The ultra-rich are investing in private equity like never before, and they are reducing their exposure to real estate and public stocks. Further, in a quest for yield, they are bucking the traditional model of investing, which recommends a portfolio of 60% equity and 40% bonds and cash. Instead, they now have 80% exposure to equities as a result of this low interest rate environment.
These are the findings of Tiger 21, an elite organization of 420 of the top entrepreneurs who have built businesses and, for the most part, cashed out. Michael Sonnenfeldt, Chairman of Tiger 21, describes the organization, saying, “These are some of the most successful entrepreneurs who've sold multi-hundred million dollar and billion dollar businesses. And when they do, they come together in communities that we form--groups around the country--to talk with fellow peers about how to invest…About half of our work centers around investing in understanding risk.”
Shifting investment allocations
The shift into private equity has been gradual, but for the first time in a decade it trumps public equity by a small amount: 23% versus 22%. Most of Tiger 21’s members made their money in private equity. Accordingly, Sonnenfeldt says that it’s only natural that they would invest in what’s familiar. Nevertheless, the shift into private equity from 18% to 23% is remarkable.
The member survey also reveals that real estate holdings are trending down from 30% in 2015 to just 25% today, which is against the backdrop of a relatively robust real estate market. But, according to Sonnenfeldt, there are still big opportunities in the gateway cities, such as San Francisco, Boston, Los Angeles, and Miami. For Tiger 21 members, real estate adds the value of income protection over the long-term.
The search for yield bucks historical investment allocations
Yields on safe investments have been near-zero for seven years, and this has distorted the typical investment portfolio. Whereas, in prior years, investors had 60% allocation to equities and 40% exposure to bonds and cash, nowadays that has changed dramatically.
Sonnenfeldt explains, “Our members hold about 12% in cash, but we also have the highest allocation to equity. It's not just public and private equity. [It includes] real estate, which is a form of equity, and a small hedge fund allocation. When you add all of that up, it's near 80% ... So, in a low interest rate environment, our members--like any investor—are being pushed to take risk … What they're talking about is not the return--but how do they assess the risk? That’s the real key.”