High Drama And Low Prices

Declining stock markets spell opportunities for family offices. But with some countries responding to the Covid-19 crisis better than others, geography matters.

Opening with a once-in-a-century pandemic and one of the worst-ever plunges of the US stock market, 2020 could still turn into a positive year for global family offices. Given that many of them are better placed than many large institutions, wealthy investors are busy as bees, holding meetings and assessing opportunities to take advantage of low asset prices during the Covid-19 crisis.

 “Lots of people are looking at deals, in both the private market and the public market,” says Munish Dhall, deputy head, Global Family Office at UBS Wealth Management. “After the easy money [made from] the stock market’s February dive, there is now preparatory work for longer-term deals. Currently, we are not yet seeing a lot of closings but the number of conversations we are having is at a historic high.” Dhall’s clients are, he explains, “highly sophisticated family office investors, generally with assets of several hundred million dollars or more.”

The US stock market’s sharp decline between February 21 and a March 23 low was starting to look like a bad dream in May. However, volatility remains high; and more sharp ups and downs are a real possibility. Liquidity concerns were moderated by strong and unconventional actions by the Federal Reserve and the European Central Bank. That leaves wealthy investors looking for good long-term bets: private equity, distressed debt and other opportunities emerging from the health crisis.

That’s not to say some of the world’s biggest noninstitutional investors weren’t taken by surprise. “Everyone expected at some point the bull market to come to an end, although I do not think anyone was expecting the dramatic event that has happened,” says Timothy O’Hara, president of the Global Family Office at Rockefeller Capital Management. “We started derisking client portfolios in January. One of our portfolio managers has family in Wuhan and understood the draconian actions that had been taken by the Chinese government, and really felt that there could be a pretty severe reaction. That was helpful timing, as we started to be more in favor of Treasuries and high-quality corporate bonds.”

Pick-and-choose is more relevant than ever.

“Several of our clients took advantage of the declines of the late-February to early-March period,” says Dhall. “Now that the market has recovered and easy money has been made, people have to become more thoughtful on where to deploy money. There are currently distortions in the stock market, with stocks positively and negatively affected by the current crisis.”

Some companies, such as Netflix and Amazon, have seen growth. Others may suffer prolonged damage. “One way to think of this is to split them into two baskets: the ‘at-home’ basket that includes stocks such as online retail and telecom, which have benefited from lockdowns; versus the ‘Covid-19’ basket, which comprises stocks that are the worst hit, such as leisure, entertainment, hotels, airlines and other penalized stocks.”

UBS’s at-home basket was up 12% for the year through April 27, while the Covid-19 basket was down 45%, Dhall says.

Where the Opportunities Arise

Private equity was already one of the best asset classes for wealthy individual investors before the novel coronavirus hit. According to a 2019 UBS report, private equity produced an average return of 16% for direct investments and 11% for fund-based investments. It will remain top choice also in the months to come, some decision-makers expect.

“For longer-term investors with sufficient liquidity, we generally think it is a good idea to have a sizable allocation to private assets, because they have a higher return expectation,” says O’Hara. “That is true even in this type of market, where we are still meaningfully below prior equity peaks but also see more compelling opportunities for privates coming up.”

Typically, Rockefeller Capital Management sets client expectations to trim public equities as capital calls are made, given that the private investment period often takes years. “In this environment, opportunistic funds will likely draw capital quickly,” says O’Hara, “so trimming public equity exposure now can make more sense than normal, given the potentially limited equity upside through year-end and the expected ongoing volatility.”

Global family offices take a different approach than the other investors, perhaps more so in an extraordinary time like the present, says David Fox, president of the Global Family and Private Investment Offices Group at Northern Trust, where he is responsible for $409.8 billion of assets under custody and $89.6 billion under management.

“These families tend to have a larger percentage of their assets in illiquid alternative investments,” he says, “and since many are business owners, they’re more comfortable making direct investments. Right now, many of our clients are looking at distressed situations to see where they can be helpful in contributing to a part of the capital structure. Unlike other investors, they do not mind staying invested during the current market environment. They are patient investors looking at unique opportunities outside the liquid tradeable market.”

In the US, some industries have suffered more than others, such as oil and fracking and some components of the tax-exempt municipal bond market. “Volatility can create opportunities for the market to overreact one way or the other,” says Fox. “Investors are looking at gaps in the stimulus package across industries where there is still uncertainty, such as oil. There is now a focus on what, if any, support will be given to these sectors and how it will affect returns over the next couple of years.”

Arguably, depressed valuations make the opportunity for new investments even more robust now, Fox suggests. “Private equity is an asset class that serves this purpose. I see private equity remaining as a core part of alternative portfolios.”

Investors must be mindful, however, that some countries are deploying fiscal and monetary policy well during the economic crisis; while others are lagging, says Cesar Perez Ruiz, head of Investments and chief investment officer at Pictet Wealth Management, which had 234 billion Swiss francs ($241.5 billion) under management at the end of 2019.

“During the financial crisis, the problem was in the banks; and the central banks have been quick in addressing the issues. Now the problem is in the real economy,” says Perez. “Countries where the flow of aid toward companies in difficulty will be facilitated, will do better than those that are still discussing who is entitled to have money.”

Perez’s clients tend to like Asia, since “it was the first in and the first out of the virus.” He says they particularly like Northern China, Taiwan, South Korea and Singapore. Global family offices generally are well positioned to leverage rapid change, he believes, “because they know the market, are willing to tolerate risks and are fast to act.”

Perez offers a recent example: “We faced an inverted credit curve with very interesting yields at the short end on very high-quality investment companies … That opportunity came down fast, when volatility was very high, and we went to selling put options that people could act on quite fast. The big difference with other investors is that family offices can have an investment discussion understanding risks and opportunities and are able to make a decision, with a recommendation, quickly enough.”

Still, it’s better to be investing in the context of a healthy real economy. “The damaging impact on the economy is exponential,” Perez notes. “We are in a world where how well governments will execute these [business relief] plans will matter.”