Where The Ultra-Wealthy Put Their Money

Ultra-high-net-worth individuals (UHNWIs) are defined as those with a net worth of at least $30 million. This wealth affords them access to alternative investments that are often unavailable to the average investor, such as expensive wine, fine art, and equity in private companies. These alternative investments can make up a large proportion of their portfolios, with UHNWIs investing in primary and secondary homes, private equity, venture capital, commercial property funds, and luxury items like art, cars, and wine.

High-net-worth individuals (HNWIs) are defined as those with liquid assets of at least $1 million. HNWIs tend to have a greater appetite for risk and longer investment time horizons. They may also qualify as accredited investors, allowing them to invest in privately traded, unregulated investments. HNWIs can invest in commercial real estate, private equity, private infrastructure, private credit, municipal bonds, and corporate investment-grade bonds.

Private equity

There are several reasons why investors are attracted to private equity. Firstly, it offers the potential for higher returns compared to public market investments. Secondly, private equity valuations are not influenced by the larger market, providing more flexibility. Additionally, private equity can be used as a diversification strategy and a hedge against inflation.

When investing in a private equity fund, individuals become limited partners. This means they provide the capital but are not responsible for managing the company or handling its sale. The private equity firm takes a percentage of the profits (typically around 20%), and the rest is distributed among the limited partners based on their contribution.

There are also non-direct ways to invest in private equity, such as funds of funds, exchange-traded funds (ETFs), and special purpose acquisition companies (SPACs). These options may have lower minimum investment requirements and provide greater diversification but may also involve additional layers of fees and management expenses.

Overall, private equity can be a lucrative investment opportunity for high-net-worth individuals, offering the potential for higher returns and diversification. However, it is important to note that private equity investing carries a higher level of risk and requires a long-term commitment, typically of at least ten years.

Commercial real estate

CRE can be a good investment option for ultra-high-net-worth individuals (UHNWI) as it can generate lucrative returns and provide a hedge against the volatility of the stock market. Here are some paragraphs detailing the investment prospects of CRE for UHNWI:

Pros of Commercial Real Estate for UHNWIs

• Attractive Leasing Rates: CRE often provides impressive returns and considerable monthly cash flows due to high leasing rates.
• Longer Lease Contracts: Commercial real estate leases are typically longer than residential leases, ranging from one to ten years, with office and retail spaces averaging five to ten years. This provides cash flow stability for investors.
• Capital Appreciation: In addition to rental income, commercial real estate offers the potential for capital appreciation as the property value increases over time, assuming it is well-maintained and updated.
• Diversification: Like all forms of real estate, commercial space is a distinct asset class that can provide diversification benefits to an investment portfolio.
• Tax Benefits: Commercial property owners can take advantage of depreciation, which allows them to claim annual tax deductions over a longer period (39 years) compared to residential properties (27.5 years). Additionally, the 1031 exchange allows investors to defer capital gains tax when selling a commercial property and reinvesting the proceeds in another property.

Types of Commercial Real Estate

There are four main categories of commercial real estate:

• Offices: This includes high-rises, mid-rise buildings, medical offices, and single-tenant office buildings. Office spaces may be further classified into Class A, B, or C based on age, location, infrastructure, and aesthetics.
• Industrial: Industrial real estate refers to properties used for manufacturing, shipping, or logistics, such as warehouses, factories, and assembly sites. Leases in this sector tend to be long-term and steady.
• Multifamily Rentals: Apartment buildings, townhouses, and multi-unit properties fall under this category. It includes residential properties with five or more units, such as duplexes, triplexes, and high-rises.
• Retail: Retail commercial real estate includes stand-alone stores, strip malls, shopping centers, supermarkets, restaurants, and entertainment centers.

Cons of Commercial Real Estate Investment

Despite the potential benefits, there are also some drawbacks and risks associated with investing in commercial real estate:

• High Costs and Illiquidity: Commercial real estate investments typically require larger amounts of capital compared to residential properties and are considered illiquid assets, meaning your money may be tied up for a significant period.
• Complex Regulations: The rules, taxes, and maintenance responsibilities for commercial properties can be complex and vary across different states, counties, industries, and zoning designations.
• Tenant Turnover: Managing tenant turnover can be challenging, especially during economic downturns when businesses may vacate properties with little notice. Adapting the space for new tenants can incur renovation costs.
• Economic Vulnerability: Commercial real estate is more vulnerable to economic shifts. For example, the COVID-19 pandemic and the rise of remote work significantly impacted the demand for office spaces, leading to high vacancy rates.

Tips for UHNWIs Investing in Commercial Real Estate

If UHNWIs are considering investing in commercial real estate, here are some tips to keep in mind:

• Diversification: Invest in multiple properties or a single property with multiple tenants to reduce the risk associated with relying on a single tenant.
• Due Diligence: Conduct thorough research and analysis before investing. Consider the location, zoning laws, market trends, initial capital requirements, ongoing expenses, and potential returns.
• Network and Education: Build a network of real estate professionals and investors to stay informed about local opportunities and connect with experts who can assist with upgrades and maintenance.
• Consider Investment Funds: For a more passive investment approach, consider investing in commercial real estate investment trusts (REITs) or using crowdfunding platforms that provide access to commercial real estate opportunities.

Luxury items

Designer Handbags

Designer handbags, such as those from Hermès, Chanel, and Louis Vuitton, are highly sought-after due to their brand prestige and limited supply. For example, the Hermès Himalayan Birkin bag, adorned with white gold and diamond trim, sold for $372,600 in 2016. The exclusivity of these bags, with only 12,000 Birkin Bags made per year, has resulted in an average annual increase in value of 14.2%, outperforming the S&P 500 average return.

Luxury Watches

Luxury watches are another investment option, with brands like Rolex, Audemars Piguet, Patek Phillipe, and Hublot often yielding returns of nearly 10% or more per year. At auctions, these timepieces can fetch prices upwards of millions of dollars.

Classic Cars

Classic cars have demonstrated impressive returns, with a 10-year growth of 404%. This asset class is relatively unaffected by market downturns, and refurbishment efforts can significantly boost a car's value. However, investing in classic cars requires proper storage and maintenance, which can be costly.

Vintage Wines

Vintage wines have been a collectible investment since the 19th century, with the potential to increase in value by 30% or more over five years. Wines with unique histories and those from well-known wineries tend to command higher prices at auctions, ranging from $10,000 to $100,000.

While luxury items offer the allure of owning prestigious and exclusive goods, it is important to approach these investments with caution. The value of luxury items can be volatile, influenced by cultural trends, celebrity preferences, and brand image. Additionally, investing in luxury items requires a deep understanding of their history and the market.

Overall, luxury items can be a rewarding investment for UHNWI, but they should be considered as part of a well-diversified portfolio and approached with a clear investment strategy.

Private infrastructure

There are two main approaches to private infrastructure investing: direct and indirect. Direct investments involve building and managing diversified portfolios of infrastructure assets, typically through pooled funds and customised mandates. Indirect investments are made via funds and co-investments in infrastructure assets.

When considering private infrastructure investing, it is important to evaluate the risk/reward profile, including the distinction between brownfield (existing) and greenfield (new) assets. Brownfield assets have longer operating histories and more predictable cash flows, while greenfield assets may introduce operational complexity.

Overall, private infrastructure provides a compelling investment opportunity, especially in the context of the growing demand for infrastructure development and the transition to net-zero emissions.

Private credit

Diversification and Risk Management:

UHNWIs often seek to diversify their portfolios beyond traditional investments such as stocks, bonds, and public markets. Private credit offers an opportunity to invest in private companies, private equity, and venture capital funds, providing access to potentially higher returns and lower volatility. By including private credit in their portfolios, UHNWIs can reduce their exposure to public market risks and enhance their risk-adjusted returns.

Tailored Investment Opportunities:

UHNWIs typically have access to tailored investment opportunities that are not available to the general public. Private credit allows these individuals to invest directly in private companies or participate in exclusive investment offerings. This provides them with greater control over their investments and the potential for higher returns. UHNWIs often work with private wealth managers and investment advisors to identify suitable private credit opportunities that align with their risk tolerance and financial goals.

Long-Term Wealth Preservation:

Preserving wealth over the long term is a key consideration for UHNWIs. Private credit can offer stable and consistent returns, often with lower volatility compared to public markets. By investing in private companies or funds with strong growth potential, UHNWIs can protect their purchasing power and maintain their standard of living for themselves and future generations.

Access to Exclusive Deals and Co-Investments:

UHNWIs often have access to exclusive deals and co-investment opportunities through their relationships with private banks, family offices, and investment advisors. Private credit deals may include investments in startups, private equity funds, or direct investments in private companies. These opportunities are typically only available to a limited number of investors and can provide UHNWIs with the potential for significant returns.

Impact Investing and Philanthropy:

Many UHNWIs are interested in impact investing and aligning their investments with their personal values. Private credit can provide opportunities to invest in companies or funds that focus on environmental, social, and governance (ESG) factors. Additionally, UHNWIs may use private credit to support philanthropic initiatives and contribute to positive social impact while potentially generating financial returns.

In conclusion, private credit plays a significant role in the investment strategies of UHNWIs. By incorporating private credit into their portfolios, UHNWIs can access exclusive investment opportunities, diversify their assets, manage risk, and preserve their wealth for the long term. Private credit also allows UHNWIs to pursue impact investing and align their investments with their personal values and philanthropic goals.

Frequently asked questions