The exact impact on private asset values of this year’s declines on global stock and bond markets has yet to be determined, but already some family offices are concerned about the shifts in their portfolios. “There are capital calls that have not been met,” a UBS banker told the Alfi conference on Tuesday.
The first quarter of next year will be a particularly important one for family offices and other investors in private markets. It’s then - during the reporting season - that the adjusted valuations of their alternative investment portfolios will become clear. It is widely expected that these adjustments will reflect the significant declines in values that publicly traded stocks and bonds already showed this year.
Tuesday’s discussion in Luxembourg about private assets and family offices, hosted by the Association of the Luxembourg Fund Industry, made clear that the shift in financial markets is resulting in a conundrum for private investors, including family offices. The imbalance between private and public assets held in family portfolios is one particular concern.
Dislocation
“The dislocation is a concern. It creates a number of issues,” said Cyril Zastawnik, head of global family and institutional wealth at Swiss bank UBS, in response to a question by Investment Officer. “Some are now overcommitted (to private assets). As a result also there are capital calls that have not been met.”
Zastawnik did not elaborate on the capital call. Such a call is the legal right of an investment fund to demand the actual money that was committed to it by an investor who may have borrowed money in the meantime. The right can be invoked once the value of the underlying investments reaches certain pre-defined levels.
“The correction is there,” he said, adding that current market conditions also make it difficult for investors to exit their private investments. “There is no exit for shareholders,” he said.
José María Ortiz, managing director at ECE Real Estate partners, a large family-owned bank based in Hamburg and Luxembourg, was less pessimistic, referring to the relative solidity of real estate investments in his portfolio.
‘Investors are paralysed’
“The market has completely changed the way investors look at it. They are paralysed. They do not want to make a mistake. They want to increase their wealth, not to lose it,” said Ortiz. ”When you are in real estate, you are hedged. It helps keep cash flows, and turnover rates (of tenants) result in new cash flows.”
“In the current market you have an opportunity: shift to volume-add opportunistic,”Ortiz said. “You are trying to find the alpha. Get out of money market funds, go into real estate because that is where I am going to find my opportunity.”
UBS’ Zastawnik said the impact on private asset values of the “massive correction” markets have seen so far in 2022 remains to be determined.
”The impact is yet to be seen. In the first quarter of next year, that is where we are going to see a little bit the magnitude of the correction. There could be a significant correction,” he said, referring to an earlier revaluation of the value of Swedish fintech and payments firm Klarna, which was valued at some 45 billion euro a few years ago and only at 6 billion this summer.
New chapter in private markets
“With a number of exceptions, the correction will be of a lesser magnitude,” he said. “We are entering a new chapter in private markets. The times of a tech company with multiples of times 50… those days are gone. It is much more about finding companies with earnings as soon as possible, in a sustainable manner.”
UBS in the past recommended investors place five percent of their wealth in private products. UBS now recommends 10 percent, while family offices now in many cases hold up to 25 percent, he said.
“Half of all family offices are looking to increase their allocation to private markets,” Zastawnik said, referring to the UBS Global Family Office Report, published in June. “Two thirds see private markets as a key contributor to portfolio performance. The asset class now is under a little bit of a shift. We are entering a new chapter in private markets.”
“We are kind of moving to a buyer market. Family offices are able to negotiate better terms. There are fewer transactions,” he said. “It becomes a binary decision for the shareholder. Be diluted or die.”
Luxembourg needs to extend its scope
Addressing the financial ecosystem in Luxembourg, speakers at the Alfi conference expressed their wish for the grand duchy to expand the breadth of its services in the space of private assets. While the legal framework is suitable for professional investors with an international focus, Luxembourg still needs to further improve certain aspects of its ecosystem for alternatives.
“We need to make the asset class easier for families,” Zastawnik said. “Luxembourg has an essential role to play in the execution part in private markets, but only a part of it. It would benefit if Luxembourg could extend its scope, to deal making, structuring.
“Different types of support can be boutique,” said Ortiz. “The more players come to Luxembourg the better. The family office niche is becoming more and more professionals. It has an opportunity to take market share from others.”
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