family offices and UHNWs combined. What? You don't believe us: Consider this fact: according to Preqin, the total assets under management for the private equity industry have grown to just $2.49tn as of June 2016 (the latest figures available). In fact, Preqin’s 2017 Global Private Equity & Venture Capital Report finds that industry assets rose from $2.39tn as of the end of 2017, continuing eight consecutive years of expansion in the wake of the Global Financial Crisis. At the start of January 2018, there are 3,484 private capital funds seeking investment, 2.5x the number of funds that closed in the preceding 12 months. 2017 saw 921 private equity funds reach a final close, securing a total of $453bn in investor commitments.
Sure, this is beyond impressive. However, if you compared the total private equity assets under management, or AUM, of $2.49 trillion to the total AUM of global family offices and UHNW which sits at over $27 trillion, you should ask yourself why the financial media is focused on the small private equity fish when they should be hunting for the large elephants of global family offices and UHNWs in the global financial landscape.
Wait? What about hedge funds you may be asking. Family offices have an unique insight into the hedge fund world that few other investors have in this market. By way of example, in August 2018, many family offices know that hedge funds are "tightening up their book" in anticipation of a serious market correction that many in the financial services industry believe is on its way. Family offices report that their best traders see "cracks in market dynamics" and that they are "getting rid of their low conviction positions" to keep their powder dry for upcoming opportunities. Some traders think the markets are starting to look a whole lot like 2008 and the market is overcooked, with M&A and private equity driving an overheated environment. Whatever the case, hedge funds are reporting to their family office investors that they are seeing pockets of high disconnection in the financial markets that they are looking to take advantage of for their family office investors.
Surely they crush these "family offices and UHNWs" right? Nope. Hedge funds clock in at the end of 2017 with just $3 trillion last year, but that was thanks to higher security prices. Net outflows persisted, and fund liquidations totaled 1,057, the highest level since the financial crisis, according to Hedge Fund Research. In last year’s fourth quarter, the average fee structure fell to 1.48% and 17.4%, respectively, according to HFR. So, if you take the total AUM of leading hedge funds Bridgewater, AQR, JPMorgan Asset Management, Renaissance, Two Sigma, Elliott, Winton, Och-Ziff, Man Group, Millennium, DE Shaw & Co., Two Sigma, and others - wildly successful shops for sure, yet the total AUM of these incredible hedge funds contains less firepower and influence than the world's leading family offices and ultra-high-net-worths.
Interesting, right? You didn't think of it like that did you? Yet, family offices have remained under the radar because they have earned their wealth through a term that we have coined at Privos Capital as the "Quiet Grit of a Family Office." To us, Quiet Grit (QG) means changing the world with honor and dignity, without being loud and boastful about one's influence or success. Take the family offices of Steve Jobs, Li Ka-shing, Bill Gates, Sri and Gopi Hinduja, Nicky Oppenheimer, Ernesto and Kirsty Bertarelli, George Weston, Mohamed Bin isa Al Jaber and family, the Rausing Family, the Duke of Westminster and the Grosvenor Family, Freddy Heineken and his only daughter Charlene de Carvalho-Heineken, John Fredriksen, Sir James Dyson, then perhaps starting thinking about the investment offices of Bono, Sting, Sergey Brin, and others - these are the true Lions of the New World Order who have transformed innovation to change the world.
According to PWC, the only asset class that beats family offices and UHNWs is the asset managers, the Blackrocks and Vanguards of the world. Yet, family offices and UHNWs still beat each of these individual asset management firms hands down: For instance, of the leading asset management companies worldwide as of September 30, 2017, ranked by managed assets, BlackRock was ranked first, with managed assets amounting to 5.98 trillion U.S. dollars; trailing behind BlackRock with 4.5 trillion U.S. dollars in managed assets was the Vanguard Group.
Turning to the specifics of family offices, various projections and estimates in the financial press estimate that by the year 2025 China, Indian, and Asia Pacific wealth will surpass the US and Europe combined as the wealthy continue to accumulate assets. A 2016 EY Family Office Guide estimates at least 12,000 single family offices now exist worldwide, half of which have been established over the past 15 years. Asia’s narrow promotion to second place came despite a 10% rise in 2017 in the number of ultra-wealthy Europeans (with $50 million or more), taking Europe’s number of wealth-holders to 35,180. Asia’s ultra-wealthy population accelerated 15% to 35,880 wealth-holders, according to Wealth-X data which informed the new Knight Frank Wealth Report. Today, most (34%) of the world’s ultra-wealthy were still based in the United States and Canada. The North American population increased by a further 5% last year, taking the total number to 44,000 ultra-wealth-holders. Other sources estimate that the grand total number of ultra-wealthy people around the globe rose by 10% in 2017, raising the total population to 129,730, with a combined worth of $26.4 trillion. The population grew at a notably more rapid rate in 2017 than in the previous five years, when there was a cumulative 18% increase, according to a new Knight Frank report
It is important to appreciate that a high percentage of wealth is managed in the financial hubs of the world,” says Jurgen Vanhoenacker, executive director, sales, marketing & wealth structuring and Ann Marie Reyher, director, wealth structuring services-UHNW at investment manager Lombard International. However, the Swiss market has come roaring back following the various global pressures and American tax pressures; today in Zug, Zurich, Lugano and Geneva ex-private bankers are gathering global assets, following much of the banking restructuring that took place after the 2008—2009 financial crisis.
Privos Capital 2018 Predictions For The Coming Year
Our Privos 2018 Outlook kicks off, as we always do, with our report from Davos, where this year's forum carries the theme of "Creating a Shared Future in a Fractured World." Freezing temperatures and the heaviest snowfall in the meeting's 48-year history still allowed our firm and family office partners to mingle and swap big ideas with the global elite.
World leaders from the US, Canada, Mexico, France and most western governments, along with titans from industry and leading billionaires, tycoons, single and multi-family offices descended on the tiny town in Switzerland to frame and discuss leading themes that will guide the economy and investment decisions for our multi-family office this year. By attending and analyzing investment themes uncovered at Davos - both at the official events and the off-site cocktail parties, our multi-family office has been successful in discovering investment themes and risk profiles to help our firm for the coming year.
We start with what we believe is the most relevant investment news from Davos, which includes the following:
* Financiers in Davos are liking the European expansion. It was “the biggest story of 2017 in terms of the economy,” said David Rubenstein of the Carlyle Group. “Europe, many thought was dead and gone years ago. Despite Brexit, the problems in Spain, the weakened German government, a new French government, Europe has done quite well economically. It’s a very attractive place to invest." That was echoed by Blackstone CEO Stephen Schwarzman. “Europe’s doing really well,” he said. “The Europeans in the areas that we invest basically had lost confidence. Now Europe has awakened.”
* We expect to see a full-blown trade war between the US and China. Beijing will try to keep the country's economy on course which will result in fund managers looking for bargains in the Chinese economy in 2018 and 2019. Privos predicts that this year China will look to provide financing for infrastructure investments; open up wealth management product rules and bank lending; and focus on the continued depreciation of the renminbi vs. the dollar.
* “There is a numbness out there, there is an ambivalence out there that’s concerning,” Citigroup CEO Michael Corbat said on Tom Keene’s panel in Davos. “When the next turn comes -- and it will come -- it’s likely to be more violent than it would otherwise be if we let some pressure off along the way. He also said there are risks from an end to the “science fair project” of quantitative easing, noting that markets had rallied despite the U.S. government shutdown just as they had after votes for Trump and Brexit.
* President Trump’s protectionist U.S. trade policy is the biggest risk to a global economic recovery, according to BlackRock Vice Chairman Philipp Hildebrand. “It all depends on what ‘America First’ means,” Hildebrand said in an Bloomberg Television interview. “If it means to fundamentally unravel and destroy the global trading order in a highly complicated supply chain world that would be bad news for the global economy.”
* Trump’s tax revamp is getting a mixed response from Davos delegates. On the positive side, Blackstone’s Stephen Schwarzman said: “There are companies around the world looking at the U.S. now and saying ‘this is the place to be.”’ He added he expected companies to shift work to the U.S. Adena Friedman of Nasdaq said “the impact on companies was positive for the most part. It’s definitely a growth driver for the United States.” Tidjane Thiam, chief executive of Credit Suisse, also predicted greater investment in the U.S., saying “I’ve learned over time never to bet against the U.S. economy. However, Bank of America Corp.’s Brian Moynihan said low unemployment in the U.S. meant the “reality of bringing a lot of jobs back is difficult. Where are the people to do the work?” Frank Appel of Deutsche Post said the tax cut would deliver a “limited short-term impact” but would swell the budget deficit and didn’t do anything to boost productivity.
* Chief Executive Office Pedro Parente told reporters that he anticipates less oil market volatility. He also said that Brazilians don’t want the company privatized;
* Mexico’s Economy Minister Ildefonso Guajardo would like a Nafta trade pact agreed during President Enrique Pena Nieto’s administration and is prepared to negotiate for as long as necessary to reach a good deal, he said in an interview with Bloomberg Television;
* The world’s biggest energy companies plan to expand an effort to standarize oil- and gas-pumping equipment, people familiar with the matter said. “Standardization could save the oil and gas industry hundreds of millions of dollars every year,” Bob Dudley, BP chief executive officer, said in an interview;
* From the U.S., to the U.K., to Italy and beyond, an unusual number of leaders due to address the World Economic Forum are arriving in the Swiss Alps politically damaged, unpopular or with waning influence. Their weakness is all the more striking in contrast to other major powers like China and India, according to Bloomberg;
* Customers are cautious about recruiting permanent staff in Britain, showing Brexit impact, and investment has decreased in sectors including financial services in London, Adecco CEO Alain Dehaze said in an interview with Bloomberg TV. “Everybody is waiting for clarity,” he said.
* David Rubenstein discussed complacency. “The biggest concern I have is that most people think there’s no problem of a likely recession this year or early next year,” the co-founder of the Carlyle Group said on Tom Keene’s panel in Davos. “Generally, when people are happy and confident, something wrong happens.” He worries governments have too much debt and that there is the potential for unanticipated geopolitical shocks.
* Liu He -- the chief economic adviser to President Xi Jinping -- was greeted in Davos as the architect of the recent revival in China’s growth, and China welcomed as a champion of globalization.
* Europe’s revival was the talk of the town in Davos. Even with the challenges posed by populism and Brexit, the EU has become a trade leader and counter Trump’s protectionist policies. “The EU has an important chance at this moment, which is to reaffirm itself as a leading region in the world, and a leading region that believes in open trade,” said Manuel Caldeira Cabral, Portugal’s economy minister. European Central Bank President Mario Draghi, who will retire in October 2019, was singled out for his job in stabilizing the region. “When he goes, a real giant will have gone because he’s done an incredible job,” said David Rubenstein, co-founder of the Carlyle Group.
* The bosses of Barclays Plc, Citigroup Inc. and the Carlyle Group voiced concern that the strongest global economy since 2011 was leaving financial markets complacent. Barclays CEO Jes Staley said the upbeat environment reminded him of the eve of the last crisis a decade ago and that the combination of stocks at record highs and volatility near all-time lows wasn’t “sustainable” in the long term.
* The 17 SDGs and climate change is one of the key challenges facing human civilization, India’s Prime Minister Narendra Modi said in a speech. While the impact of extreme weather is on the rise, few countries are backing promises to curb carbon emissions with action, he said. The other risks are protectionism and terrorism, said Modi, the first Indian prime minister in two decades to attend Davos. Meanwhile, nationalist policies are on the rise and “globalization is slowly losing its luster,” he said, adding that most areas of India’s economy have been opened to global investment. Tax claw backs are still an issue in India, as we have learned at our firm.
* Trump's decision to impose tariffs on solar panels and washing machines won’t help the American economy, Nobel laureate Joseph Stiglitz said. “It’s bad for the global environment, it’s bad for the American economy, it’s bad for jobs in the United States,” the Columbia University economics professor told Bloomberg Television. “You can’t build the world that we had in 1950, 1960 -- that’s not going to come back. So what we have to do is find new industries, like installing solar panels. And what are we doing? We’re making it more difficult to install solar panels.”
* Anne Richards, chief executive of M&G Investments, also sees room for concern. “If interest rates go up meaningfully over the next 12 months, there will be a bunch of people who have borrowed money who will not be able to pay it back,” she said during a panel discussion moderated by Bloomberg’s Tom Keene. “Those people are out there, and the markets are not in aggregate pricing that.”
* Harvard University’s Kenneth Rogoff also sees risks and is worried about a potential rebound in inflation-adjusted interest rates. If that was to happen, then countries with weak growth and high debt such as Japan and Italy could suffer, he said on the same panel.
* Trump confirmed that the way to a chief executive’s heart and mind is through their wallet, when he got 15 European business leaders to join him for dinner. Fawning was on the menu alongside grilled beef tenderloin, as several bosses expressed their gratitude for the president’s tax cut and policy of deregulation.
* The corporate world seems happy to suppress any concerns over Trump’s wider behavior. It may not like what he says, but it likes what he’s doing.
* The days of bowing to Facebook, Google and Twitter are over. Social media from California was kicked from one end of the Davos promenade to the other this year, chastised for failing to control extremist content and for hooking young people onto an unhealthy diet of updates, selfies and likes. George Soros made scathing attacking on the social media elite, saying social media giants were exploiting the social environment and undermining democracy.
* The topic of sexual harassment was discussed mostly off site, in bars and on the ski slopes, in hushed tons as business leaders visibly blanched at the details of groping and sexual harassment and quickly checked the guest list to find out whether any of their employees had been in attendance. The previous evening, Canada's Justin Trudeau, made a speech on woman's rights and equality. As reported in the Guardian, his speech resonated through the hall, but what really shook business chiefs was the possibility their firm had been on the Presidents Club invite list.
* Education must be reimagined to handle AI. World leaders fear that millions of old economy jobs will be crushed by the fourth Industrial Revolution, while business leaders fret that workers won’t have the skills needed for the new technology age.
* In 2018, the number of announced M&A deals in North America is forecast to grow 4% year-over-year in H2 2018, with the Real Estate, TMT and Energy & Power sectors predicted to lead the growth.
Even when it runs smoothly, Davos is a wild cocktail of keynote speeches, top-level meetings and intimate sessions. “I’m constantly feeling Fomo – fear of missing out,” joked one senior UK delegate. Add to that the worst snow in decades, which brought the already glacial traffic to a complete halt, and you start to think that Davos has outgrown Davos.
High Level Summary: As witnessed at Davos, our firm believes that for global family office LP investors, the world in 2018 has become a complicated place filled with risk and daily change. It is proving difficult to manage capital and investments in such a fluid environment. The consensus is that a major correction is coming to the global financial markets so banks and funds are hunkering down to find sticky assets for their family office clients. Despite the current run up in world financial markets, there is significant risk that family offices are hedging in this current investment climate, and Davos started off the year with official, and off the record, discussions of these issues.
As seen at Davos, Privos family office partners rely on our firm for sound judgment, experience, wisdom and the ability to execute in face of growing global uncertainty. We leverage our global network of family office partners to make capital allocations and world-wide investments and get deals done. Our core values as a firm is that we take care of each of our family office partners in good times and in times of uncertainty.
Privos 2018 Family Office Investment Themes - What We Are Watching This Year
In 2018, 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.
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;
* China vs. India
* 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;
* US elections in November 2018 and whether the Democrats can recapture the House;
* Latin American elections in Brazil, Columbia, Venezuela, and Cuba;
* Upcoming Mexican elections, what happens to Andres Manuel Lopez Obrador;
* 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;
* Winter Olympics in South Korea;
* Russia’s upcoming World Cup;
* 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;
In 2018, 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;
* Mobile streaming;
* 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
President Trump, executing on this campaign slogan of “Make America Great Again,” will focus this year on domestic policy and withdrawing the nation from the costs of global nation building.
Building on the past of acting as the world’s policeman, by attacking Bashar al-Assad with cruise missiles when he used nerve gas on his own people, boosting troop numbers in Afghanistan, and engaging with, President Trump will continue to march to his own drummer. He has pulled America out of the Trans-Pacific Partnership, pushed Congress to withdraw from the international nuclear deal with Iran, and is engaging, as the the Economist has pointed out, by “keeping people guessing” in diplomacy with Japan, China and South Korea in response to Kim Jong, North Korean’s leader.
China and India – 2018
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 2018 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 2018. 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.
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 2018, the French President wants 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.
Further Trends to Watch
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 is eyeing a relaunch 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.
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.
2018 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.
Sovereign Wealth Funds Expand Globally, Creating Direct Deal Teams and Going Head of Head with Private Equity
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.
Priviate 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 2018 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 in 2017 the biggest 309 hedge funds increased AUM to $1.88 trillion today.
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 2018 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 2018, 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.
In 2018, 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 2018 and had to be lowered. Thus, we predict that 2018 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 2018 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, said economist Jan Hatzius in Goldman’s recent November 2017 Economic Outlook report. The Goldman report says the projected GDP growth for next year is “notably above consensus expectations and supported by still-easy financial conditions and fiscal policy.”
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.
Today, family offices have witnessed a whole lot of mess in the world. Family offices have experienced in the past 24 months the fallout from the Bannon accusations about Trump, Panama Papers, rioting in the streets of Istanbul during a failed Presidential Coup attempt in Turkey, Trump at the Republican Convention, failed Hillary in Philadelphia at the DNC Convention, the recent election in Peru of its new Oxford and Princeton trained economist, Putin pulling out of Syria,, Dilma's impeachment in Brazil led by the PMDB opposition leader, Mauricio Marci elected the new leader of Argentina, the February 29, 2017 $4.65B settlement with Paul Singer's Elliott Management, Putin invading Ukraine, the U.S., France and Russia teaming up to bomb ISIS in Syria (conveniently forgetting Putin's invasion of Crimea and fomenting rebellion in Ukraine), Macron's win in France and Robert Mueller being appointed Special Prosecutor for the Russian Investigation.
In the past 36 months years, family offices have seen it all. We have survived the Dow Jones Industrial Average falling 1089 points on August 25, 2015 - the worst intraday drop in financial history, Trump's stunning campaign success in the U.S. Republican primary running up to his actual successful White House run (the "American Brexit"), the out of control situation in Greece (Grexit), the weak growth in China, the new impressive Saudi King Salman bin Abdelaziz Al Saud, the earthquake in Napal, the horrific ISIS deaths of the Japanese Yukawa and Goto and the Jordanian pilot Lt. Muath al-Kaseasbeh, the Malaysian Airlines and AirAsia disasters, the Ebola outbreak, Prime Minister Nouri-al-Maliki relinquishing power in Iraq, the advance of the radical Sunni group Islamic State (ISIS) into Iraq, Scotland's near succession from the UK, fighting in the Gaza Strip, Russian hacking the DNC servers, the real Snowden and then "Snowden the Movie," American's fracking energy rebirth, the new Trump administration, and the U.S. nuclear deal with Iran - all these global events, and others, serve as a stark reminder these current events are resetting a new world order that is complicated and fraught with risk.
Trump Sworn in January 20, 2017 - 45th President of the United States - What Does This Mean For Global Family Offices?
In one of most surprising American political turn of events this century, the world was stunned late last year when President Donald J. Trump, a businessman with no political experience, was elected to the White House on November 8, 2016. The American version of Brexit, family offices are still trying to digest the impact of American's election even as we welcome 2018.
As an American led multi-family office, we wish our new President well and the best of success in governing the U.S. However, the question for family offices is how the Trump presidency will impact their investments, family offices and world-wide holdings. Trump's new tax changes are causing massive movement in the tax and estate planning bar. Before the election, global family offices were positioning their portfolios and investments to take advantage of winners and losers in markets in light of a Trump Presidency. Now, in 2018, Trump is creating massive liquidity and wealth transfer in the hands of financial advisor and tax counsel who are trying to figure out how the new tax legislation will impact their family offices.
America: The New Switzerland
Despite the emotional upheaval and angry debate between liberals and conservatives in the United States, the US continues to be the beacon of stability, freedom and economic prosperity in the world, and a economic safe havens for global family offices. Put another way, the U.S. has become the financial "safe harbor" for the world' global family offices. Continued capital flight from the world's regions have few choices at the end of the day, with the U.S. being the primary beneficiary of capital inflows.
Further, the Federal Reserve is tapering its unprecedented bond-buying and gunning after companies practicing the art of "inversions." The price of energy is plunging and the US is becoming a global energy exporter as we have seen with the rise of Cheniere. There is talk about Trump encouraging a Russian "brain drain" by offering American O-1A and EB-5 visas to Russia's best and brightest, to lure them to the shores of the States ostensibly to create jobs and opportunities for US citizens. Add to the mix concerns regarding China’s property market, coupled with vigorous debates about its bad debts, and daily CNBC and Bloomberg “breaking news” about the Federal Reserve pullback from its supporting the American and global economy and now ISIS march across Iraq, we are certain that 2018 will be a wild ride for those family offices not prepared for the storm and opportunities associated with uncertain times.
The Big Picture: Our View of the World
In 2018, 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, Macro was just elected in France, 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, with America now considered the "New Switzerland." 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 2018 opened with a massive cold spell that many tie to global warming, with New York and New England seeing temperatures in the negative digits.
In 2018, 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.
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 whatis really happening inside the Chinese economy. The official China 2018 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 2017 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.
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 2017 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.
SDGs, Climate Change and COP21
As the world struggles with terrorism, it is also attempting to move the needle on climate change and sustainability as we all know well from the recent COP21 in Paris. Last year at COP21, leaders from 195 countries agreed on the first universal, legally binding deal to cut carbon emissions, in a move that David Cameron said marked "a huge step forward." Yet, for every step forward, there are painful steps backwards, as the Volkswagen experience shows when the global car manufacturer admitted it had literally installed software on diesel cars that cheated emissions tests in America. The Trump White House deleting climate change data on Day One speaks volumes about the coming fight this year over climate change, the environment, sustainability.
We refer you to the SDG section of our website to learn more about the investment philosophy of our firm.
Yet, despite the positivity of COP21, today the world is actually the most dangerous that family offices have seen it in decades. Look at the current reality. The regional struggle between Iran and Saudi Arabia took a step in an even more dangerous direction when last year Saudi Arabia, a Sunni monarchy, executed the outspoken Shite cleric, Sheikh Nimr al-Nimr, provoking the supreme leader of Iran, a country ruled by Shite clerics, to seek "divine vengeance" for the killing. France is at war with ISIS. Russia is bombing ISIS as a cover to propping up the Syrian chemical weapons despot, Bashar al- Assad, one of Putin's few international allies. Turkey is targeting both ISIS and the Kurdish PKK. The Islamic Estate extended its base beyond its base in Iraq and Syria, knocking on Turkish border. Graphic images of ISIS burning alive a Jordanian pilot, beheading 21 Egyptian Coptic Christians, and looting a heritage site in Syria and killing the 82 year old head of antiquities at Palmyra, flashed across the 24/7 news media a while back.
As a result of the West's failure to defeat ISIS, our family office partners in Europe report on the worst refugee crisis since the Balkan wars. The conflict in Syria continues to be by far the biggest driver of the migration; however, the violence in Afghanistan, abuses in Eritrea, and poverty in Kosovo are driving factors as people look for new lives in Europe.
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 2018. 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 2017 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 2018 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 2018, 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.
2018 Latin America Forecast: Watch Panama, Argentina, Peru, Columbia, and Chile
We predict that all the "action" in Latin America in 2018 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.
Most of Latin America's currencies and stock markets have suffered a beating. The region will contract slightly in 20178 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 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 2018. 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.
Chile's President Bachelet, a Socialist pediatrician, raising the corporate tax rate over the howls of protest from local businessmen. According to Bloomberg, Chile´s central bank forecast slower growth and faster inflation than previously estimated for this year, highlighting the dilemma facing a country with the most expansive monetary policy in the Americas.
In 2017, Bachelet will continue to push through an ambitious package of reforms during her second term in office, including changes to the tax code to pay for improvements to education and a restructuring of the electoral system. However, many of the president's reforms have stalled, as weak economic growth has drained public resources and corruption scandals have dragged her approval rating to an all time low.
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 last month 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 2018, compared with the previous estimate for an increase of 0.7 percent, policy makers said. In 2017, 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.
A New Powerful Argentina: A New President, Hedge Fund Settlement, and the Awakening of A Sleeping Giant in 2018
Despite the recent election, Argentina has been faltering, but our family office partners there report for the first time in nearly two decades the country is experiencing pride and hope they can overtake the Brazilians up north.
First, on February 29, 2016, Bloomberg announced that Argentina and a group of holdout creditors have agreed in principal to bring an end to a 15-year legal dispute over defaulted debt. Argentina will pay a group of litigants led by Paul Singer’s Elliott Management $4.65 billion, or about 75 percent of their full judgments including principal and interest, according to a statement by Daniel Pollack, the court-appointed mediator. The funds, which also include Aurelius Capital Management, Davidson Kempner and Bracebridge Capital, will also receive a payment to settle claims outside New York District court and for certain legal fees and expenses incurred during the dispute.
On the surface, the country's failure to complete a debt coupon payment which triggered the second default in the past 12 years. The country has been litigating in New York for years against the hedge fund holdouts which is creating a situation in which Argentina, led by former President Cristina Fernandez de Kirchner, opted to default on billions of dollars of bonds, thereby plunging Argentina into further economic chaos. However, in February 2016 Argentina struck a deal to pay $1.35 billion to a a group of Italian investors whose bonds the country defaulted on in 2001. Privos predicted correctly in 2015 that a global settlement will happen, paving the way for Argentina to re-enter the global capital markets.
Then the world watched the election of center-right Presidential candidate, Mauricio Marci, who displaced Cristina Fernandez de Kirchner, thus making Argentina open again for business. Marci’s coalition, Cambiemos or “Let’s Change,” resulted in Pampa Energia, Banco Hipoteario and the state-backed oil company, YPF, increased borrowing and activity in the local market.
To kick off 2018, President Macri took to social media and discussed the following challenges his administration will face this non-election year, including:
(1) Marci took the opportunity to differentiate himself from his predecessor, leftist Cristina Kirchner, promising that Argentine growth will be solid and sustainable. He stated, “I have been thinking a lot in these days that we live, in these last months, in this last year. I feel it was positive. We are laying the foundations to keep growing, and in 2018 we will be back on solid foundations for economic growth."
(2) Since 1994, one reelection campaign has been allowed in Argentina a reelection has been permitted; subsequently the former president in question must wait at least one term to run again. So far the most likely candidate for the ruling party will be Mauricio Macri, and nothing suggests that he will face a primary challenge. Figures such as the governor of Buenos Aires, María Eugenia Vidal, and the current chief of staff, Marcos Peña, appear to be powerful candidates, after a possible re-election of Macri. Of course, in Argentina, talking about what can happen two years from now is astrology.
(3) Different polls have showed a drop in approval ratings for the Argentine president. One of the sharpest drops came from the polling firm Aresco, which showed a drop of eight points. The fall in support, however, leaves Macri with a level of support equivalent to the one he had before winning a large majority the 2017 legislative elections. Today he is polling at the same levels as 2015, when he was first elected president.
(4) Cambiemos was able to take advantage of the political split between several Peronist governors and the former president. Up to this point, several former Kirchner-era officials have faced criminal prosecution and incarceration. The list of detainees with preventive detention includes, among others, former Vice President Amado Boudou and Néstor and Cristina’s former right-hand man, Carlos Zannini. In the current environment, it is often suggested that it would not be in the government’s interests for the former president to wind up behind bars, since her freedom and political activity guarantees a divided opposition, and greater opportunity for Cambiemos to advance their legislative agenda. But Macri needs the votes of appreciable numbers of Peronists to pass fundamental laws, and it would not be out of the question that Peronists elements might press for the incarceration of Kirchner, in order to eliminate her as a threat in the future. In a scenario of this nature, Macri must walk a fine line as he balances playing one off the other.
(5) Although Macri has implemented some timid reforms and cultivated a positive image abroad, Argentina has yet to hit the foreign investment levels that it needs. The government, which preferred to avoid a rapid changes, and instead opted for a gradual plan, desperately needs a strong flow of foreign investments that can help to bring it back into the black.
(6) Another major challenge will be to reign in inflation, which, although it has been declining since the end of the Kirchner administration, Cambiemos has been unable, until now, to meet the inflation targets that were proposed at the beginning of Macri’s term. Of course, this has been the classic challenge historically for the Argentine economy: balancing high levels of inflation and unemployment, and trying to contain both. Source: our favorite Argentina site, PanAmPost.
That being said, fewer of our family office partners are heading to BA and Mendoza for the holidays; how can that be good for the country? The result for the people of Argentina has been economic turmoil. Our family offices in Buenos Aires and Mendoza report that the government has restricted the amount of dollars available to importers and is clamping down on foreign goods. Shops are closing and retailers are reporting empty shelves. BA is becoming unsafe. The practical result, which no one is talking about, is that Argentina family offices, like their counterparts in Brazil, are participating in a massive capital flight overseas. Swiss asset managers are quietly opening offices in Montevideo, the so called "Geneva of Latin America" to take advantage of the financial pressures happening to the Argentina's ruling elite. We are running into Argentina family offices all over Europe and the U.S. Its the like the days of the Rohm Brothers all over again.
In 2018, Marci will continue transforming the Argentina economy creating huge new opportunity for family office investors world-wide. Inflation is coming down and Argentina is continuing its re-emergency as a South American economic powerhouse, taking advantage of the missteps in Brazil.
Impeachment and Financial Crisis in Brazil: 2018 Outlook
According to the Economist, the Brazilian government in 2018 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 2018 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 2018, 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 2018, 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.
As we witnessed in January 2018 in Davos, Switzerland, 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 2018 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 2018 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 2018, 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 2018 List of Best Global Markets for Family Offices
We are proud to announce our annual 2017 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 2018 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 2018 Top Western Market Pics: US, Switzerland, Germany, Canada, Netherlands, Sweden, Finland, Norway, Australia, New Zealand, Singapore, Hong Kong, Iceland, Belgium, Israel, Japan, Ireland, Luxembourg, and Portugal