"As a rock star, I have two instincts, I want to have fun, and I want to change the world. I have a chance to do both."
Introduction: How Steve Jobs Created A Family Office
To understand our multi-family office and the global world-class work that we do every day, it might be helpful for you to understand what a family office is and why they matter in the global financial markets. Put another way, if you do not know what a "family office" is or why you should care, you've come to the right place.
To give you a practical, real life example, you need to look no further than Steve Jobs, the American founder of Apple Computer and Pixar, who created a "first generation family office" based on his genius, drive, and creativity. When Steve Jobs died in 2011 due to complications from a relapse of his previously treated islet-cell neuroendocrine pancreatic cancer, his wife, Laurene Powell Jobs, inherited $17.9 billion from the Stephen P. Jobs Trust to become the fourth-richest woman in the world and the 49th wealthiest person on the 2017 Forbes annual list of world billionaires.
Today, Laurene Powell Jobs is the richest woman in Silicon Valley, the largest shareholder in Disney, and uses her family office to promote social causes and philanthropy that are the heart of her family's values and vision. Laurene Jobs is the founder of Emerson Collective, which promotes entrepreneurship to advance social reform, and the co-founder of Collect Track, a nonprofit. In a January 2017 SEC filing, the Laurene Powell Jobs Trust disclosed that she sold some of its stake in Disney; the trust owns 2.5% of Disney, 4% of the media firm, and today 0.7% of Apple.
Steve Jobs' family office is one example of why you need to sit up and become intelligent about global family office LPs and the world-wide impact and change they are making in our global economy. At Privos, we believe that the legacy of Steve Jobs and his legacy as the hard driving, creative, brilliant, tough, entrepreneur that we strive to replicate at our firm every day.
Jony Ivy and Steve Jobs
To further understand the values and DNA of our firm, we ask that you watch the following short video clip of Sir Johnathan "Jony" Ivy, Apple's world famous Chief Design Officer (CDO), giving his moving eulogy for Steve Jobs, his best friend, during Steve Jobs' Memorial Service that took place on Apple's campus in Cupertino, California. Jony Ivy's short, seven minute eulogy is one of the most powerful, uplifting, joyful, and inspirational tributes to a best friend and business partner that hold dear at our firm. Jony Ivy's short eulogy in which he describes the "bold, crazy and magnificent" ideas that Steve Jobs inspired embodies the vision and mission that we hold dear and inspires us everyday at Privos.
You can view the eulogy here: https://www.youtube.com/watch?v=GnGI76__sSA
Privos Capital: Our Work & What We Do As A Multi-Family Office
As a multi-family office LP, Privos Capital works with our global family office LP partners to grow their world-wide holdings, investment, assets, private equity, secondary and hedge funds, portfolio companies, foundations, SRI, ESG, SDG, impact allocations, endowments, and foundations by sourcing and partnering with other international family office LPs and capital partners around the world. From the Arab Spring to the Global Financial Crisis, our people have built an impressive track record of helping our single, multi-family offices, and sovereign family office partners, their funds, portfolio companies, and global holdings navigate today’s turbulent financial markets, increase business development opportunities, grow revenue, access the capital markets, form strategic alliances, and get international deals done.
Family offices, their funds, portfolio companies and philanthropies work with our firm to gain access to our people and their extraordinary talent, our proprietary global family office relationships, incredible deal flow, deep family office research, and far reaching global insights and understanding of capital that have helped our family office partners survive financial upheaval ranging from the Global Financial Crisis to the Arab Spring. Our firm is a leading voice in partnering with global family offices in the Emerging Markets, BRICS, N-11, and Frontier Markets around the world.
Our people have deep expertise in direct, co-investments, and alternative investments. We understand complex global capital flows, where to source and close "club deal" with other international family offices in this difficult, competitive global economy. We have deep cultural understanding of the Arab world as well as the opportunities and challenges that family offices in Latin America, Africa, Eastern Europe, the Nordics, Australia, the ASEAN countries, China, and elsewhere face in attempting to engage in international commerce. Our CEO has lived in and worked in the US, London, and Middle East and travels extensively around the world every month to work with our family office partners on highly confidential and complex global matters. We have broad capabilities and deep expertise advising sovereign royal families and leading Arab family office partners from the GCC, MENA, and Levant regions of the Middle East. We understand how to execute and get deals done around the world.
Old Fashion Values: The Airline Example
As leading family offices in the Emerging and Frontier Markets achieve extraordinary success, whether perhaps by selling their prize assets to private equity GPs, going public, or finding the right strategic partner for a trade sale, our people have deep experience working on highly complex, confidential, joint ventures and “club deals." Because Privos is agnostic to the size, location, or assets under management (AUM) of a family office, we have the resources to undertake significant engagements and execute on opportunities in BRICS, N-11, and the Frontier Markets of the Emerging Markets. Our offices, people, and partners are either located in your city or a short flight from the location of your family office no matter where in the world you are located. We will travel "in person" to your family office for a meeting from Buenos Aires to Lima, Cape Town to London, KL to Perth, in a matter of hours if we cannot walk across the street in our main global offices. We are a traditional firm. We believe that in-person meetings are good business, that getting on a 20 hour flight for a meeting with you is a sign of respect, that using the old fashion telephone is preferable to email, texting, or sending a WhatsApp message. We returns calls. We welcome you to our offices around the world. And, shockingly, we actually believe that "doing lunch" or having a lovely dinner makes good business sense.
As a firm, we welcome the involvement and active work and participation of the children, relatives, and grandchildren of our family office partners. For instance, we recently welcomed 12 members of one of our family office partner that owns a national airline to our New York offices to discuss the growth, exit strategy, and financing needs of the family's core asset, followed by more work on how our airline family partners will re-invest the future capital from the upcoming aviation liquidity event that we are quarterbacking; our work with our airline partner may also include interviewing and selecting the private equity firms that are worthy of the opportunity to have an audience with our family office and their 50 year legacy management team during the process, selecting and partnering with global wealth managers, lawyers, trustees, investment bankers, and asset managers whose values are aligned with our partners, running the manager selection and asset allocation strategy post-exit to help our family office partner select the best global private equity GPs, hedge funds, and asset managers who can both grow and preserve our partner's capital and the legacy of the family over the next 100 years. We have built over time as a firm a true global partnership and close working relationship with trusted professionals around the world who we believe are the best in the world at "watching the back" and protecting our family office partners in good times and in times of stress, thereby helping our family office partners continue to achieve their dreams. That is just one example of the work we do quietly with our partners the leading families of the world.
Global family offices trust Privos Capital to partner, co-invest and advise them on all aspects of managing their far-flung, international portfolio companies and overall financial activities. We bring the highest standards of technical excellence together with the best practices and practical wisdom of experience to work on transactions that shape family office success around the world. As private equity utilizes a broad range of sophisticated investment structures in their transactions with family offices, including PIPEs (private investment in public equities), leverage buyouts, and growth equity, our people protect our family office partners and help them achieve similar success in their international growth ambitions. Our people are experts in all aspects of estate planning, in bound and outbound investments, investor visas, onshore and offshore trust structures, family governance, philanthropy, and foundations.
As a firm, we play by the rules of the road in international business and have a zero tolerance policy for any family office partner, vendor, or professional who does not share our rigid and inflexible view of "best practices" in following the legal standards that we must all play by in conducting global commerce. Put another way, we understand regulatory issues and how to strictly follow and adhere to the complicated "rules of the road" including FCPA, OFAC, and other US, UK, EU, and global legal frameworks in pursuing international business. For instance, one of the principles of our firm worked at White & Case, was a former law firm partner prior to joining our firm, and manages our panel counsel and outside counsel of our family office partners world-wide. Thus, as a firm we have a deep and sophisticated understanding of US and international compliance and work and have a zero tolerance for unethical, illegal or inappropriate actions or behavior.
Hedge funds and Private Equity
Family offices both invest in hedge funds and private equity, as well as own, seed, and manage them. By way of background, hedge funds are private, actively managed investment funds that invest in a diverse range of markets, investment instruments, and strategies. Most hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their own interests with those of the investors in the fund. A hedge fund typically pays its investment manager an annual management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year.
Preqin reports that in 2017, the estimated size of the global hedge fund industry was US$3.17 trillion. There are over 5000 institutional investors who allocate to hedge funds today, yet in 2016 only 62% of hedge fund managers posted positive returns. Today, given then regulatory environment in certain developed markets, hedge funds are converting to family offices in record numbers. Thus, family offices investing in hedge funds face a tricky "asset allocation road" ahead in looking for a specific exposure to a strategy or asset class that could be missing from their portfolio. For the most part, family offices do not use consultants for the most part to pick hedge funds, but a family will typically ask an in-house employee, panel counsel, accountant, CFO, trusted advisor or investment committee member to select their hedge fund allocations, much to the chagrin of the consultant community (Cambridge, Mercer, Wilshire, etc.) who have been trying for years to make inroads into the family office world as their institutional clients and pension funds cut their fees and hire more in house staff to take over the manager selection process.
At Privos, our people have deep hedge fund experience and work with our family office partners on their alternative and hedge fund investments and businesses. Our people with experience in the fund industry includes a principle and former global head of sales and marketing for an international hedge fund of funds (FoF), a former GE Capital executive, a COO of a Greenwich based third party marketing firm, and a former law firm partner who served as legal counsel to prominent hedge funds, private equity firms, venture funds, third party marketing firms, placement agents, foundations, and endowments. Our people have expertise in asset allocation and sophisticated financial modeling. We have an incredible breath of experience in the hedge fund industry which is why our family office partners work with us every day on important hedge fund matters around the world. Like any family office, we work, co-invest, and collaborate with a wide range of international allocators including endowments, pension funds, foundations, wealth management, investment advisors, consultants, family offices, high net worth individuals, and fund of funds.
With respect to private equity, we refer you the section on our website about private equity; however, in general, our people also have deep experience in private equity. For starters, our family office partners start, own, manage, and invest world-wide in private equity. Family offices allocate capital to private equity which complements bank lending, bond markets, micro finance, and other forms of financial products. Family offices participating in private equity drive both profitability and development impact throughout the world.
Our people work with both family office private equity GPs and LPs world-wide on a wide range of significant and highly confidential matters. Our family office partners both run leading global private equity firms and invest in private equity as an asset class. In emerging markets, our family offices have witnessed a wave of successful buyouts, exits, and new funds coming to market; however, challenges remain with inconsistent deal flow, a scarcity of bank debt, and a lack of good international investment grade quality assets that can survive deep due diligence from the investment community. Our people include a HBS alum and former CFO of a leading private equity firm, a former CFO of a NYSE listed REIT, and other private equity professionals who work with our family office partners on all aspect of private equity, from manager selection to running a process to sell a prize family asset, to perhaps how to find a buyer or manage a private equity secondary trade to exit the "black hole" of China, for example. If you are an experienced private equity investor, you get what we are saying here, without the need to elaborate further.
Sovereign Wealth Funds
In 2017, sovereign wealth fund wealth surpassed $6.5 trillion, according to Preqin. As an advisor to one of the largest sovereign wealth funds in the world, our CEO has gained insights into how sovereign wealth funds partner with family offices on co-investments, sourcing deal flow, and allocation opportunities around the world.
Leading private equity firms and hedge funds often fail to appreciate that family offices hold the metaphorical key that can help unlock the mystery and access to the large sovereign wealth funds such funds covet because family office patriarchs often sit on the investment committees of their home country's sovereign wealth fund, or co-invest with sovereign wealth funds on individual deals around the world. Leading family office principles are active in their country specific sovereign wealth funds, whether holding board seats, or participating in co-investments or direct investments. Privos predicts that over the next decade, these sovereign fund assets will far outpacing public pension asset growth rates.
Thus, our family offices hold unique insights and relationships into sovereign wealth funds and partnering with them can create unique access to country specific sovereign capital for funds and direct investments. Put another way, you can fly to Dubai hawking your Powerpoint and marketing collateral, go for drinks at the Buddha Bar to chase a hopeful fleeting allocation (that rarely happens), or your can take another approach and co-invest and engage with global family offices as a more honest and transparent way to have a more meaningful, high level, conversation with sovereign wealth fund decision makers.
Fashion, Fragrance & Jewlery
Privos works with global family offices active world-wide in the fashion industry. Our family office partners own and operate leading brands and portfolio companies understand the immense hard work, talent, dedication, and capital it take to create, own, operate, and build a iconic luxury brand.
Our family office partners embrace and invest in the global fashion industry. We have in house expertise, investment expertise, and understanding of fashion and the unique capital needed in the industry including brands such as Hermes, Dior, Miuccia Prada, Gucci, Louis Vuitton, Chanel, Burberry, Dolce & Gabbana, Georgio Armani, Saint Lauren, Bottega Veneta, Celine, DKNY, Valentino, Versace, Roberto Cavalli, Chloe, Mulberry, MaxMara, Fendi, Tory Burch, Ralph Lauren, Rag & Bone, Moncler, Salvatore Ferragamo, Paul Smith, Tom Ford, Miu Miu, Calvin Klein, Tommy Hilfiger, Alexander Wang, Givenchy, Balenciaga, Fendi, Karl Lagerfeld, Christopher Kane, Jil Sander, Proenza Schouler, Stella McCartney, La Perla, Missoni, Givenchy, Kurt Geiger, Isabel Marant, Alexander McQueen, Comme des Garcons, Kenzo, Helmut Lang, Missoni, and Celine.
Our family office principles active in the fashion industry. Our partners participate in the biannual fashion-show circuit, the spring collections, and autumn catwalks. They work with designers, editors, buyers, booking editors, models, moving from city to city. Our family office partners know what to wear, who to watch, and where to go. Our partners include the former global creative director of Donna Karen and a consortium of world-wide family office investors in fashion and leading brands.
Family offices, their funds, and portfolio companies involved in the global fashion industry have unique insight into the movement of capital in the BRICS, Emerging, and Frontier Markets. Any hedge fund or private equity portfolio manager interested in understanding family offices or raising capital should pay close attention to the trends in the international fashion industry and where the high end luxury brands are chasing increasing purchasing power, particularly among women.
Privos works with leading fashion family offices and their portfolio companies to help grow their global businesses. From New York to Paris to Milan, the fashion industry is creating vast opulent wealth and with it new family offices. Family offices involved in fashion are enjoying new sense of vitality and confidence. Fashion houses are flush with RMB from sales of huge volume of product in China and need help investing their liquidity and expanding their businesses.
Our people have experience in Italy and France with high end fashion and luxury goods. In Milan, where taste and refinement is displayed in private, leading creative directors marry fast fashion and e-commerce to create bold, intimate and coolly minimalistic collections. Accessory houses owned by leading Milanese families are looking to embrace international commerce and build monumental, exquisite labels. Italian house classics are finding high-end consumers in Shanghai, Sao Paulo, Doha, and Stockholm. Interior design practices in Milan’s Brera neighborhood are exporting Italian sensuality and restraint to Moscow, Tokyo, and Dubai. Design boards from New York to Milan are focusing on the lifestyle of the Modern Woman Consumers with vast consumer purchasing power.
Leading Italian family offices in the fashion industry export lifestyle and Italian design to elevate the experience a woman’s everyday life. In Rome, the city is removed from the Italian fashion world, so creatives need to travel to stay relevant . Artisans in Cremona and Como desire luxury fashion conglomerates, like LVMH, to take notice of their labels and take minority stakes in their businesses. Parisian brands are also seeing their favorite pieces sold out in advance of Art Basel Miami Beach. Our French family offices report tin Paris that business at the House of Worth is booming, as elegant women book their couture fittings on the Rue de la Paid.
The fragrance industry, which was started by medieval Parisian aristocrats attempting to fight off the Black Plague, is booming today, marketing the tale of Cleopatra, sailing to meet Antony at Tarsus in her boat’s perfumed sails, or the fact that 18th century courtesans at the court of Louis XV at Versailles changed perfumes for each day of the year. New fragrance boutiques are popping up from Shanghai to Santiago registering booming sales by cash rich consumers. Of course, many of these companies are all owned by leading fashion family offices.
In London, family offices report high end jewelry houses, stone setters, and goldsmiths are being revived in booming Mayfair and clients are searching for unique bijoux, objects, furniture, and art. It is no coincidence that Chanel chose London over all other cities for the location of its new New Bond Street fine-jewelry maison, scheduled to open next year after extensive renovations. The recent New York Fashion Week witnessed the parade of these opulent jewels worn by leading family office investors.
The Middle East is a leader in fashion, with some of the highest grossing sales volumes being generated by luxury brands in Doha, Dubai, Abu Dhabi, and Kuwait City. Arab family offices are holding high end, invitation-only, events where luxury is sold in exclusive events in private homes. Arab woman continue to court high end hand bags, shoes and jewelry. Traditionally, an Arab woman's clothing could not reveal anything about her body; however, the strict dress code is liberalizing by region. In Jeddah, many woman go out with their faces uncovered while Riyadh is more conservative. Designer abayas are becoming more fashion conscious with colors expanding beyond traditional black. Professional Arab women in the region are experimenting with more liberal fashion, with Dubai and Doha leading the way.
Fashion families with exposure to Africa are seeing huge gains. With six out of the 10 fastest growing economies in the world today located in Africa, the Continent is the new hotbed for SDG, ESG and fast fashion manufacturing. Leading fashion houses are turning to artisanal creative communities for creative high end goods made in Madagascar, Tanzania, and Nairobi. With Maasai warriors are spinning twine on the continent, Africa is developing a skilled and energized work force for the fashion industry. Labels like Maiyet, ASOS Africa, and Suno have committed to Africa. Production capabilities are set to skyrocket. New collections display purity and ease that reflects the simplicity, elegance and subtle power of African style. This new African fashion story owes a real debt of gratitude to Red, the incredible, world class campaign launched by the infamous family office musician, Bono and his wife Ali Hewson, to fund AIDS, HIV and sustainable initiatives in Africa.
The Work of Privos Capital: Examples of the Regional Work of Our Firm Around the World
The Middle East, Levant, and MENA Region - The Arab Spring and Arab Royal Families
Privos Capital reports that Arab billionaires spend as consumers on average $7.5 million per day when visiting London. Today, the average Arab family office, defined as a wealthy family with over $100 million in liquid assets, spends twice as much as Australian, German and French family offices when on holiday outside of the Gulf. Visits to London by wealthy Arabs last year was the highest in volume and spending since 1961.
However, when it comes to investments and moving money outside of the Gulf, Arab family offices are on the global hunt for investments, following leading Gulf institutional investors and pension funds who are pouring money in the U.S., Europe, Latin America, Asia and China, seeking alpha. Our Arab family office LP partners are following this trend of increasing allocations out of the Gulf and into western markets due to their concern that the MENA region post Arab Spring will frankly not witness an improved investment climate for years to come. The current situation with Iraq and ISIS will only increase the outbound flows of capital from the region. The Trump Trade makes Arab family office concerned about America's position vis a vis Iran and the MENA GCC region. This uncertainly creates a flight of capital from the Gulf to Europe and the States. Today, the Syrian conflict is the deadliest conflict in the 21st century with widespread ramifications for the entire Arab world and its leading family offices.
There is wide speculation and late night debate in the Middle East that the flight of private wealth from the Gulf to western markets is driven, in part, by the Arab world’s movement back to the old autocratic order, including the resurgence of the Middle Eastern strongman in the region: Syria’s Bashar al-Assad recent staged victory that Laurent Fabius, the French foreign minister called “a farce;" Egpyt’s Abdel Fattah al-Sisi victory in which he won 96.9 per cent of the vote appears strong, but he actually has less popular support as he had hoped for during his recent coronation; Iraqi Prime Minister Nouri al-Maliki’s authoritarian rule; Libyan general, Khalifa Haftar versus the unruly Islamist militias. In fact, there have been news reports that only Tunisia may have a fighting chance of a stable democratic future, according to the Financial Times. These Arab strongmen are not all the same, but the Arab family offices are yearning for stability after years of fighting and chaos that have seen the value of their regional holdings plummet, especially illiquid private equity investments.
In addition to political uncertainty, the Middle East is grappling with the systemic risks of corruption and lack of uniform legal standards that protect the local Arab partner at the expense of the western investor. There are six Arab countries in the bottom section of the Transparency International’s 2013 corruption perceptions index. A recent PwC survey of CEOs from the GCC region cited bribery and corruption as the biggest concerns after talent shortages, with half of all fraud detected by accident.
History of the Arab Spring from a MFO Perspective
In December 2010, the Arab Spring was born in Tunisia and provoked a spark of outrage across the Middle East and North Africa (MENA). Coupled with widespread joblessness and economic challenges, the world watched a revolutionary wave of demonstrations and protests, riots, and civil wars unprecedented in the Arab world. To date, rulers (and their Arab royal family offices) have been forced from power in Tunisia, Egypt, Libya, and Yemen; civil uprisings have erupted in Bahrain and Syria; protests have broken out in Algeria, Iraq, Jordan, Kuwait, Morocco, and Sudan. Minor protests have occurred in Mauritania, Oman, Saudi Arabia, Dijbouti, and Western Sahara.
Current protests in Turkey are also considered by some to be part of the Arab Spring. Syria threatens the overall stability of the Middle East. Russia only cares about its port assets in Syria, but is risking a global showdown over the country. Historically, revolts have been occurring in the Arab area since the 1800s; however, the recent Arab Spring revolutions are inwardly directed at the problems of Arab society (which in fact are very similar to the problems of all western societies, including high unemployment and lack of future for the young people of the region).
Clearly, the Arab Spring has presented unprecedented and highly confidential challenges for our Arab family office partners throughout the MENA region. Private equity investments by family offices in certain countries have been destroyed and are trying to be rehabiliated. Alliances and partnerships - some going back centuries between certain Arab families (and their predecessor Bedouin tribes) - have collapsed literally overnight. Reputable family offices in the Middle East are transferring massive wealth to safe haven banking centers - Geneva, Zurich, Frankfurt, Paris, Luxembourg, Jersey, Guernsey, the BVI, Caymans, London, New York, Hong Kong, Singapore, and Sydney - and looking for good investments for their fleeing capital all the while taking advantage of incredible investment opportunities born of the wide spread unrest. Traditional financing no longer exists in certain countries. Investments are underwater and illiquid. We have all heard about the situation in the financial press and media.
Today, in the MENA region, capital raised from banks and the public markets have become increasingly difficult to secure. Small and Medium Enterprises (SMEs) are struggling. Arab financial institutions are reluctant to provide debt funding family offices, their portfolio companies, and funds need for growth. Liquidity raised on the Arab stock markets has not recovered from its historic levels. IPO markets lack new issuances. Trading volume in the MENA region remains volatile. Arab family offices are all concerned. Iran dominates the political discourse around the family office table; protecting your assets and investments is the real issue on the minds of leading family offices along with the topic of what country to relocated your family in the event that your home country becomes unstable or worse. The price of oil is a daily conversation and concern to GCC family offices.
Nearly three years after the Arab Spring, democracy is hard to find in the Middle East and family office capital is flying out of the Middle East in record numbers. Tunisia, Libya and Yemen are struggling. The president elect of Egypt is behind bars. Syria is a bloody civil war. Yet, democracy and transitions are often violent and lengthy. The more progressive Arab monarchies, like Qatar, are liberalizing their democratic institutions, including Morocco, Jordan and Kuwait, and looking towards islamists in Malaysia and Indonesia to learn the habit of democracy. Turkey is a democratic success story with its own issues today. One of our German family office partners, based in Istanbul for a decade, recently relocated his family to London after his young girls were physically slapped repeated times at the local playground for displaying their bare legs.
The Arab Spring resulted in fundamental shifts in power in the Middle East. For instance, the Arab Spring catapulted Qatar to the center of the world stage and cemented its reputation as most sophisticated and politically correct leader of the GCC. Yet, Saudi feels that Qatar has "grown up to fast" and is looking to take an overstated role in the region.
Certainly, the Arab world is complicated, as our Gulf LPs know. Yet, Arab family offices turn to Privos Capital as our people thrive in uncertainty, yet understand the culture. We have a passion for the Middle East, its family offices, and diverse cultures. In the MENA region, our people have worked with leading Arab family office partners before, during, and after the unfolding events of the Arab Spring. The changing geo-political landscape following the Arab Spring has resulted in our people getting the dreaded middle-of-the-night call from our Arab partners calling for immediate and emergency action. Yet, not unlike our work during the Global Financial Crisis, our people do not waiver; instead, we dig in, roll up our sleeves, and solve complicated problems in record time for our Arab family office partners, their funds, and portfolio companies.
Privos has been active in Qatar for well over a decade, long before Doha became the "Geneva" of the Arab world. Our people have years of experience working with Qatari and Arab family offices in the region. Recent Qatari "wins" or successes include the 2022 World Cup, massive infrastructure buildout, a safe and free society, freedom of the press, respect for women's right, and successful growth of leading family offices and the financial services industry. Today, serious expat professional are flocking to Qatar for opportunities that cannot be found in London, New York, or Hong Kong.
For anyone having had the experience of flying Qatar Airways, there is little doubt why the airline has consistently been ranked Number One Airline in the World. In fact, hardly a week goes by without a new press release from the airline announcing new routes for the airlines' Boeing's 787 Dreamliner aircrafts or the recent delivery of more than 230 aircraft the airline has on order, including Boeing's 777 & 787 and Airbus' A380 & A350 (launch customer). No American or British carrier can brag of the explosive growth of Qatar Airways, along with one of the newest fleets in the world. If you have flown Qatar Airways, you understand our admiration.
Qatar Airways, the award-winning and fastest growing airline in the world, has announced eight more destinations for 2017-18, in addition to seven previously announced new cities for a total of 15 new gateways. Joining the Qatar Airways’ route network, which spans more than 150 destinations on six continents around the world, are: Canberra, the airline’s fifth destination in Australia; Dublin, Ireland; Las Vegas, the airline’s 11th destination in the United States; Rio de Janeiro, Brazil; Santiago, Chile; Medan, Kualanamu International Airport, the airline’s third destination in Indonesia; and Tabuk and Yanbu, the 9th and 10th destinations in Saudi Arabia. These newly-announced destinations join the already-announced list of new destinations to start in 2017: Auckland, New Zealand will start 5 February 2017, and will be the world’s longest commercial flight; Sarajevo, Bosnia; Skopje, Macedonia; Libreville, Gabon; Nice, France; Chiang Mai, the airline’s fourth destination in Thailand; and Douala, Cameroon. Qatar truly has become the envy of the world, and our people are proud to have the opportunity to conduct serious business in the country. We have deep connection and unrivaled network in Qatar that benefits our global family offices.
Arab family offices, their funds and portfolio companies are participating in the massive expansion of Qatar that has fueled an unprecedented accumulation of wealth in the Middle East. Qatar is a world class country, political beacon in the Arab world, and new financial hub of the Gulf region. Its population is exploding, business is booming, and the entire Arab world is benefiting from Qatar’s grand entrance on the world stage. When Qatar talks, the world listens with respect.
Qatar has quickly become the leading Middle Eastern jurisdiction for family offices. The Qatar Financial Center (QFC) has developed a highly conductive environment for the development and growth of family offices. The QFC recently issued new liberal regulations governing single family offices which provide new opportunities for global family offices to establish and manage their affairs more professionally. The QFC is now known as the safest, most progressive and leading financial center in the Middle East. The QFC, working in conjunction with the Qatari banking industry, now provides the most progressive legal, tax and regulatory environment to family offices in the entire Arab world. The QFC Authority is simply second to none in the GCC and has helped Doha outpaced Dubai as the banking and financial center of the Middle East.
The QFC Authority has published recent studies which reveal that Qatari family offices pursue wealth creation as an investment goal and look for high returns on relatively low-risk investments. Hedge funds and private equity are the most popular alternative investments among Qatari and Arab investors. Relationships with the private banking industry in Qatar is excellent. 55% of Arab of family offices continue to invest their money in the Middle East at the expense of other regions of the world and view Doha as a "safe haven" for their generational wealth. Qatari family offices also invest in Africa and other leading Emerging Markets.
Separately, there is underway a massive infrastructure build out going on in Qatar. In the past five years alone, Qatar has awarded over $96 billion in construction related projects. In 2017, there will be $140-150 billion awarded on new projects, according to the most recent MEED Insight Report. After winning the 2022 World Cup, Qatar launched numerous FIFA 2022-related projects. Six stadiums are in advanced stages of design work and this year will see an additional five stadiums begin the early works on foundations and construction. In addition, Qatar will issue 10 tenders this year from project managers and design consultants on the stadiums being built for the games. Qatar’s infrastructure projects grew 26 perent last year alone, the second highest growth rate in the GCC. Real estate deals have exploded, with transactions of open plots continuing to dominate the news as foreign firms buy up land to propel growth.
Qatar’s Public Works Authority (Ashghal) has announced plans to launch $27.5 billion worth of expressway and interchange projects over the next five years to supplement the over $3 billion worth of contracts that were awarded last year. The road projects are expected to be completed by 2020. Doha expects to spend an additional $4 billion on building stadiums and related sporting infrastructure for the World Cup. The Lusail Iconic Stadium, the largest being built, will have a capacity of more than 86,000 people and will be used for the opening march and the finals. Doha Metro recently issued a new tender for phase one of its Doha Metro, a key infrastructure project in the country as it prepares to host the 2022 World Cup. Ashgal is also starting preparations to build three massive bridges and a submerged tunnel to handle the explosive growth of the city.
There is a new Hamad International Airport which our CEO traveled through recently for meetings with our Qatar family office partners: our CEO says it is one of the best airports in the world. Qatar Petroleum is issuing tender documents for infrastructure projects. Qatar’s petrochemical industry is flourishing, as discussed at the recent Gulf Petrochemicals and Chemicals Association (GPCA) inaugural Research & Innovation Summit. The Supreme Education Council (SEC) is expanding their use of vouchers for both private and public schools. The Ministry of Information and Communications Technology (ICT) is actively courting leading programmers and app developers and sponsoring them for the World Summit Award Mobile (WSA-mobile). Qatar General Electricity & Water Corporation (Kahramaa).
Islamic banking and jurisprudence in Qatar is expanding. Qatar Faculty of Islamic Studies (QFIS) is expanding its research studies and consulting to increase knowledge about Shariah foundations. New products are being introduced to the market that convey concepts and theories of Islamic economics and Islamic banking. A first ever encyclopaedia of jurisprudence in Islamic banking is being published. Qatar’s push to expand Islamic banking and financial products is the envy of the region. Recently Dubai’s government announced it will follow Qatar's lead and consider establishing the world’s first fully Shariah-compliant export-import bank to promote the Emirate’s foreign trade. Dubai is a top trans-shipment hub for trade in the region and wants to become a leading global center, like Doha, for Islamic finance
Medical care and medical tourism are flourishing in Qatar. Weill Cornell Medical College provides leading medical care to the expat and Qatari communities. The Qatar stock market is booming, and anslysts belive that Qatar will attract more foreign investors when the country is upgraded, along with Kuwait, on MSCI’s frontier market index. Trading data has indicated larger than usual deals with increased institutional flow and buildup. Asset quality is improving and companies are paying generous dividends.
Family offices report an excellent, professional, confidential and world class experience doing business in Qatar. The country is safe, Doha has world class attractions and is a wonderful place to raise a family. Young people in the Middle East go to Dubai to party, yet Doha has become the serious place to conduct international business. Clearly, Privos is a big fan of Qatar and our family office partners have contributed to the success of this tiny Switzerland of the Gulf.
Following the Arab Spring, family offices in the Middle East still face great uncertainty in the region. Syria’s civil war is on everyone’s mind again with ISIS fighters flooding into Iraq, drawing recently the US military back into the region with bombing in Iraq. Foreign governments insist that diplomacy is the only answer to the war in Syria. The region is highly unstable.
As has been widely reported in the press, there are basically three options in Syria: a negotiated settlement, rein in Iran’s efforts to influence the region, or remove Bashar Assad, Syria’s president, from power. Today, over 110,000 people have died during the past 30 months of violence in Syria, an incredible loss of life if you think about it. Under the spell of Sunni fanaticism, Mr. Assad prefers to prolong the fighting as a way to save his own life and that of his regime. The rebels fight on, knowing full well that any surrender will mean certain death. However, what keeps the western governments up at night is, of course, Iran. Iran is pumping money into Syria and propping up the Assad regime. Coupled with Iranian money and arms, Russian is a vital ally of Mr. Assad as Russian warships call Syria home. That said, it is our position that the fact that Mr. Assad is still in power slaughtering innocent women and children is a shame on humanity, as well as causing a huge instability, economic chaos, and personal suffering in Arab region.
Today, various power-sharing deals regarding Syria are being brokered by western diplomats meeting in Geneva, at the UN, and in the Middle East. There is discussion of a large UN peacekeeping force to provide security following Mr. Assad’s war crimes. Whatever the case, Syria is a major issue for Arab, Levant and MENA family offices trying to run their businesses, funds, foundations, and portfolio companies.
This past year, one of our family office partners in Jordan reports having witnessed regularly heavily armed international mercenaries from the U.S., England, France, and Latin America literally eating breakfast and dinner in Amman western hotel chains, leaving the hotels in the morning to cross the boarder Syria to conduct intelligence operations for various foreign governments only to return to the hotel buffet line in the evening. These antidotes represent small examples of the effect that the war in Syria is having on neighboring countries, their cities, and businesses due to the deeply troubling war crimes and atrocities being committed by the Assad government. For family offices trying to do business in the Levant, Gulf, and MENA region, running into a armed mercenary in a hotel elevator adds to the political instability and the uncertainly in the region.
As reported in Economist, "Aleppo, once Syria’s largest metropolis, will soon join their ranks. Its 1,000-year-old Muslim heritage has turned to dust; Russian aircraft have targeted its hospitals and schools; its citizens have been shelled, bombed, starved and gassed. Nobody knows how many of the tens of thousands who remain in the last Sunni Arab enclave will die crammed inside the ruins where they are sheltering. But even if they receive the safe passage they have been promised, their four-year ordeal in Aleppo has blown apart the principle that innocent people should be spared the worst ravages of war. Instead, a nasty, brutish reality has taken hold—and it threatens a more dangerous and unstable world. To gauge the depth of Aleppo’s tragedy, remember that the first protests against Syria’s president, Bashar al-Assad, in 2011 saw Sunnis marching cheerfully alongside Shias, Christians and Kurds. From the start, with extensive help from Iran, Mr Assad set out to destroy the scope for peaceful resistance by using violence to radicalise his people. Early on, his claim that all rebels were “terrorists” was outrageous. Today some are. There were turning-points when the West might have stepped in—by establishing a no-fly zone, say; or a haven where civilians could shelter; or even a full-scale programme of arming the rebels. But, paralysed by the legacy of Iraq and Afghanistan, the West held back. As the fighting became entrenched, the need to intervene grew, month by bloody month. But the risk and complexity of intervening grew faster. As Mr Assad was about to topple, Russia joined the fray, acting without conscience and to devastating effect. Aleppo’s fall is proof that Mr Assad has prevailed and of Iran’s influence. But the real victory belongs to Russia, which once again counts in the Middle East."
Turkey is a world class country that has been, and will continue to be, a success story in the region for decades to come. Anyone flying Turkish Airlines and spending time in the airline’s incredible Istanbul business class lounge will appreciate the potential of this history country that served as West’s bridge to the Levant and Middle East. Today, IFC has hundreds of employees stationed in Istanbul, their family offices are the envy of the world.
However, after a decade of being the darling of the Emerging Markets, Turkey has hit some serious headwinds. Recently, the country has been in the throes of a political war involving wiretapping between Prime Minister Recep Tayyip Erdogan and members of his inner circle. As these things typically do, the mess all came out on the internet, confirming to the population at large that the government does, in fact, interfere in the media and judiciary. To make matters worse, there has been an outcry against Mr. Endogen quarterbacked curiously by Fethullah Gulen, a moderate Islamic preacher curiously based across the pond in the American State of Pennsylvania. In response to this “Zionist” attack, Mr. Erdogan has been leaning towards the military for support and protection.
The political scandal in Turkey is serious, in part pitting Mr. Erdogan’s Sunni-dominated government against the Alevi religious minority. However, recent polls show that Mr. Erdogan is still popular and his Justice and Development Party, the A.K.P., will retain power. There has discussion in the press that Mr. Erogan has established a textbook case of illiberal democracy – a system whereby the ruler comes to power through elections but is not bound by the rule of law and shows little respect for civil liberties. This is most closely compared to Mr. Putin’s Russia than the liberal democracies of Western Europe that Turkey claims to hope to replicate.
That being said, Turkish voters have demonstrated that they care the most about the economy and will let Mr. Rogan’s actions be forgiven provided the economy still hums along. This bodes well for the leading family offices in Turkey whose power lock on the country remains unchanged despite the political uncertainty.
Today, Europe is in turmoil as we have seen by the massive flows of family office capital from the Continent to offshore safe harbors. The European Union has suffered setbacks with Brexit and the fall out of the GFC. As has been reported extensively in the media, at the heart of Europe's problems lies the monetary-policy measures (OMT) made by the European Central Bank (ECB) to buy the bonds of struggling euro area governments. The euro-zone economy has contracted for six consecutive quarters. The IMF predicts the euro zone to shrink by 0.6% this year. Pundits are lining up on either side of the fence arguing whether Europe will climb out of the recession or be faced with a decade plus of suffering post Brexit.
What does all of this mean for European family offices? As long as Europe's banks are not strong enough to lend, its economy will struggle to grow, opportunities will move off the Continent, and family offices will look to faster growing economies of Asia, China and Latin America to fuel their ambitions.
Today, our Spanish family offices are seeing unemployment rate of 27% following the recent news that King Juan Carlos will abdicate the throne. In Italy, the country's credit rating was recently downgraded and assets are moving from Italy across the border to Switzerland; Swiss yacht brokers and asset managers are flush with Italian cash fleeing systemic country risk and massive Italian government mismanagement and tax clawbacks. Years of joblessness and economic hardship have taken its toll on residents of Greece, Italy, Portugal, and Spain.
Our European family office partners report that they are relocating their factories, employees, and banking relationships out of their home countries, exiting investments to private equity GPs who are overpaying for growth, and repatriating their capital to the safe harbors of the "New American Switzerland in New York," as our CEO has stated. Shaky, non performing European loans keep climbing. House prices keep falling. It cost $40 to get two shirts and a suit dry-cleaned in London. Prices are climbing, real wages falling. In the meantime, family office owned private equity firms have raised billions to buy up distressed assets from European banks, but they are waiting for deals to arrive. Clearly, the jury is still out on Europe and investors are growing tired of looking for European "gems" that do not materialize. Half of London family office partners rejoice with the Brexit result, others are closing their company in the city and relocating to to the lower tax shorts of Dublin, Ireland.
For centuries, global family offices have turned to their trusted Swiss private banker guidance on the most complex wealth and banking matters. Switzerland was historically a cross roads for trade between Italy and Northern Europe, as well as Arab traders seeking to enter the Continent. Over time, Swiss banking developed a reputation for quality, reliability, precision, and prestige. Swiss bankers helped launch the the Geneva watchmaker industry 400 years ago, the “Swiss Made” trademark in 1880, and leading industries in chocolate, cheese, railway, luxury good, pharma, life sciences, medtech, jewelry, gemstones, and Roger Federer.
Today, despite the age of legality and increasing transparency, private banking is booming in Switzerland as international family offices from the BRICS, Emerging Markets, and 37 Frontier Markets all fly into Zurich or Geneva for their important banking needs. For international family offices during the global financial crisis, the "Swiss Made" brand represented and stable Swiss franc was a safe haven from the uncertainly of world markets.
According to the financial press, Switzerland is "the New London" of Europe. Leading London based hedge funds and family offices have been fleeing the U.K. (the City) in record numbers for the secure and private harbors of Geneva's Lake Leman. Family offices in Switzerland, in contrast to the European banks and insurers, are growing rapidly. The Swiss government has been able to produce a budget surplus every single year since the start of the financial crisis in 2008, and, as a result, Switzerland enjoys one of the world's lowest government debt ratios and is one of the last countries in the world with a AAA-rating. The Swiss Franc is a safe haven currency as Switzerland is not part of the Euro zone, nor part of the EU. Hedge funds and commodity houses bring thousands of ex-city traders and their families to enjoy skiing at Chamonix, Megeve, Zermatt, and boating on Lake Lugano an attractive alternative to city life in London and New York. Last year alone, the UK lost over 300 well-respected fund houses; Geneva won a lion share of the relocations. Coupled with the diplomatic families, private schools in Geneva and Zurich are reporting record enrollment.
Family offices relocating to Switzerland, or family offices based there for centuries, described the country as literally two separate countries - the German speaking Zurich and the French speaking Geneva - instead of today's 26 cantons or member states of the federal states. Banking in Switzerland is regulated by the FINMA, and the country's long history of bank secrecy, which dates to the Middle Ages, was first codified in a 1934 law. Currently, an estimated one-third of all world-wide funds held offshore are kept in Switzerland. Today, Swiss banks manage over $6.4 trillion.
Swiss banking began in the eighteenth century by way of the riches of merchants. Wegelin & Co. established in 1741, was the oldest bank in Switzerland, until it was restructured into a new legal entity in 2013. In 1796, Hentsch & Cie and Lombard Odier were founded as private banks. Pictet was established in 1805 as a merchant bank. Today, there are more than 350 authorized banks and securities dealers in Switzerland. UBS and Credit Suisse are respectively the largest and second largest Swiss banks and account for more than 50% of all deposits in Switzerland.
In Switzerland, a "private bank" refers to a financial institution that offers private banking services and in its legal form is a partnership; these private banks employ "private bankers" to distinguish them from the other private banks which are typically shared corporations. The first Swiss private banks were created in St. Gallen in the mid-18th century and in Geneva in the late 18th century as partnerships; today, some private banks are still in the hands of the original families. Today, progressive Swiss trust and tax laws are tailored to attract international family offices. With the infamous ski resorts Verbier - Les Quatre Vallees, St. Moritz, Zermatt, and others offering family offices the finest winter sports, Switzerland is home to the finest family offices.
Leading global family offices interested in commodity trading also call Switzerland home. It is important to understand that for family offices, the country is a leading global center for commodity trading, attracting international trading companies since the 1920s, a trend driven by the coutnry’s political neutrality and stability. After World War II, Switzerland was the desired location in the geographical heart of Europe with a stable infrastructure and freely tradable currency in the Swiss franc. Since the 1990s, Switzerland has become the world capital of commodity trading and shipping, driven by Russian oil exports and Swiss corporate tax advantages. The favorable corporate cantonal tax regiemes (now under attack by the EU) have added to the wealth being created in Switzerland.
The commodity trading floor located cantons of Geneva, Zug, Vaud (Lausanne), and Ticino rival London and house well known traders of petroleum, derivative products, metals, carbon emissions, diamonds, etc. Many international family offices today have made additional substantial wealth partnering and investing in these commodity trading operations. The commodity financing banks such as BNP Paribas, ING, Credit Suisse, Societe Generale, and UBS, Mediterranean Shipping Company (MSC), Swissmarine, V Ships, SGS and Cotecna are active in the business. Leading trading companies in Zug (a 20 minute train ride outside of Zurich) include Glencore, Estrata, Gazprom, and Rusal; Geneva is home to Cargill, Bunge, Louis Breyfus, Litasco, ADM, Mercuria, Sucafina, Trafigura, and Vitol. Hundreds of family offices have been born from the success trading activities of employees and owners of these companies.
In addition to private banks, Swiss asset managers manage billions of dollars and offer their select institutional, endowment, and family office clients leading alternative products, including private equity, hedge funds, and bespoke managed accounts and creative solutions to their financial needs. One leading Swiss private bank, in business for over 200 years, manages in excess of $650 billion dollars of assets and was the original seed investor in most brand name western private equity funds. When an employee is typically hired at a leading Swiss private bank, they are welcomed with the saying, “you just took the last job interview of your life.” Few banks in New York, London, or Hong Kong have bragging rights to such impressive stability. Family offices share similar values and have been flocking to Switzerland following the credit crisis in record numbers. Recent legal changes to buying second homes for ex pats, the so called “Lex Weber” laws, have made it easier for a "non dom" Swiss family offices to purchase vacation property in Switzerland, particulary in the cantons of Vaud and Valais, for example (commercial property has no such restrictions). Swiss private bankers and legislators hungry for an increased share of international business are behind these progressive changes to promote growth in the financial industry as well as property agents and real estate investment firms.
Historically, there have been two models in private banking for family offices. The Swiss model has been that banks “say everything but have little information” about their client. Outside of Switzerland, the Western private banking model has been that your banker “knows everything about a family office, but do not disclose this information” to a third party. The result is that unscrupulous clients used to manipulate both systems to find solutions for undeclared money, thus setting off global prosecution alarms. As has been widely reported in the financial press, the United States came banging on Switzerland’s doors, the Swiss authorities relented, and Swiss banking was forever changed.
Thus, the so-called “Age of Transparency” in Swiss private banking that we see now in 2013 was willingly thrust upon the Swiss banking community in shock, as the Swiss argue, at its government’s failure to stand up to the Americans, their wide open discovery rules, and overzealous U.S. prosecutors. Yet, the unintended by product of Switzerland’s fight with America has caught the attention and gained the respect of much of the world that oftentimes also finds itself under the oppressive weight of the self-interested American superpower.
Today, international family offices looking for a safe harbor to protect their hard earned assets turn to Switzerland, and its private banking community, as the “New Safe Haven” for international investors looking for an alternative to New York, its cozy friendly neighbor London, and the political uncertainly of Hong Kong. Increased regulatory scrutiny, led by the Americans, of the BVI, Jersey, Guernsey, Cayman, and Mauritius, coupled with recent events in the Arab Spring in the Middle East, have also moved family office assets to the safe haven of Switzerland. Thus, these international geo-political trends are transforming Switzerland, once again, into a leading destinations for family offices, their funds, portfolio companies and foundations.
Further, as the world financial community stood by recently and watched tax evasion stories being played out in the media, it was assumed that the Swiss private banking brand would die a quick and sudden death. In fact, the opposite has happened. Instead, family offices following the Global Credit Crisis stood back and marveled at the incredible stability of Swiss private banks that stood rock solid when the global financial system was melting down. The result is that today more and more global family offices, from Sao Paulo to Shanghai, are placing their trust in the hands of Swiss bankers. For instance, Latin American family offices understand this paradigm shift and have been opening new family offices and operations in Switzerland in record number, flying in from Sao Paulo, Rio, Montevideo, Panama, Lima, Santiago and elsewhere, to the welcoming Zurich and Geneva airports, avoiding the increasingly hostile, overcrowded, and physically decaying US and UK airports, long customs lines, and hostile immigration officials. Put another way, more family office meetings are taking place in Zurich and Geneva, instead of London or New York.
Swiss private bankers are also experts on esoteric alternative investments, such as fine art, valuable letters, manuscripts, and gemstones. In 2013, letters and manuscripts only represent 8% of the gigantic world art market, valued today at over $50 billion. Last year, the letters and manuscript market is growing and is currently estimated to have over 3 million collectors. Family offices come to Switzerland for private banking help, partnerships with major houses such as Droulet, Alde, Christie’s, Sotheby’s, Bonhams, Actcurial, and Pierre Berge, and expertise in proper assessment of assets as seen in the Fraser’s 100 and FCP40 indices. These firms are in New York and London; however, Swiss private bankers have a sophisticated understanding and appreciation of these asset classes.
In Switzerland, in general artworks transmitted by way of direct-line inheritance or donation- spouse, children – are free of taxes (federal, cantonal, and municipal income taxes combined). Capital gains after assigning a collection generally do not generate taxes, provided that this activity may be qualified as a hobby under Swiss law. Swiss private bankers work with a network of brokers, wealth managers, and experts in buying and selling collections to take advantage of the market growth. Examples of recent art purchases include Leonardo da Vinci’s Codex ($30M to Bill Gates); Giacometti’s Walking Man I (sold in 2010 for $104M); the Shout by Munch (sold in 2012 for $120M); Picasso’s Dora Maar (sold in 2006 for $95M and had not been seen for 40 years). Privos works with our Swiss private banking partners who visit regulary leading art galleries and shows, such as Art Basel, Art Basel Miami, and the Bussels Art Fair (BRAFA), one of the oldest art fairs in the world.
Switzerland is proud not to be part of the European Union, and its history of Switzerland supports the current reality of independence, which translates into the unique financial industry. During the past 200 years, Switzerland developed into a global commodities hub. The political stability, legal certainty, and progressive tax system, together with the trading culture of Switzerland, built Geneva and Zurich into the cross roads of trading and private wealth. Today, Switzerland is home to over 570 trading companies and over 10,000 commodity related employees. In 2010, as much as half of Switzerland’s GDP growth was attributable to the commodity trade. Family offices are being born from these successful businesses and trading operations.
Today, our family office partners appreciate the global experience and international outlook that a Swiss private banker, and Switzerland as a host country in general, brings to their family. While our people and partners are committed to full and transparent tax compliance and strict adherence to the letter and spirit of the tax laws in every jurisdiction, the global nature of our family office partners, their funds, portfolio companies, and foundations demand sophistication and confidentiality that Swiss private bankers and professionals bring to the table. Thus, we are proud of to partner with the leading Swiss private bankers and professionals in Zurich, Geneva, and throughout the country to help our family offices achieve their business goals.
Privos Capital maintains its European headquarters in Geneva in order to better serve our European, Arab, Latin American, Asian, Australian, and Chinese family offices. We work closely with leading Swiss private bankers and partner with Swiss single family offices, multi-family offices, Arab royal families, and their advisors who are active throughout Switzerland, including in Zurich, Geneva, Basel, Bern, Lausanne, Lucerne, St. Gallen and Lugano.
The Principality of Liechtenstein is a leading banking center that family offices turn to for private wealth expertise. Family offices turn to Liechtenstein for its business-friendly framework, financial stability, innovative products, and world class private banking and trust services.
Financial services is the economy’s biggest sector after its manufacturing industry, with wealth management the largest employer. Liechtenstein is also an attractive location for insurance companies, asset managers, investment funds, and trustee services. The country enjoys a triple-A rating from Standard & Poor. Liechtenstein’s customs and currency agreement with Switzerland means that its financial sector enjoys privileged access to the Swiss economy.
Today, Liechtenstein enjoys high trust, banks recorded new cash inflows and record profits following the credit crisis. Its banks have high levels of equity and already meet the Basil III core capital ratios. More importantly, the banks have never asked for state assistance, even during the global financial crisis. By the end of 2012, bank client assets under management by Liechtenstein banks, including group companies, have increased to CHF 183 billion. This represents a yearly increase of 11.1 percent. The net inflow of new money into Liechtenstein increased in 2011 from CHF 7.0 billion to CHF 13.2 billon last year.
Family offices view Liechtenstein as a safe place to do business. The Financial Market Authority Liechtenstein (FMA) is exceptionally stable. During the global financial crisis, Liechtenstein held strong, bolstered by highly capitalized banks and conservative business strategy. The debt crisis in European countries and their weak economies have not filtered into Liechtenstein.
In the past two years, Liechtenstein’s government has negotiated at least 12 new tax treaties, all of which must be implemented at the bank level. As a result, the banks agreed not to assist in shifting assets abroad that are subject to future withhold tax agreements (i.e., the tax treaty with Austria). Liechtenstein financial community has successfully dealt with a myriad of complex regulatory matters successfully, relating to the fund center, FATCA, EMIR (European Markets Infrastructure Regulation), the revised FATF recommendations and the draft proposal of the 4th Anti Money Laundering Directive.
Liechtenstein’s banks are stable, enjoy high capital ratios, and have earned a place at the table as a respectable banking center. The banks are involved in the European Banking Federation (EBF), the European Payments Council (EPC) and two international associations for deposit security systems, the International Association of Deposit Insurers (IADI) and the European Forum of Deposit Insurers (EFDI). Since Liechtenstein banks are not vital to the global banking system and the “too big to fail” discussions, they can rapidly identify trends, unique products and implement them for their family office clients. The Liechtenstein Bankers Association developed preventative measures and new legislation on bankruptcy of banks which will be coordinated tightly with the upcoming new EU regulations. The Association have also committed itself to international standards with regard to integrity, transparency, and professionalism by signing the ICMA Private Banking Charter of Quality.
In the beginning of 2014, new U.S. FATCA legislation will take effect governing the automatic exchange of information between banking centers. A rising floodgate of regulatory demands will make heavy demands on the offshore and onshore banking centers and only the most diligent will survive. At the EU level, the Savings Directive should be implemented shortly. These developments are favorable for the Liechtenstein private banking community, and the business community as a whole, as global family offices will only do business with respectable, nimble, and rule abiding financial centers in the years to come. As the offshore Caribbean offshore world comes under increasing scrutiny, international family offices will seek to do more business on the Continent, particular those families who enjoy winter sports and Liechtenstein’s beautiful countryside.
The stunning news coming out of Spain is that King Juan Carlos, the founding father of Spanish democracy, will abdicate the throne after nearly 40 years. The long and deep economic crisis send the monarchy tumbling coupled with allegations of self-dealing and graft. Crown Prince Felipe, 46, will success his father.
In addition, there has been reports of thousands of people demonstrating in the streets in Madrid and elsewhere calling for an end to the monarchy, waiving flags and chanting: "La monarquia es una porqueria!" In English, that phrase means "the monarchy is garbage."
Despite the change in the ruling guard, Spain has moved beyond the memories of its long-ruling dictator Franco, who arranged for the restoration of the monarchy upon his death in 1975. Today, Spain is a successful democracy and a powerful member of the European Union; its bullfighting, football and flamenco are world famous; however, the country is currently suffering through the worst depression in Europe after Greece. Recently, King Carlos media embarrassment regarding a hunting safari trip in Africa and other scandals involving the royal family broke the monarchy. Current political uncertainly adds to economic unrest.
Crown Prince Felipe and Princess Letitia have much work to do when he does assume the throne. Educated at Canadian boarding schools, university and military school in Spain, and in America at Georgetown University’s School of Foreign Service, the Crown Prince is Spain’s best hope for future leadership and a path out of the economic crisis engulfing the nation. Our family offices in Spain and those doing business with Spanish portfolio companies are looking forward to a more stable environment in which to do business.
In light of the current economic and political climate, Spanish family offices are in a difficult situation. The harsh austerity measures imposed by the conservative government of Prime Minister Mariano Rajoy are putting pressure on their local and international portfolio companies. Financing has all but shut down to all but the largest Spanish multi-nationals. King Carlos business development successes promoting Spanish companies to the global investment community have taken a back seat to the various scandals. Investments in Latin America cannot possibly make up for lost ground financially Spanish family offices. Sensing Spain’s economic and political weakness, Argentina fired a shot across the bow, recently nationalizing the Argentinean subsidiary of leading Spanish oil company Respol RFP, much to the horror and condemnation of the international investment community. International arbitration claims are flying from the ICC to the AAA; yet Spain does not have the economic muscle to fight back anymore. There are increasing calls for a republic.
Privos Capital works with Spanish family offices, funds, and leading portfolio companies doing business in Spain and Latin America. Our deep ties to Latin American family offices are a huge competitive advantage that we bring to our Spanish speaking partners.
Global family offices are both stunned and alarmed by the recent developments in Ukraine and with the current 20,000 Russian troops that Putin has amassed on the Russian border with the country. Family offices in the CIS have watched incredulously as former Prime Minister Yulia V. Tymoshenko raced to Independence Square in Kiev to join the celebrations, a new government in Kiev was formed, and Russian forced seized the Ukranian Navy in Sevastopol. Today, Russian-backed authorities now control Crimea. Russian President Vladimir Putin signed a treaty in March making Crimea a part of Russia, defying the United States and the European Union which have imposed sanctions on a handful of Russian officals.
As the recent events in Ukraine demonstrate, APresident Vladimir Putin has been in power for nearly 14 years; during his tenure Russia has not moved in a pro-Western direction as many had hoped. Putin’s antics, including nationalizing industries and wrongfully stripping foreign equity partners of their place at the Russian table, recent events in Syria and Ukraine, and his support of the vile Assad regime have diminished Russian's reputation on the world stage, jailing of opposition leaders, arms control, and opposition to gay rights have further harmed Russia's position on the world stage. Germany is fed up with Putin’s solitary positions; the U.S., the U.K and the world is outraged by the situation in Ukraine. Putin’s record of obstruction in the Organization for Security and Co-operation and opposition to minority rights in Europe have the press up in arms.
To make matters worse for the former Soviet Union, today European countries are less dependent on Russian gas. Falling energy consumption, creative new pipelines that skirt around Russia, US shale gas and Arab oil has reduced the power and relevancy of Russia. Putin’s efforts to pressure his neighbors to join his Eurasian Customs Union, a poor alternative to the European Union, is falling on deaf ears and allowing the Europeans to expand their reach to countries like Moldova. All eyes are on Ukraine; the former Soviet country, rich in natural resources, that wants to sign an association agreement with the EU this November; if so, it would be another loss for Russia. However, despite its reduced reputation on the world stage, , Russia is still a huge market and powerhouse BRIC whose economic might is felt around the globe. It is the world’s biggest oil and gas producer; it has a permanent seat on the U.N. Security Council, and a dangerous nuclear-weapons stockpile.
The real question we are asked frequently is what does Russia’s place in the world and its geo-political temperature all mean for Oligarchs, Russian family offices, and other high net worth Russian expats attempting conducting global commerce and living in London, Geneva, Paris, Zurich, Cyprus, Dubai, New York and Hong Kong? First, the reality is that adverse media attention over the years, coupled with Putin's actions, means that being Russian in any western market brings unjustified and heightened scrutiny in every international business deal. Second, deals involving Russian investors are harder to source, finance and close due to the heightened legal, regulatory, and government scrutiny. Finally, honest, hard working, and successful Russian family offices, traders, fund managers, and leading businessmen are wary of doing business in the U.S. or Europe often because they are made to feel like criminals before they sit down at the honest negotiating table.
The result of this anti Russian prejudice (what we call the "reverse Oligarch factor") is that Russian family offices are looking to deploy capital in more hospitable regions of Africa, Latin America, China, and Southeast Asia. Of course, world class cities such as London, Paris and Geneva make Russian Oligarchs and their family offices feel welcome; the U.S. less so. The result is that legitimate Russian money moves from Russia to offshore banking centers then into Emerging Markets and Frontier Markets em masse, but the capital is bypassing the narrow minded U.S. where it is not as welcome and to host goverments that are more appreciative. For instance, Russians are running into Chinese in Africa competing for oil and gas assets, creating jobs, and economic opportunities.
At Privos, our experience has been excellent with our Russian partners who are transparent and astute global investors. While Russian wealth on display in Knightsbridge, Dubai, or Cyprus (and to a lesser extent in New York, Los Angeles, and Hong Kong) causes envy and media attention, our People have had tremendous success working alongside Russian family office partners and look forward to doing more business with our Russian and CIS partners.
Global family offices are both stunned and alarmed by the recent developments in Ukraine. They have watched incredulously as former Prime Minister Yulia V. Tymoshenko raced to Independence Square in Kiev to join the celebrations, a new government in Kiev was formed, and Russian forced seized the Ukranian Navy in Sevastopol.
Today, Russian-backed authorities now control Crimea. Russian President Vladimir Putin signed a treaty in March 2014 making Crimea a part of Russia, defying the United States and the European Union which have imposed sanctions on a handful of Russian officals. Images of Crimeans dancing in the streets, giddy at the prospect of being fathered into Russia, have set off a quiet wave of panic, particulary with Russian speaking family offices, their funds and portfolio companies, from London to Dubai, Moscow to New York. The Bank of England has warned about the impact of the Ukraine crsis on global commodity prices – in particular the prices of gas, oil, and grains.
It has been reported that Putin and his “war council” decided to use military force to annex Crimea more than a fortnight before the referendum was held. Kremlin observers believe that Mr. Putin held a top secret meeting on the evening of February 25 o 26 to map out his plans. In attendance were hard-boiled veterans of the Soviet security state.
Recently, President Vladimir V. Putin of Russia reached out to President Obama to discuss ideas about how to peacefully resolve the international standoff over Ukraine, a surprise move by Moscow to pull back from the brink of an escalated confrontation that has put Europe and much of the world on edge. After weeks of provocative moves punctuated by a menacing buildup of troops on Ukraine’s border, Mr. Putin’s unexpected telephone call to Mr. Obama offered a hint of a possible settlement, but it is anyone's guess how this global crisis will be resolved.
In response to Putin's unilateral actions, the United States imposed sanctions on a number of Russian billionaire “oligarchs” with close tied to Putin, including Mr. Putin’s right-hand man and former KGB agent, Sergei Ivanov; Yuri Kovalchuck, Mr. Putin’s personal banker; Vladimir Yakunin, head of the Russian Railways; the billionaire Rotenberg brothers, who have known Mr. Putin since they were children in Leningrad. The U.S. has also imposed sanctions on the St. Petersburg-based Bank Rossiya, the financial home of many leading Russian oligarchs. EU leaders are adding names to the list of sanction targets announced by the U.S. Government, but there is a different of opinion by European leaders of who should be included on the list, highlighting the lack of coordination by Western leaders to the events in Ukraine. Family offices tell us daily of new developments regarding the movement of Russian and Ukrainian assets as a result of Putin's moves.
Yet behind the headlines, the real story in the family office world is that London has become the huge benefactor of Putin’s aggression; the British pound is becoming a safe haven for family offices seeking a safe haven, Russian and Ukraine's oligarchs are disposing of CIS exposed assets at "fire sale" prices, and London based law firms consulting firms, and accounting firms in cashing in on advising LPs, global investors and corporate LPs on the new crisis in the Crimea.
The question on everyone’s mind is, of course, how far will Russia go?
There is much debate over Vladimir Putin’s annexation of Crimea and his disdain for the West. The United States and the European Union are likely to impose added sanctions. European leaders will seeks ways to cut their dependence on Russian gas, but the E.U. cannot sever energy ties with Moscow for now. Today, Europe relies on Russia for nearly one third of its gas, providing Gazprom with an average of $5 billion per month in revenues. In fact, 40 percent of Russian gas is shipped to Europe through pipelines that cross Ukraine, and the country is a big exporter of wheat and corn. However, beyond the measures ordered against a few senior Kremlin officials, there is no chance that Mr. Putin can be coerced into reversing what the overwhelming majority of Russians and Crimeans seemed to regard as the righting of a historical anomaly.
Germany has particulary close energy links to Russia. In launching a PR campaign in Germany, Russia has marketed its actions not unsimilar to the reunification of Germany that was supported by the West. In response to the outrage by the U.S. and Europe, Russia has reacted by turning its attention east; Igor Sechin, head of Russia’s state energy company Rosneft, recently visited Japanese investors more cooperation in the development of Russian oil and gas. Sechin will also visit India, Vietnam and South Korea.
As NATO’s secretary general, Anders Rasmussen, remarked recently,
“This is a wake-up call for the Euro-Atlantic community, for NATO and for all those committed to a Europe whole, free and at peace. We had thought that such behavior had been confirmed to history, but its back and its dangerous because it violates international norms of accepted behavior.”
Tough talk for sure, but the lack of an unified voice and action from the West emboldens Mr. Putin. Even, German Government spokesman, Steffen Seibert, favoring business interests over all else, stated that Russia “was pursuing a path of international isolation, and its is a path containing great dangers for the coexistence of states in Europe.” U.S. Vice-President Joe Biden, “As long as Russia continues down this dark path, they will face increasing political and economic isolation.”
For any family office, their funds, or portfolio companies with “Russia or CIS exposure,” the unfolding events in Ukraine threaten one’s survival, power, and wealth. As events unfold, one issue becomes what happens to a family office LP’s illiquid, non-control, private equity type investments in Russian and CIS region in light of the Kremlin’s audacious move and Western non-response. When leaders of the 28-nation European Union cannot even issue a joint press release condemning the annexation of a sovereign, and German business executives have forced Chancellor Angela Merkel to take a cautious tone in favor of trade ties, it is no wonder that a family office or foreign investor realizes that they are alone among wolves when venturing into the expanding Russian empire. For corporate LPs who have invested.
Family offices are moving quickly to hedge their exposure to Ukraine. Recently, billionaire Mikhail Fridman’s Alfa Group announced it was selling its Ukranian supermarket chain to Varus. We see this as the new reality or trend for family offices with Russia, Ukraine or CIS exposure.
However, the real concern among family offices is whether Mr. Putin will make a takeover attempt in southeastern Ukraine, a mining and industrial region whose pro-Muscovite majority has been restive since the government turnover in Kiev. There are great family office wealth - from Moscow to London - tied up in these mining and industrial assets, and Western banks and funds have huge concerns about this region. Europe’s huge reliance on Russian gas makes it all but impossible to halt Mr. Putin’s expanding authoritarian rule and imperial illusions.
The real struggle today in Ukraine is that the blighted, corrupt, oligarchic past is being tested by its possible future. As the culture of Russia expands, it means a lot of money will flow into the region, but it will be distributed in terriby, corrupt and inefficient ways, some believe. As the United States aligns itself with Georgia, the Brits focus on selling property schemes, hedge funds, legal divorces, and handbags to the wealthy Russians in London, and the Germans and French attempting to revive Greece and save the E.U., global family offices are exiting their Ukrainian holding en masse. Buyers beware, as they say.
Standard & Poor’s announced on February 21 that “we now believe it is likely that Ukraine will default in the absence of significantly favorable changes in circumstances, which we do not anticipate.” Russian leadership follows international sovereign debt law very carefully, and they know that foreign-law bondholders do not get mad, but somehow they get even. Put another way, even when the contract provision in foreign-law sovereign bonds are weak, countries more desperately broke than Ukraine decide to pay rather than not pay and become Argentina. We have all seen institutional money that had to let go of Ukraine’s 2.5 per cent weight in the EMBI Global bond index find ready counterparties among the specs.
Add to the equation the fact that Russia supplies about 30 percent of Europe’s natural gas, with almost half of it piped through Ukraine. Russia’s annexation of Crimea has launched a natural gas war between the countries, with Gazprom presenting Ukraine with a $2.2 billion invoice for unpaid natural gas. Gazprom and Ukraine are locked in a show down over outstanding debts and a new pricing regime being promugulated by Russian company. The Ukraine government says that it is willing to pay the bill, but Gazprom raised its prices from $268 per 1,000 cubic meters of gas to $485. The company also seeks to claw back previous discounts which the Ukrainian government finds objectionable.
The recent stand-off between Russia and Ukraine over gas is an attempt by Russia to “pressure and grab Ukraine through gas and economic pressure, stated Arseniy Yatseniuk, Ukraine’s prime minister. Recalling 2006 when Russia halted gas transit through Ukraine amid a price dispute, Yatseniuk is calling for Slovakia gas transit pipeline operator to allow reverse gas transit flow, enabling Ukraine to import gas from the European market.
Ukraine’s 46 million citizens witnesses 100 anti-government protestors killed by President Yanukovich’s administration in the center of Kiev. Viktor Yushchenko was mysteriously poisoned and disfigured during his ultimately successful 2004 election campaign. The political system was broken. However, several interesting candidates have registered for the election on May 25. Currenly leading opinion polls is “Chocolate King,” Petro Poroshenko, a businessman and politican, who was targeted by Russia personally by restricting imports of his sugar business, taking over his factories and raiding businesses linked to him in newly annexed Crimea. Next, the “Gas Princess,” Yulia Tymoshenko, recently released from prision. And, Vitali Klitshcko, a former world heavyweith boxing champion, who has pulled out and will run for mayor of Kiev instead.
For our Russian family offices, there is much debate about the collision of Russian and Ukraine. One view is that Russian, with its gas shipments, is finally emerging as a world power as seen in state-showboating in Sochi and military action against a weaker neighbor. This view also believes that the west has underrated Russia and its nationalist fevor and self confidence. Another contrary view held by the majority of our family offices is that Russia is a failing, criminal state, where oligarchs who play by Putin’s rules will always survive and prosper; where the rule is law is frankly “a joke.”
The IMF’s $20 billion bailout of Ukraine will be a work in progress. From a capital markets perspective, effects on assets will depend on the severity of sanctions. Real damage to Russia is possible if the US and advanced countries restart petroleum exports to Europe. Investors might then stop trading with Russian companies, financial holdings in any Russian asset, or exposure to Russian individuals. If Russian assets are effectively gated, investors in crowded trades could struggle to liquidate emerging market bond assets, while defence sector shares should thrive.
Brazil, Mexico, and Latin America
We have been working in Latin America since the inception of our firm and our people have decades of experience on the continent. We bring a deep cultural understanding, appreciation, and respect for the diverse expanding family offices in Brazil, Peru, Chile, Uruguay, Ecuador, Columbia, Argentina, and Panama, whose funds and portfolio companies are among the most ambitious, aggressive, and successful world-wide, often with great liquidity and incredible management. The terms, "East of the Andes", or "West of the Andes," as opportunities are now often referred to in Latin America, our people are dedicated to helping family offices in South America succeed on the world stage. We have also been particularly active helping our Latin America family offices partners expand their portfolio companies with family office partners in the Middle East. As capital flows increase in record speed between the Middle East and Latin America, while the rest of the world hardly notices, we are there to guide our family office partners to success and new opportunities.
In Brazil, where impeachment proceedings have begun against Dilma, the country is in a crisis. The GDP shrank for the third consecutive quarter between July and September. It was 4.5% lower than in the same period last year; 2016 will mark the second year of recession—the longest downturn since the 1930s. Inflation was around 10% in November. Unemployment is becoming alarming and rising everyday. Alberto Ramos of Goldman Sachs, an investment bank, speaks of an “outright depression." However, like Warren Buffett, there are glimmers of hope rising in Brazil today. One of our family office partners recently called us from Sao Paulo, announcing that Brazil is "on sale," and it was the best time in decades for their family to start building a new 5 star luxury resort hotel in the city. Prices for builders are at rock bottom and the banks are dying for bankable projects. We are moving forward in this chaos, they remarked.
Against the current painful macroeconomic reality in Brazil, it is important to appreciate that our people have been working in the country for over 20 years long before it achieved international investment grade status or Jim O'Neil of Goldman Sachs coined the term "BRIC." We have witnesses first hand the staggering growth of Brazilian family offices, their deals, funds, foundations, and portfolio companies in Sao Paulo, Rio de Janeiro, Brasilia, Mato Grosso, Manaus, Santos, and elsewhere. We have deep understanding of foreign investment in Brazil, including Cross-Border Security Based Swaps, and structuring inbound and outbound investments in Brazil. As the world's sixth largest economy by nominal GDP, Brazil is a member of diverse economic organizations, such as Mercosur, Unasul, G8+5, G20, WTO, and the Cairns Group, which allow its family offices to enter Latin American markets in record number. We are privileged to work in Brazil with our leading family office partners.
One example of the world class ambition of Brazil businesses can be seen in the investment banking sector where our people have deep experience. Ten years ago, U.S. and European investment banks dominated Brazil. However, senior Brazilian bank executives, charged with dislodging foreign investment banking competition, have been successful in winning more business by understanding the market better and taking more credit risk than their foreign competitors. International competitors come to Brazil with a small capital base and few staff. Conversely, local bankers have long lasting relationship with clients and their firms remain committed to the market long after the foreigners have withdrawn in a global slowdown or crisis. Brazilians have invested in international bond and equity distribution and many banks have broker-dealers in Hong Kong, London and New York. They are also recruiting top global talent in record numbers, paying bonuses 100 percent in cash. The only true competition are the state-owned banks who receive complaints from local bankers about going head to head in both investment banking and lending against these non-profits like entities.
The world’s sixth largest economy, Brazil built the 12 stadiums nationwide that hosted the 2014 soccer World Cup. 12 cities hosted the soccer event nationwide. Despite Brazil not winning the World Cup, spending for the entire event required over $14.9 billion across the country. In 2016, Rio de Janeiro will host the Summer Olympics with similar cost outlays. A total of 3.6 million short and long term jobs will be created by the end of 2014 from the infrastructure, transportation and related projects. Our Brazilian family offices have already profited from the World Cup and Olympic building boom engrossing the country. Today, Brazil’s growth slowed to 0.9 percent last year, a far cry from the 7.5 growth in gross domestic product in 2010 that had investors pouring into the country. The Ibovespa stock index is down nearly 10 percent compared to a 15.4 rise in the S&P 500; however, we are seeing huge wealth creation and business success by our Brazilian family office partners, who live and work in Sao Paulo, Rio, New York, London, Hong Kong and around the world spreading the unique Brazilian business culture and success.
Recent Presidential elections in Peru have resulted in the election of Pedro Pablo Kuczynski, who beat out Keiko Fujimori after five days of close voting and potential crisis in the country. President-elect Kuczynski is a 77-year old, former economy minister who studied at Oxford and Princeton. He has confirmed his pick for economy minister, Alfredo Thorne, a former JP Morgan investment banker who managed Kuczynski's campaign. Kuczynski won 50.1 percent of the vote to 49.9 percent for Jujimori, the daughter of jailed ex-president Alberto Fujimori.
On November 23, Argentina made history in Latin America by being the first country to "turn right" and being the long crawl back from socialist and left leaning policies by electing the 56-year old engineer, Mauricio Marci, as Argentina's next president. The center-right mayor of Buenos Aires pledged to resort order to a crisis-wracked and failing government that has witnessed the worst crime and poverty in the nation's proud history. Mr. Marci narrowly won the recent election against the ruling-party rival, Peronist Daniel Scioli.
Peronists will also control both houses of Congress, making Mr. Macri the first president in recent history to take office without the support of a majority in the Lower House. While Mr. Macri is inheriting adverse economic conditions, his non-Peronist predecessors faced outright insolvency, says José Luis Machinea, who was Mr. de la Rúa’s economy minister. Mr. Alfonsín was also confronted by restlessness within the military and ballooning foreign debt. And Mr. de la Rúa inherited a dollarized economy that was so close to collapse that even the most experienced statesman might have been unable to forestall disaster, as reported in the Wall St. Journal.
President Marci will face a country with empty government coffers, rampant inflation, and a powerful opposition from the Peronist movement that has ruled the country for most of the past 70 years. Argentina has had only three non-Peronist presidents elected over the past half century. Arturo Illía was overthrown in a coup in 1966. Raúl Alfonsín resigned amid hyperinflation in 1989 and deadly social protests led Fernando de la Rúa to flee the presidential palace by helicopter in 2001.
Mr. Macri’s future cabinet chief, Marcos Peña, says Argentina has changed and that a new generation of governors and younger politicians favors dialogue over political drama. He notes too that Mr. Macri and Mr. Scioli—as well as a third presidential candidate, Sergio Massa, a dissident Peronist—agree on the need to address pressing problems including drug trafficking and currency controls.
Mexico enjoys the second largest economy in Latin America, and we have been privileged to work with leading Mexican family offices deal who are faced with incredible crime and unrest that threatens their businesses and livelihood. Mexican family offices have been successful in transforming their businesses into world class companies on both sides of the border; however, the progress of the past decades are being threatened by the unsafe conditions in the country, where over 37,000 Mexicans have died at the hands of the drug cartels in the past four years alone.
Today, we are seeing record number of well known Mexican family offices fleeing their country and relocating to the safe shores of the U.S., investing in the U.S., and opening successful, entrepreneurial businesses. As the United States economy improves, wealthy Mexican businessmen are pouring millions of dollars into the largest economy in the world. They seek to take advantages of their proximity to the U.S. and its foreign investment-friendly laws.
In 2012, Mexican investment in the U.S. went up by 11% and currently stands at $27.9 billion. There is an increase in Mexican family offices filing for EB-5 visas, which can grant the well-heeled financiers and their families green cards in exchange for investments in projects demonstrated to create or sustain U.S. jobs. The majority of the investments are arranged through so-called “regional centers,” designated public or private economic units, which according to law accept a minimum of $500,000 for economic growth projects in rural or high unemployment areas, or a minimum of $1 million for projects outside such areas. Mexicans and Chinese are taking advantage of this U.S. program in record numbers. The U.S. Government has issued 4,000 investor visas to Mexican citizens in 2012 - the third most in the world, behind only Japan and Germany. This type of visas has no quota or annual cap, and spouses and children under 21 years old may receive derivative E-2 Visas. Privos helps Mexican family offices on a wide range of business and investment related activities.
Our people are also active in Columbia, which is challenging Panama as a leading Latin American banking and energy center. The past decade in Columbia has seen easing of restrictions on foreign investments that has lead to a transformation in the country. Free trade agreements have been signed with the European Union and Peru. Free trade has helped transform Columbia into South America’s No. 3 oil producer, behind Venezuela and Brazil. Local energy executives were able to find huge deposits of heavy oil and armed with foreign capital list their companies on foreign exchanges. Former executives of PDVSA took issue with the late Venezuelan President Huge Chavez pilfering Columbia energy assets and broke away to build their own successful businesses in the country.
Columbia family offices have prospered in the face of the country’s surging energy exports. Canadian family offices and funds, who supplied a large amount of capital to fund the expansion of energy assets in Columbia, have enjoyed the fruits of the close relationship between the two countries. Capital and deal flow between Bogota and Calgary is on the rise. The increased capital flows have fueled the expansion of leading Columbian family offices into other leading financial markets in the U.S., Europe, Asia and Australia. Coupled with investment from the IMF and other leading LPs, the financial services industry in Bogota is growing and attracting expat fund managers returning from New York and London. Privos helps Columbian family offices expand their business overseas and has experience working with international investors as they enter the local market and create exciting new opportunities.
Chile is the wealthiest country in Latin America, but the recent election results threatens the economic success the country has experienced for the past decade. International investors are concerned and attention is moving north to other countries such as Columbia, Peru and Mexico, in light of the latter's recent legislative changes opening up the country's oil and gas industry.
In Chile, on December 15, 2013, Michelle Bachelet won a landslide victory in Chile's presidential election, pledging to increase corporate taxes to finance fre education for all. She is the first candidate to win a second term since 1990 and the return to democracy. Bachelet, 62, won by the widest margin after promising $15.1 billion in extra spending during her term in response to three years of protests over the quality of schooling and hospitals. She won the majority of Congress last month, allowing her to carry out her proposed tax increase.
Recently, Chile President Michelle Bachelet’s new government suffered an embarrassing setback when four governors resigned under fire less than one week after taking office. The provincial governors, all appointed by Bachelet’s administration, were hit by a wave of criticism regarding potential graft, fraud, and mismanagement.
Recent elections aside, Chile has transformed itself into one of Latin America’s most dynamic and fastest growing economy in modern times. The transformation has resulted in a massive explosion of wealth and the creation today of hugely liquid successful family offices combing the globe for investment opportunities, most notably in Canada’s energy sector. As one of the new Latin America power countries in the new power structure “West of the Andes,” Chile is booming in part fueled by natural resources and Chinese capital flowing into the region.
A quick history of the political situation is instructive. On November 17, 2012, Michelle Bachelet was re-elected, once again, the president of Chile. A Socialist pediatrician, unmarried mother of three children, and an atheist, President Bachelet ran the country previously from 2006-10 but was later succeeded by Sebastian Pinera, a billionaire businessman, who returned the center-right to office for the first time since the end of General Augusto Pinochet’s dictatorship in 1990. After leaving office, Bachelet ran the UN’s organization for women.
The Pinera administration was a success in Chile. The economy under his pro-business administration grew 5.5% annual average rate and unemployment was held at 5.7%, the lowest in decades for the Latin American country. Today, real wages are growing, inflation is contained, and public accounts are in good shape. That said, there have been recent problems under the surface during Pinera’s administration. The world has watched on CNN as student protests and demonstrations have marched down the Alameda in downtown Santiago. Thus, there is a real under current of dissatisfaction by the middle class which is causing pause for concern for international investors. Unless Chile “puts in house back in order soon,” foreign investors will run for the hills and greener pastures of opportunities in Peru, Columbia, Panama, Uruguay, and Brazil.
President Bache let’s first administration was controversial. A bus transit system project failed miserably and the global financial crisis hurt the country under her watch. She recovered, partly by using Chile’s fiscal surplus to ease recession through emergency handouts and infrastructure projects. The Alliance party recently backed President Bachelet in the recent elections. The former labor minister in Mr. Pinera’s government, President Bachelet is experience and smart. But she is more conservative than her party, and the public is wary of her given the past. Her father had been an air force general who died of a heart attack after being imprisoned and tortured by the dictatorship in 1973.
Now, President Bachelet will begin her second administration governing from the left. Her policies include reducing income inequality, free higher education over the next six years, transform the secondary schools into non-profits, reforms to the privatized health-care and pension systems, and tax reform to pay for these socially regressive policies. She is also working to replace the old Pinochet constitution from 1980, including calling for a constitutional assembly and end the conservative electoral system. The communist party has been brought into an expanded center-left coalition in part due to student concerns.
The business community is up in arms and vocally concerned about these reforms. President campaigned on the promise of raising the corporate tax rate from 20% to 25% over four years, reduce personal taxes from 40% to 35%, and eliminate the Taxable Profits Fund (FUT), which allows companies to defer indefinitely tax payments on reinvested earnings. The business community argues these policies will destroy growth.
Despite serious concerns about Chile, there are bright or promising sectors that are "in play" and attracting international investors. Take, for instance, the asset management business. This year, global asset managers are buying into Chilean pension plans and investment houses. Only six private sector investment houses are approved to manage assets in the country’s mandatory Administradora de Fondos de Pensiones, or AFP. Last year, two of the six players were bought by US groups – market leader Provida by MetLife and Cpurum, the fourth biggest, by Principal Financial Group. Recently, Nuveen Investments and Federated Investors just announced distribution deals making their funds available. Chile’s upward mobility, transparent political and regulatory system, and endorsement of defined contribution pension savings plans created one of the leading retirement markets in Latin America. Chile’s system is also remarkable as it allows investors to allocate up to 80 per cent of their contributions to foreign investments; about 40 percent of that is invested in the US. Built in the early 1980s, Chile’s persion system is building on individual sayings accounts funded by mandatory 10 per cent salary or wage contributions. The assets are invested by one of the six AFPs, which offer up five government-approved portfolios invested according to differing risk levels. This year, AFPs manage $160 billion in assets, up 11.5 percent over the past year. Finally, President Michelle Bachelet has announced her administration will create a government run retirement fund to compete with private sector providers.
Chile has been, for our international family office investors, the "Go Fast" economy in Latin America. Western hotel chains, armed with demographic and economic reports from their consultants, have been piling into Santiago and Chile in record numbers. Setting up a company is fast, simple, streamlined and quite impressive. That said, we hear from family offices in Chile and Latin America that the recent political developments has turned everyone suddenly cautious about the growth story of Chile. We would argue for a wait and see approach if you are a family office, fund, portfolio company, or foundation looking to invest in Chile. We would advise the current administration of Chile to think hard before ruining one of the fastest growth engines in Latin America history in the face of protesting students who will face an employment crisis of grave proportions if they succeed in chasing away foreign investment.
In October, 2014, Incumbent Evo Morales declared victory in Bolivia's recent presidential vote. Morales, a former union leader for coca growers, won his first election with a campaign that promised a government focused on the needs of the country's poor.
But as an ally of Chavez, critics have accused Morales of using the system to concentrate power. Yet, Bolivia, a country comprised of four departments, is the poorest country in South America, but one that is fighting hard to embrace the modern age with virtually no help from the outside world. Yet, few foreign investors realize that the country surprising paid $234 million in hard cash for its new cable car transit system from its vast trove of hard currency that the country's Central Bank has amassed during the past several years of impressive economic growth, fueled largely by the sale of natural gas to neighboring Brazil and Argentina. Bolivia's transformation is truly stunning and runs circles around the public transit systems of California, with crumbling embarrassing LAX airport and the state's inability to build a high speed train, or the cash strapped, crowded, and frequently delayed the London Underground.
Bolivia’s estimated 2012 gross domestic product (GDP) totaled $27.43 billion at official exchange rate and $56.14 billion at purchasing power parity. Bolivia has the second largest natural gas reserves in South America, and the government has a long-term sales agreement to sell natural gas to Brazil through 2019. The government held a binding referendum in 2005 on the Hydrocarbon Law. The US Geological Service estimates that Bolivia has 5.4 million cubic tones of lithium, which represent 50%–70% of world reserves.
La Paz, Bolivia, the world's highest capital at about 12,000 feet above sea level, is the seat of the national Bolivian government, old money, and the lighter skinned elite of the nation. It also has the fifth highest airport runway in the world that poses well reported challenges for the world's leading airlines. During a recent trip to Latin America, our CEO met in La Paz with leading Bolivian government officials and business leaders to discuss how the country could increase international investors. Our family office partners have been potential potential investments in agriculture, forestry, fishing, mining, refined metals and petroleum. The mining industry attracts international investment, particularly in tin. Bolivia also has its own port facilities in the Bolivian Free Port in Rosario, Argentina, located on the Parana River, which is directly connected to the Atlantic Ocean.
Bolivia is a terrific opportunity for international family office investors looking for a country desperate for foreign capital. The country is attempting to reform and modernize Laz Paz and neighboring El Alto. There is a new cable-car system in operation with President Evo Morales, an indigenous former coca farmer from a poor background, announcing plans to build five more lines. Two million people rode the cable car system in the first two motions of operation.
Bolivia also recently launched its first communications satellite to mass acclaim, demonstrating that the government is trying to open the country to technology. While there has been much negative press about Bolivia as a drug haven and Morales being close to Chavez; however, our CEO was impressed during his visit to La Paz with the incredible work ethic and national pride and desire to move the country into a more modern era. As is typical in Latin American and Africa, while the western world sits back in judgment of developing countries like Bolivia, the Chinese have moved capital and resources into the country, particularly in the mining industry.
After being shunned by western governments, Bolivia has turned to Russian and China for partners; it does not have to be this way. Last year, Bolivian President Morales visited Moscow for the Forum of Gas Exporting Countries. He met with Putin who is eager for Russian companies to access Bolivia's oil and gas development. Today, after the political disaster in Ukraine, we anticipate that Russian will make a bigger play for Bolivian gas field assets, while the international investor community and U.S. Government sits back and lets this happen. Morales discussed with Putin purchasing Russian helicopters in order to fight drug cartels Bolivia is also courting China and Qatar as potential partners so they are not utterly dependent on the U.S. market.
While foreign investment into Latin America is concentrated in Brazil, Chile, Peru, and Columbia, our family office partners view Bolivia as a country eager to embrace international family offices and foreign investment. Bolivia's Lake Titicaca and the snow peaks of Illimani could be, one day, some of the most beautiful tourist attractions in the world. Foreign investment is the runway to prosperity, and Bolivia is trying its best to embrace the new economy despite some terrible odds; the international family office investment community should step to the plate in the metaphorical game that the west is losing in Bolivia to China and Russia.
In Asia and China, we have deep experience working with our family office partners who are active across sectors and asset classes in Hong Kong, Tokyo, Kuala Lampur (KL), Soeul, Taipei, Singapore, Bangkok, Beijing, Shanghai, and throughout China, Vietnam, Southeast Asia, and the the ASEAN countries.
It is well known that Asian family offices - both first-generation and established families - are among the most sophisticated in the world, especially when it comes to embracing different asset classes. Typically, Asian family offices prefer private equity and "club" deals between family offices. For centuries, wealthy families in Asia have been setting up family offices, and today a new generation of wealthy Asian professionals are forming single family offices and multi-family offices in record numbers, often with cross boarder partnerships with other Asian families in the U.S., Europe and Latin America. In 2010, the Asia Pacific HNWI population grew 9.7% to 3.3 million, with a total family office wealth in excess of $10.8 trillion. Our people are participating in the success of family offices in Asia and China.
Asian family offices have reaped the benefits from world class finance professionals at OPIC and other DFIs who have dedicated resources into the development of emerging economies in the region. Over the years, OPIC has supported new manager private equity funds as well more established funds entering China, North Asia (Japan and South Korea), Southeast Asia (Indonesia, Singapore, Malaysia), and the ASEAN region.
Asian family offices have reaped the benefits from world class finance professionals at OPIC and other DFIs who have dedicated resources into the development of emerging economies in the region. Over the years, OPIC has supported new manager private equity funds as well more established funds entering China, North Asia (Japan and South Korea), Southeast Asia (Indonesia, Singapore, Malaysia), and the ASEAN region.
Few family offices globally appreciate the incredible fact that China now ranks only behind the U.S. in the number of dollar billionaires, according to Forbes. This past year, the International Monetary Fund's World Economic Outlook database forecasted that by 2018, China's economy will be bigger than the of the U.S., and Asian economies will be larger than those of the U.S., Canada, Germany, Britain, Italy, France and Russia combined. Thus, any family office looking to participate in global commerce must take affirmative steps to engage the Chinese in a positive and mutually beneficial ways and, of course, find the right Chinese joint venture partner to enter the market.
The Communist Party recently released a "reform blueprint" which has unleashed a sense of optimism about the fast-growing economy. As has been reported widely in the financial press, the Chinese leadership is starting to act on its reform promises. According to the People's Daily, the Party is starting to "plan the path of good economic work for 2014" and "with the reform blueprint in place, the key now is to put that blueprint into reality step-by-step." Officials are forecasting growth in 2014 to range from 7.0% to 7.5%, as the market plays a greater overall role in the Chinese economy. The result will be tighter financial conditions, a re-focused effort to rein in overcapacity and excess investment in state-run industries, and a slowdown in the wide range of infrastructure projects that have powered the economy in the past several years. The new focus in China today, as reported by our local partners on the ground, is to create a "consumer-led" marketplace, opposed to an export driven economy. Chinese leaders are focusing on building up the private sector to balance state-backed giants' stronghold on the economy, and there is a focus on building internal, Chinese founded brands that will one day enjoy world-wide appeal and respect.
Our people have been working with Chinese family offices and ultra high net worth individuals from the Mainland for many years. We have gained deep insight and an unique understanding of the people, culture and business opportunities that the powerful nation offers our GP and LP family office partners. For instance, we appreciate that many wealthy Chinese believe that the property markets in Hong Kong and China are overheated, debt is to be avoided, and that Chinese family offices have been buying less land in Hong Kong and China because prices are inflated. There is concern about the fact that China's corporate debt is high by international standards, 127% of gross domestic product compared with an average of 70% in other emerging markets.
In addition, our Chinese family office GP and LP partners are alarmed at what they see on the Mainland as the vast borrowing at very high rates, and they believe that when money gets tighter, scores of high profile Chinese will face financial issues. Therefore, many Chinese family offices are going on international buying sprees, acquiring high profile assets in the U.S., Europe and elsewhere as a way to repatriate their cash to safer foreign markets and protect their capital for future generations. Because the vast majority of Chinese billionaires are first-generations entrepreneurs, their wealth is closely tied to their companies, which poses a host of additional issues in trying to preserve wealth for their future generations.
Today, foreign investor sentiment towards China is at rock bottom, but our family offices report huge opportunities investing and doing business in China. Despite the proverbial cries of “wolf” from foreign investors about the “China Story” our family office partners report massive opportunity in China and are “doubling down” on their Chinese strategic investments. They point to the fact that Chinese households have more than $7 trillion in bank deposits – more than the combined gross domestic product of Russia, Brazil, and India – and any risk of a banking crisis or widespread financial problems is an overhyped media story.
The financial press has been “trash talking” about new “China woes” for much of the past year, with reports coming out of China regarding property companies are buying stakes in banks, raising concerns that the country’s already stretched developers are trying to cosy up to their lenders. Ten Chinese property companies have invested $3B in banks. Some of the developers are heavily indebted, causing concerns regarding cozy lending practices in the real estate industry. Falls in housing sales across China and defaults by small developers have stirred fears about the risk of a serious property market downturn.
Other media outlets report headlines that foreign investors have pulled $1 billion from China-focused funds in the first two months of this year as fears about the country’s slowing economy continued to affect investor appetite. The withdrawals from Chinese equity funds in the US and Europe follow net redemptions of $5.4 billion, $1.8 billion, and $5.1 billion respectively in the three preceding years, according to Morningstar.
There are also added investor concerns regarding the government’s anti-corruption drive, which is impacting consumption and fixed asset investment. There are reports that investor appetite for China will remain flat this year from the highs immediately following the credit crisis when a lot of money poured into China as investors were chasing returns and searching for uncorrelated markets.
China also experienced its first corporate bond default in March of this year when Chaori Solar, a leading solar equipment manufacturer, faulted on its debt. In addition, 10 wealth and trust products have defaulted on payments to investors in the past 12 months. In March, a rural bank suffered a three-day “run on the bank” that forced the Bank of China, the central bank to make the unusual move of stepping in to reassure depositors that their money was safe. Until recently, local goverments tended to bail out companies that were close to missing payments on bond or trust loans. These pockets of high leverage and over-reliance on short-term funding sources is problematic in China. Hedge funds have stepped into the fray, looking for shorting opportunities in areas such as China’s oqaque shadow banking sector, which is a huge area of concern for foreign investors.
Further, there has been much debate over the liberalization of the Chinese renminbi. There is debate about whether the renminbi will become an internationally adopted investment currently within the next three to five years. Optimistic investors point to the fact that the volume of trade settled in renminbi four years ago was zero, but today it is 14 percent of the Chinese trade; this is the beginning of a trend that all major trading nations have experienced. Further, external use of renminbi is being used in Mongolia and, to a lesser extent, South Korea. Contrarians argue that the renminbi is on a part with the Philippine peso and a bit higher than the Peru’s Nuevo sol. That said, our family office partners dismiss outright any likelihood that the renminbi can achieve any meaningful share of global portfolios in the foreseeable future. They believe that most non-Chinese family office investors do not appreciate just how closed China’s financial borders are today nor, despite all the noise and rhetoric, how little progress has been made in opening corss-border capital movements over the past few years. Put another way, Chinese policy makers will always want to exercise a degree of control over the renminbi which will, by definition, arrest the pace of currency liberalization for years to come.
But beneath the surface, our Family office partners, who do not make money following the 24/7 financial media, applaud the current Communist party actions, arguing that the current trend of rewarding proper behavior will propel the country to new heights, as more good Chinese companies will thrive and the bad companies will go bust. They see the impending defaults as a buying opportunity. Chinese family offices also point to the fact that in the past two years, the US has witnessed 70 banks go bankrupt according to figures from the Federal Deposit Insurance Corporation (FDIC). However, these failures have not raised any questions about the viability of the US. economy or its financial sector.
Our Chinese partners also point to the progressive nature of Chinese banking and finance industry. For instance, they argue that the fact that Alibaba, China’s leading ecommerce company, has gathered the equivalent of $65 billion in their money market fund in less than one year is evidence that China has bypassed the banking systems of most advanced markets. Chinese savers have rushed into internet money funds because they have much higher yields and are convenient for the millions of Chinese savers already signed up for payment services such as Alipay or WeChat. These savers can buy internet money funds through apps on their mobile phones and can then make withdrawals the same way on any business day. Internet money funds also provide an alternative source of loans to small and medium-size enterprises. China’s banking sector is dominated by huge state-owned banks, which lend mainly to state-owned enterprises (SOEs). Neglected by the large state-owned banks, SMEs are happy to borrow money from internet money funds.
We are also active world-wide working with wealthy Chinese setting up family offices to manage the capital and investments generated from successful business activity on the mainland. Typically, leading Mainland investors establish family offices in Hong Kong or Singapore given the domestic restrictions on inbound and outbound capital flows. Hong Kong is the natural choice to establish a family office; however, many Chinese businessmen choose Singapore, Geneva, the BVI, Delaware, or various offshore locations to base their global operations. That said, most affluent Chinese are first-generation wealthy; if there is a second generation, they tend to be quite young. Many Chinese businessman have made their money via a listing or trade sale, selling all or part of their business to a third party, or back to a state owned entity. There is huge liquidity to manage and thus opportunities for international family offices looking to partner with Chinese family offices.
We also work with our Chinese family office partners in a wide range of business venture, ranging from rare-earth output and metals to real estate and Hollywood film financing. With China supplying approximately 80% of the specialized magnets produced with rare-earth ingredients used from elevators to cruise missiles, mining and energy opportunities offer attractive returns and joint venture partnerships for Chinese and westerns family offices.
Despite the "mystery" surrounding the wealthy Chinese, in our considerable experience Chinese family offices are no different than any other western family office trying to provide the best opportunities for their families, children and future generation. For example, there have been reports in the mainstream media about wealthy Chinese purchasing home residents in the US (Manhattan, Princeton, Greenwich, Boston, San Francisco, Chicago, Los Angeles, Denver, Dallas, Houston, Seattle, Portland, Washington D.C.) in order to be closer to their children who are being accepted and attending, in record numbers, top U.S universities (Harvard, Princeton, Yale, Stanford, Cornell, Dartmouth, Brown, Penn, MIT) and U.S. boarding schools (Exeter, Andover, Choate, Groton, Deerfield, Hotchkiss, St. Pauls, Lawrenceville). Our colleagues in Geneva and London report seeing the same impressive Chinese ambition and drive to purchase residential assets and offer their children the finest educations. Access to the finest education is bringing Chinese and western family offices closer together in important ways outside of traditional business.
We have numerous global family offices that are investing and doing serious business in Mongolia. Today, squadrons of expat consultants are working in Mongolia, living and working along side investment bankers, hedge fund managers, and mining executives who have come to make their fortune. Recently, we have learned that distressed debt hedge funds have descended on Ulan Bator, getting ready to divide the spoils of government and private industry alleged mismanagement. Chinese investors, following the developments in the Financial Times, are waiting on the sidelines with cash in hand to pounce on any opportunity. Sovereign wealth funds from Latin America to Southeast Asia are monitoring the situation in this leading Frontier Market country.
For the landlocked nation of 3 million, Mongolia has seen a mining-based windfall give birth to a GDP of $11 billion but with huge capital ebbs and flows. A new revised foreign investment law was recently announced which the government hopes will stabilize regulations after years of sudden and destabilizing reversals. The government is worried that foreign investors could turn around and sell its most valuable assets to Chinese firms, increasing the country’s dependence on its much larger neighbor.
Problems are more than bubbling to the surface. The Bank of Mongolia has seen the tugrik trade near the currency’s historical lows. Foreign direct investment fell 54 percent last year, export revenues dropped by $800 million, and foreign exchange reserves dropped from $4.1 billion to $2.4 billion. Weaker copper and coal prices, fluctuating foreign investment and a simmering commercial bank dispute have put the dampers on what was once the world’s hottest Frontier Market. There has been a revision of a damaging gold tax that some say has caused the steep slide in the tugrik, as miners are selling gold to the central bank in exchange local currency for dollars. Even the Asian Development Bank has cut expectations for Mongolian rowth to a still healthy looking 9.5 per cent this year, from 14 percent previously, according to London’s Financial Times.
In 2013, parliament passed a law to treat foreign and domestic investors the same. But foreigners and family offices report that the country has a history of sudden regulatory changes and corruption probes that have sometimes ensnared foreign projects or citizens. Everyone is now watching the spring parliamentary session, when the government’s approach to Ouy Tolgoi will be debated.
Recently, there has been much coverage of a dispute between the Mongolian government and its biggest foreign investor over the expansion of one of the world’s largest copper mines. A financing deadline to expand the vast Oyu Tolgoi copper project passed recently without an agreement between developer Rio Tinto and the government in Ulan Bator, which is a 34 percent equity holder in Oyu Tolgoi. The government, which can get a guaranteed return, wants to ensure that cost overruns do not eat into its share of revenue. The expansion is crucial to Rio’s plans, but the company missed a dealine to secure a $4.2 billion in financing from banks due to a dispute with the government over how to divide the revenues. The mine could wind up being more than one-third of the country’s gross domestic product.
The Rio dispute is just the latest example of the issues facing Mongolia The country is desperate for its all important mining revenue as the country made massive spending commitments in the first flush of optimism of a mining-based windfall over a decade ago. Family office investors from London to New York to Moscow are all watching the Oyu Tolgoi project carefully but are cautiously optimistic that the government, and its smart consultants, will get it right. Thus, our outlook for family offices looking to invest in Mongolia is positive as the potential for returns and high multiple "exits" are favorable despite the risks involved. It is also a way to play China for family offices interested in the metals and mining sectors.
The world's 15th largest economy and seventh-largest exporting nation, South Korea is home to a large number of prominent family offices and family-controlled conglomerates known as Chaebols. South Korean President Park Geun Hye is continuing the transformation of the former agrarian country into the current emerging icon of manufacturing and technology, producing memory chips, liquid crystal displays, and tablet computers. Today, 50 million people have survived a 35 year Japanese occupation and the Korean War to create a thriving capitalist democracy.
International family offices and funds are investing in South Korea in record number, buying over $50 billion more Korean stocks and bonds than they sold in 2012. Samsung sells more smartphones than Apple and Hyundai Motor Group is attempting to go head to head with BMW. Seoul, with 10.4 million residents, sport designer clothes, travel in subways equipped with free Wi-Fi, and play Anipang on their mobile phones. Rap artist Psy's Gangnam style video has made the Korean lifestyle "cool" and the envy of the world. Working in this new environment, Privos helps leading Korean family offices invest and expand their businesses world wide.
South Korea affords our family office partners and investors unique opportunities. As President Park Guen Hye focuses on expanding the economy, creating new jobs, and moving beyond the industrial chaebols, her focus is creating 2.5 million new jobs during the next five years. Growth to reduce employment will come from competing with China, not concerns about North Korea, unification, or the Gaeseong industrial zone. The new Korea will grow by creating an entrepreneurial, venture capital driven culture that can go head to head with Silicon Valley, where joining a Seoul creative startup is as prestigious as working up the ladder of success at an industrial chaebol.
Current problems in South Korea include an economy expanding at only two percent, the slowest pace since 2009, and an aging population. Household debt in South Korea, ranked eighth in the world measured against disposal income, together with a 8.4 unemployment rate, is an issue. The largest 30 companies exported 84 percent of all goods manufactured, creating the current conglomerate-run economy that exports jobs instead of helping reduce employment at home. The current slowdown in China, the leading purchaser of South Korean exports, together with rumblings from Pyongyang, will always give international investors pause for concern; however, our global family offices, their funds, and portfolio companies are reporting a world-class South Korea open for business.
South Korea is a traveling road show marketing itself to global investors. Recently, President Park visited the U.S. to drum up investments and interest in doing business in South Korea, accompanied by the chairmen of Samsung, the most successful chaebol, and Hyundai. Film financing, media, art, and venture capital were discussed in closed-door investor meetings, along with dialogue regarding how South Korea can create another Apple or Google. The new massive 17.3 trillion won government supplemental budget to spur growth and the unveiling of the new Ministry of Science, ICT and Future Planning to fostering innovation are examples of the country’s attempt to move away from reliance on the chaebols. Companies three years old or younger are receiving expanded tax breaks for angel investors and there is now 200 billion won of government seed money available for local entrepreneurs. These progressive changes make South Korea a more enticing place for inbound and outbound family office investments and joint venture opportunities for our partners. Privos is active in South Korea and our people are interested in meeting new family offices and investment professionals to help them work with our partners.
At Privos, our people have deep experience in Japan and have lived and worked in Tokyo. We speak the language and understand the culture. As the world's third largest economy by nominal GDP and the second largest developed economy with over 127 million people, Japan is home to more than 50 percent of all high net-worth individuals in the Asia-Pacific. As of 2010, Japan possessed 13.7% of the world's private financial assets (the 2nd largest in the world) at an estimated $14.6 trillion. As of 2011, 68 of the Fortune 500 companies are based in Japan. In recent years, Japan has been the top export market for almost 15 trading nations worldwide. There are 176 airports and the largest domestic airport, Tokyo International, is Asia's second busiest airport, edging out Narita.
There has been an increased focus on Japan by multi-family offices and private equity firms who view Japan as a growth opportunity over the next three to five years. For instance, TPG is increasing their resources in Japan and leading Arab family offices are increasing business opportunities in Japan.
That said, there is a cultural preference for local expertise in Japan, a nation with the world’s highest number of millionaires after the U.S. The private banking business is wide open, and there is no real established leader in managing family office assets in Tokyo outside of the big banks.
In Japan, the concept of the family office is not as developed as in Hong Kong or Singapore; for instance, Japanese law permits the establishment of a trust, but it is not fully developed as a legal entity, nor does the Japanese tax code support fully the legal concept. That said, Japanese inheritance tax (up to 70%) drives family offices and high net worth investors to look at off shore options more carefully in recent years.
Privos is growing our Japanese business and is respectful of the preference of Tokyo based family offices to work with local talent. Thus, we have cultivated close working relationship with leading Japanese finance executives who have been working the Japanese markets for decades. We are also working with Japanese family office partners on outbound investments into the U.S., Europe and Latin America.
Joko Widodo was recently elected president of Indonesia, the world's third-largest democracy with a population of about 250 million people. Widodo, the 53 year old former furniture exporter and son of a carpenter, is the first president not to have come from the military or political elite.
Indonesia, with its 34 provinces, is the fourth most populous country in the world with 283 million people. It is the largest economy in Southeast Asia and the 27th biggest exporting country in the world. It has the second largest number of Facebook users globally. Indonesia is a founding member of ASEAN and a member of the G-20 major economies. The economy is the 16th largest by nominal GDP and 15th largest by purchasing power parity, beating out its former colonial master, the Neatherlands. The economy performed strongly during the Global Financial Crisis, it regained its investment grade rating in 2011. In 2012, its GDP grew by over 6%. IFC has blessed Indonesia, setting up a dedicated country fund instead of a “regional fund” that has overall exposure to the country.
Jarkarta, the thriving, gritty, Southeast Asian megacity, is home to a large number of family offices that are creating portfolio companies and wealth in record number. The country has enjoyed 13 years of uninterrupted growth, expanding an average of 6.3 percent annually since 2010. The stock market is the second-best performer out of nearly 100 global watched markets. Last year, its credit rating became investment grade. At its current growth trajectory, Indonesia will by 2030 beat out Germany and the U.K. to rank seventh largest global economy, according to McKinsey & Co predictions. It ranks No. 1 for exports in nickel, power-station coal and palm oil; No. 3 in natural gas exports, and can boast the world’s largest gold mine and copper reserve. We see little risk of a “Black Swan” event in Indonesia, unlike the events unfolding in Egypt. The upcoming mid-2014 Indonesian presidential election to elect a new leader for a five-year term should increase stability and interest in the country for our global LP family office partners, their funds and portfolio companies.
Yet, despite the impressive statistics, openness of the economy, low trade barriers, and beautiful beach resorts, many in the private international investment community take a negative view of Indonesia, arguing that too much “dumb money” is chasing too few Indonesian opportunities. Cronyism, political risk, and bloated government are other criticisms. Families that ignore ESG and sustainability principles is often the justification for failed exits in Indonesia. One private equity manager has been burned so many times by Indonesian leading families and tells the tales at international investor conferences to anyone who will listen Yet, OPIC and other DFIs have paved the way for the private investment community, which in turn has created incredible opportunities for Indonesia family offices, their funds and portfolio companies. We are now seeing other international family offices looking to enter the country.
Today, capital flows are increasing in Indonesia and family offices are prospering, but at the same time Indonesia is having trouble attracting international family offices and investors. The most common complaint is falling commodities prices and uncertainly surrounding next year’s presidential election. However, in our experience, family offices, their funds and portfolio companies cite corruption, lack of corporate governance, and a dismal ESG track record as key drivers thwarting their expansion into the country. Nationalism is also a current complaint, with the government forcing foreign companies to keep more jobs and commodities in their host country.
Further, Indonesia ranked 118th out of 176 countries in Transparency International’s 2012 Corruption Perceptions Index, a fall of 18 places from the year before. The fallout over the control of Bumi, as reported in the financial press, has not helped investor uncertainly surrounding Indonesia, together with international private equity GP and LP investors less than positive experiences investing in the country. DFIs report positive returns and successful exits, but we are seeing a narrowing of the private sector, as reported to us by our family office partners looking to increase business and investment in Indonesia. That said, the aviation business is booming in Indonesia. Recently, AirAsia relocated its corporate headquarters to Jakarta and becoming one of Airbus and Boeing’s largest customers, placing total orders of $64.4 billion together with its domestic carrier rival Lion. Thus, with any Frontier Market, growth comes with pain, but Indonesia is a market that is currently attracting the attention of our family offices partners, and Indonesian family offices are working with our people to source global investment and joint venture opportunities.
The ASEAN Nations
The 10 member countries of the Association of Southeast Asian Nations, or ASEAN, include Singapore, Thailand, Vietnam, the Philippines, Brunei, Cambodia, Indonesia, Laos, Malaysia, and Myanmar. Founded in 1967, the ASEAN countries are on course to become a single trading block on December 15, 2015, not unsimilar to the European Union. All ASEAN countries are a part of the WTO, meaning that they can engage in trade with the rest of the world as a single powerful unit. Together, the ASEAN countries include 600 million people with an annual GDP exceeding $2 trillon.
For the first time since the financial crisis, IPOs by ASEAN companies are outpacing those in North Asia. Investment in ASEAN companies continues to be the largest destination of cumulative U.S. investment in the region, far outpacing China, Japan and India.
We are seeing leading ASEAN family offices owning global businesses in banking and financial services, petroleum exploration and production, power, gas, oil and petrochemical refining, consumer goods, media and real estate. Family offices are running and investing in regional private equity, hedge funds and fund of funds.
Vietnam & the Philippines
Vietnam is a family office success story. Our family office partners report that Vietnam is experiencing the beginning of a strong private equity market. The country is moving rapidly from Frontier Market to Emerging Market. Debt is starting to be enjoyed like fine wine. Family offices in agriculture are competing on the world stage. It is a good place for LPs to invest. There are several world class private equity fund managers putting up impressive returns that their business school colleagues in London, New York and Hong Kong often cannot replicate. GPs are opening offices in Vietnam, hiring local finance professionals, and looking to family offices for deal flow and exit opportunities. The economy is stable, the Global Financial Crisis took less of a toll on Vietnam than say London or New York. High profile private equity funds have raised substantial money in Vietnam and are closing oversubscribed funds.
Vietnam is becoming a close ally of the United States and an important strategic ally in keeping in check the Chinese in the South China Sea. The US - Vietnam alliance will, in turn, increase business opportunities and foreign investments for family offices in both business communities. Recently, Gen. Martin E. Dempsey, the chairman of the U.S. Joint Chiefs of Staff, courted Vietnam and was the first US chairman in more than 40 years to visit the country. Vietnam has stood up to the Chinese in the South China Sea, and the Americans are showing their support. Thus, the U.S. plans to lift a longstanding embargo on lethal weapons sales by the United States, which will pave the way for more American corporates to enter the country, particularly those connected to the U.S. Department of Defense. Vietnam recently purchased six Kilo-classsubmaries from Russia and six new Coast Guard vessels form Japan. The Vietnamese Communist Party has even called for a democratic, law-abiding state. As a result, our family office partners in Asia report new opportunities in Vietnam in maritime resources, environmental and thermal treatments to clean up the fallout of Agent Orange, oil and gas, military defense, shipping,
The Philippines, on the other hand, has been described as a "mini Indonesia" with respect to corruption, lack of transparency disrespect for ESG best practices. There are ample reports in the financial media of international family offices, their funds, and portfolio companies, as well as brand private equity firms, losing 100 cents on the dollar venturing into the Philippines. Our family offices report that the Philippines is a “local game,” where local players are kept afloat by a protectionist government.
That said, family offices report that you can be successful in the Philippines if you take a long term view and have the right partner. For those family offices bullish on the Philippines, they should point to the fact that OPIC is positive on the Philippines, the economy is growing, and the macro trends are positive. The IFC, KfW (Reconstruction Credit Institute, German Bank) and the German Federal Ministry for Economic Cooperation and Development have exposure to the Philippines, particularly in the regional need for microfinance institutions (MFIs). Put another way, the Philippines has a long way to go to entice LP family office investors in the region, but it remains on our list as a promising long term play for our partners.
Deloitte has reported that India could become the second-largest economy in the world by 2050, with key growth drivers in infrastructure, domestic consumption, global outsourcing. The number of high-net-worths in India, those with at least $1 million in investable assets, grew by 22 percent in 2012 to reach 153,000, according to the Asia Pacific Wealth Report by Capgemini and RBC Wealth Management, beating out both Hong Kong or Singapore.
Our Indian family offices report that one example of the progressive "New India" can be seen the appointment of the new governor of the Reserve Bank of Inida, Raghuram Rajan. The former University of Chicago professor and ex-International Monetary Fund chief economist, Rajan has taken the lead in transforming India's economy and dealing head on with the challenges facing the country. Recent election polling has also resulted in the flow of billions of "new money" into India.
On May 16, Narenda Modi and his Bharatiya Janta Party (BJP) stormed to victory in India's general election. With a landslide victory, which scooped up 282 seats for the BJP and thus an absolute majority in parliament, it marks the first time in Indian politics that any party has won a majority for itself. The new Modi era also marks the defeat for Congress, ending the Nehru-Gandhi dynasty that has been at the heart of India for so long.
Modi's huge victory also reveals the truth about India, which is the population is sick and tired of high inflation, slowing growth, weak leadership, corruption and more. Yet, despite the voter unease and hunger for change, India is emerging as the country to watch in the BRICS this year. The government recent growth-oriented politics and favorable environment for private equity, is transforming India as one of the leading family office growth countries in the world. The country's glowing stature, its opening economy, progressive reforms encourage global family offices, their funds and portfolio companies to turn to Privos for help in entering India.
Today, Hindu nationalist opposition leader Narendra Modi has ascended the top of India's politics. The former chief minister of the state of Gujarat more than a decade ago, Mr. Modi is well respected by the international investor community. His recent victory gives Mr. Modi with a strong mandate to push through structural economic reforms.
Thus, Mr. Modi is now India’s new prime minister at the head of a relatively stable coalition government. For Congress, the voting confirms a hard defeat under its figurehead leader Rahul Gandhi, the son of party leader Sonia Gandhi and great-grandson of India’s first prime minister, Jawaharlal Nehru.
Foreign investors and family offices are flocking to India in light of the pro-business results. This year alone, international investors pumped $3.7 billion into India’s equity market on the back of optimist over the likely decisive election results, sending stocks to record highs and leading to the sharp appreciation of the rupee.
To appreciate the current growth in India, you need to look no further than the massive $1 trillion India will spend on infrastructure investments alone in the next five years, half of which will come from private sector funds. Further, anyone who has experienced the the Tata Starbuck "difference" in the Horniman Circle store in South Mumbai, the city's high end shopping at Palladium, or Delhi's plush Emporio Mall, which houses high-end luxury brands such as Louis Vuitton, Versace, Cartier, Dior and Jimmy Choo, it is clear that India is on fire. India's luxury market is worth about $4.35B and should grow to $30B by 2015, transforming India into the Asian hub of luxury goods consumption. It is estimated that India has 167,000 millionaires and that the number is growing steadily.
The number of Indians with more than $1 million in net assets grew by 25 percent recently despite the recession. Additionally, 141,000 Indians belong to the so-called "super rich" category, earning more than 10m rupees (Dh797,286) a year. It has been reported that Indians recently spent as much as $2.9B on private jets, luxury homes, cars, yachts and art; the luxury boom has debunked the myth that India is a rapidly growing market only for fast-moving consumer goods because of its conspicuously consuming middle class; that middle class accounts for less than 30 per cent of India's 1.2 billion people. The growth in the rise of wealth in India can be traced to favorable demographics, a growing GDP, rising FDI investments, and forward looking policy reforms are driving growth in the country.
Leading Indian family offices are active at present across a wide range of sectors and industries in India, ranging from the IT sector, real estate, construction, infrastructure, telecom, media, entertainment, power, and energy. Within the past 24 months, family offices have been involved in increased commercial, residential, and large infrastructure projects such as airports, ports and roads, as well as activity in the automotive sector (the recent Hero Group – Bain Capital deal comes to mind). Today, Indian family offices are reporting opportunities in small retail format stores, hospitality, food, and beverage.
There is also a massive, impressive surge in India - U.S. Silicon Valley cross border technology investment opportunities in which our family offices are participating; for instance, the India Institute of Technology (IIT) and Stanford / Sand Hill Road VC Silicon Valley community in California has fueled the growth in smart phones and tables combined with mobile internet. It has been reported that in the States, ex-pat Indian entrepreneurs have started a whopping 33.2% of all immigrant-founded startups in America. The first generation of successful entrepreneurs—people like Sun Microsystems co-founder Vinod Khosla--served as visible, vocal, role models and mentors and provided seed funding to members of their ex-pats in the Silicon Valley, created vast wealth which is being exported back to India. These brilliant Indian scientists and IT professionals in the States have also led achievements in medical devices and innovation in healthcare delivery models that have caught investor attention in the States and Europe.
It is also important to appreciate that Mumbai has witnessed the explosion of new family offices. The technology and film capital of India, Mumbai has endless beaches, incredible architecture, and shady mangrove forests.
One hundred years ago, India’s first black and white silent move, Raja Harish Chandra, stunned audiences. The May 3, 1913 premier of the seminal work in Mumbai’s Coronation Cinema was one of the greatest moments in Indian film history. Today, India’s film industry is the envy of the world. Today, it produces almost one thousand movies per year, up to 300 of them in Mumbai alone, making Bollywood an incredible source of revenue for the largest city on the subcontinent.
Bollywood movies are filmed at the Taj Mahal Palace, Gate of India, Juhu Beach, Chowpatty Beach, and Powai Lake. John Collins, Angelina Jolie, and Brad Pitt have all stayed recently at the infamous Taj Mahal palace Hotel. Slumdog Millionaire catapulted Dev Patel and India into world-wide box off fame. Shah Rukh Khan, India's top A listed actor, is seen working frequently in Film City, an $800M megaplex of studio and movie theaters not unsimilar to Universal Studios in Los Angeles. Other studios include Mehboob in Bandra West and Chandivali in Andheri East, the latter having co-produced Slumdog. Indian folk music also has a home in Bollywood and can be heard in many areas of the city on the banks of the Arabian Sea, including Bandra West, home to creatives and Bollywood stars who meet at BRU World Cafe and the Dome at the InterContinental. Bollywood's fame has been transported to the States; for example, the University of California has an endowed chair in Indian music made possible by a prominent Silicon Valley U.S. Indian family office.
Privos is proud to work with leading Indian family offices around the world who have been successful both doing business in India and conduct global commerce on an unprecedented scale. Recently, India has been the fastest-growing private equity market in Asia. Private equity firms closed over 500 deals last year, a 40% increase, fueling the growth and wealth of family offices in India. It is noteworthy that there are PE investments today in almost one third of India’s largest 500 companies according to The Economic Times (ET-500 list, 2011), including industry heavy hitters such as Bharti Airtel, Hero Moto Corp, Suzlon Energy, Kotak Mahindra Bank, DLF limited, Max India, Sun Pharmaceuticals, etc. All these companies have been instrumental in shaping the growth of the Indian economy and are portfolio companies of leading Indian family offices.
Regarding private equity in India, with respect to real assets, and particularly real estate, is going through profound changes as more international investors start making direct investments into India or setting up of India focussed investments platforms and funds. For example, the Indian government recently enacted the Real Estate (Regulation and Development) Act, 2016, enactment of the Insolvency and Bankruptcy Code, 2016, amendments to the REIT Regulations in order to facilitate promising exits, and changes to the existing SARFAESI framework to ensure better enforcement of lender rights in India, domestic or foreign lenders irrespective. Also, most investments in Indian real assets are structured with certain elements of debt to achieve tax optimization, with the debt limits for investing in listed / unlisted bonds or non-convertible debentures running out, other structures such as setting up of domestic debt funds are emerging.
Finally, any family office looking to allocate capital into India must become intelligent about real issues of tax clawbacks related to off shore and Mauritius structures that investors allocating to India need to understand by working with their legal counsel and tax advisors. While our People are mindful of the political risks, macroeconomic fluctuations, and retrospective policy changes in India, we are seeing increased requests from Indian family offices, high net worth individuals, and entrepreneurs to partner with them to take advantage of the incredible opportunities in India today.
In Africa, we are currently active with our family office partners participating in the incredible growth and capital flows that are helping transform the continent from a collective GDP of $1.6 trillion in 2010 to $2.6 trillion in 2015. In 2010, South Africa joined the world's leading emerging economies, now the so-called BRICS. Early stage family office "Africa 1.0" investments in infrastructure (ports, water, railroads, electricity), minerals, and natural resources (oil and gas, iron ore, coax) are now creating new family offices from Nigeria to Cameroon and paving the way for "Africa 2.0" family office co-investments in banking, technology, and telecom.
Our family offices appreciate that the Development Finance Institutions' (DFIs) Africa focused private equity funds have helped stimulate the local private sector through capital investments which in turn create new family offices who help lift the population out of poverty and create jobs. Major DFIs, such as the World Bank’s International Finance Corporation (IFC), the Overseas Private Investment Corporation (OPIC), the UK’s CDC Group, and Germany’s DEG, have taught African family offices financial "best practices." Today, Africa is a top investment destination for leading global family offices who turn to Privos for help expanding in the continent, particularly in the most attractive investment region of Sub-Saharan Africa (SSA).
Privos Capital and our family office partners could not be successful without the support and world-wide expertise of a wide range of professionals on every continent who collaborate with us to provide services and expertise to our family office partners that Privos, by choice, does not provide, including law firms, investment banks, accounting firms, management consulting firms, risk management firms, portfolio managers, wealth and investment advisors, CPAs, production companies, talent agencies, public relations, third party marketers, placement agents, chartered accounts, restructuring, technology, concierge services, private jet or aviation services, global security, investigation, investment management, and other service professionals.
What We Don't Do By Choice
As an international multi-family office LP group, it is important to articulate clearly the work that we do not do at our firm, by choice, to save you time reaching out to us for the wrong reasons. We are happy to report that we do not mange money for our family office partners, nor do we sell or market investment products or funds. We aren't in the business of helping you avoid FACTA, FCPA or OFAC, or advise you on how to set up some dodgy off shore tax shelter to avoid your obligations; it's our experience that birth, death and taxes are all sure things in life for all of us. We pay a ton of tax and hate it like the rest of you but view it as the privilege of adulthood. Conversely, we are not asset managers, hedge fund managers, private equity GPs, bankers, or trust fund administrators, nor do we ever provide legal, investment banking, tax, trust, structuring, private equity placement agent, off shore advice, hedge fund third party marketing services to our family office partners. Anyway, that's the mandatory disclaimer stuff that's negative in tone but hopefully positive in that it cuts down on inquiries to our firm that are perhaps misguided.
The good news is that for important services like legal, investment banking, placement services, tax, accounting - these very important services are critical in the family office world, and when we need these services we simply form collaborations and "best friend" relationships with professionals in these mission critical disciplines. Thus, we always welcome and love to develop new relationships with any world-class global professional or firm who is interested in exploring a relationship with us to better serve our family offices and help their businesses participate in international business. So, don't be shy, contact us if you would like to explore starting a new friendship or relationship with us. We are easy to reach, don't bite, and promise to always get back to you the same day you contact us. We may not be able to help you slay the dragons or cure what ails you, but we will always do our best to steer you in the right direction without judgement and hopefully with some humor and good cheer. So call us.
Privos Capital works with our family office partners to manage risk in their global portfolio companies, funds and world-wide businesses. Clearly, in our 24/7 world, managing risk is difficult for the most sophisticated family office. If JP Morgan’s Jamie Dimon, one of the finest CEOs in the world, failed to stop the rouge London Whale traders who, as reported in the financial press, allegedly amassed growing positions in complex derivatives, painted the tape, ignored risk limits, misled management, and speculated their way into trouble five years after the collapse of Lehman and three years after the passage of Dodd-Frank Act, how does a family office with much more limited means than a global bank manage risk across their holdings, funds, and portfolio companies? That is the question our family office partners struggle with on a daily basis and turn to Privos for sound, practical advice and guidance on a wide range of risk management issues.
For an international family office, risk management is about controlling operations, supervising your employees, maintaining adequate risk controls, being transparent to the market, and employing the best team of professional to guide you through times of market calm and turmoil. Family offices must have sophisticated, professional advisers and lawyers counseling them on international counter-party risk, regulatory compliance, Anti-Money Laundering (AML), Office of Foreign Assets Control (OFAC) compliance, as well as Bank Secrecy Act (BSA), the U.S. Patriot Act, OFAC regulations, Foreign Account Tax Compliance Act (FATCA) and the Foreign Corrupt Practices Act (FCPA) in order that family offices and their partners comply with the letter and spirit of all international laws. We believe that the core of risk management is about values, telling the truth, and doing the right thing, which, in the end, speaks to the issue of putting the “right people” on the boat to guide your ship more than what risk model is in your toolbox.
As an American firm, Privos has a zero tolerance policy and will refuse to work with any family office, their advisors, agents and partners around the world who fail to follow our rigid compliance practices and fail to follow the letter and spirit of U.S. law that governs our conduct. We embrace and follow the principles and practices articled in the Yates Memo (formally known as the DOJ's Individual Accountability Policy), which can be found here: https://www.justice.gov/dag/file/769036/download. We believe that you can win in international business by following the "rules the road" and anyone interested in not following US law should not contact our firm or work with us.
Another issue in risk management is the decision a family office makes with respect to what will be the true profit center of your business. Is your business driven by hedging strategies or by speculation? Do you have transparency and proper quantitative assessment of judgment? Have you undertaken a review of risk management across all divisions and portfolio companies? Have you created an oversight and control group to review risk management decisions? Do you have strong internal controls? Do you have the right team of professionals watching your back, motivated by results? Finally, in the area of executive compensation within the context of a family office, the framework for linking pay to performance provides insight into risk management and whether or not there is a proper alignment of values and transparency at the fund or portfolio company level. Put another way, does a family office reward long-term risk management at the fund and portfolio level? That should be a key driver of any compensation plan. These are the risk management and compensation drivers that our people are working on with our family office partners.
SDG, ESG, SRI and Impact Investing
Our planet faces massive economic, social and environmental challenges. To combat these, the Sustainable Development Goals (SDGs) define global priorities and aspirations for 2030. They represent an unprecedented opportunity to eliminate extreme poverty and put the world on a sustainable path. Governments worldwide have already agreed to these goals. Now it is time for family offices to take action. See, sdgcompass.org
As a multi-family office LP, our firm's core DNA is investing and allocating to ESG, SRI and impact investments that address the most pressing social and environmental challenges as defined by the UN Sustainable Development Goals (SDGs). The SDGs, officially known as Transforming our world: the 2030 Agenda for Sustainable Development, is a set of 17 "Global Goals" with 169 targets contained in paragraph 54 United Nations Resolution A/RES/70/1 of 25 September 2015. The SDGs are built on the Principles popularly known as The Future We Want. The SDGs include targets covering a broad range of sustainable development issues, including ending poverty and hunger, improving health and education, making cities more sustainable, combating climate change, and protecting oceans and forests. Privos will not invest in a transaction or make an allocation that does not involve one of the 17 SDGs.
Privos Capital endorses the United Nations-based Principles for Responsible Investment Initiative (UNPRI) and works with family office LP partners to implement UNPRI’s infamous Six Principles for Responsible investment, which were devised by the investment community. We work with our partners to design bespoke, long term programs to implement UNPRI principles across our partners core holdings. We are proud members of US SIF act active at all major SDG, ESG and Sustainability investor conferences.
The 17 SDGs are as follows:
- No Poverty - End poverty in all its forms everywhere
- Extreme poverty has been cut by more than half since 1990- however, more than 1 in 5 people live on less than $1.25 a day
- Poverty is more than lack of income or resources- it includes lack of basic services, such as education, hunger, social discrimination and exclusion, and lack of participation in decision making.
- Gender inequality plays a large role in the perpetuation of poverty and its risks; They then face potentially life-threatening risks from early pregnancy, and often lost hopes for an education and a better income.
- Age groups are affected differently when struck with poverty; its most devastating effects are on children, to whom it poses a great threat. It affects their education, health, nutrition, and security. It also negatively affects the emotional and spiritual development of children through the environment it creates.
- Zero Hunger - End hunger, achieve food security, and improve nutrition and promote sustainable agriculture.
- Globally, 1 in 9 people are undernourished, the vast majority of these people live in developing countries
- Agriculture is the single largest employer in the world, providing livelihoods for 40 per cent of today’s global population. It is the largest source of income and jobs for poor rural households. Women comprise on average 43 per cent of the agricultural labor force in developing countries, and over 50 per cent in parts of Asia and Africa, yet they only own 20% of the land.
- Poor nutrition causes nearly half (45 per cent) of deaths in children under five – 3.1 million children each year.
- Good Health and Well-being - Ensure healthy lives and promote well-being for all at all ages.
- Significant strides have been made in increasing life expectancy and reducing some of the common killers associated with child and maternal mortality, and major progress has been made on increasing access to clean water and sanitation, reducing malaria, tuberculosis, polio and the spread of HIV/AIDS.
- However, only half of women in developing countries have received the health care they need, and the need for family planning is increasing exponentially, while the need met is growing slowly - more than 225 million women have an unmet need for contraception.
- An important target is to substantially reduce the number of deaths and illnesses from pollution-related diseases.
- Quality Education - Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.
- Major progress has been made for education access, specifically at the primary school level, for both boys and girls. However, access does not always mean quality of education, or completion of primary school. Currently, 103 million youth worldwide still lack basic literacy skills, and more than 60 per cent of them are women
- Target 1 "By 2030, ensure that all girls and boys complete free, equitable and quality primary and secondary education leading to relevant and Goal-4 effective learning outcomes"- shows the commitment to nondiscriminatory education outcomes
- Gender Equality - Achieve gender equality and empower all women and girls.
- Providing women and girls with equal access to education, health care, decent work, and representation in political and economic decision-making processes will fuel sustainable economies and benefit societies and humanity at large
- While a record 143 countries guaranteed equality between men and women in their Constitutions by 2014, another 52 had not taken this step. In many nations, gender discrimination is still woven through legal and social norms
- Though goal 5 is the gender equality stand-alone goal- the SDG's can only be successful if women are completely integrated into each and every goal
- Clean Water and Sanitation - Ensure availability and sustainable management of water and sanitation for all.
- Affordable and Clean Energy - Ensure access to affordable, reliable, sustainable and modern energy for all.
- Decent Work and Economic Growth - Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.
- Industry, Innovation and Infrastructure - Build resilient infrastructure, promote inclusive and sustainable industrialization, resilient infrastructure, promote inclusive and foster innovation.
- Reduced Inequalities - Reduce income inequality within and among countries.
- Sustainable Cities and Communities - Make cities and human settlements inclusive, safe, resilient and sustainable.
- Responsible Consumption and Production - Ensure sustainable consumption and production patterns.
- Climate Action - Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy.
- Life Below Water - Conserve and sustainably use the oceans, seas and marine resources for sustainable development.
- Life on Land - Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertificaiton, and halt and reverse land degradation and halt biodiversity loss.
- Peace, Justice and Strong Institutions - Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.
- Partnerships for the Goals - Strengthen the means of implementation and revitalize the global partnership for sustainable development.
Privos in the News (Recent Media Coverage)