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World's wealthiest families stockpiling cash as recession fears grow

[NEW YORK] Rick Stone, a former partner at Cadwalader, Wickersham & Taft, sees treacherous times ahead for family offices trying to deploy cash.

The head of Stone Family Office said he doubts the bond market will provide any real return over the next decade, that equity markets will suffer a substantial drop and then be flat, and that too much venture capital and private equity money will continue to chase too few opportunities.

"It's a very hard time for family offices to allocate money," said Mr Stone, 60, whose initial wealth came from class-action litigation fees.

Mr Stone has a good vantage point on the action, since he runs the bi-monthly meetings of the Palm Beach Investment Research Group, a network of 35 family offices in Palm Beach, Florida. "The areas to invest in are fewer, and there is a lot of money looking for those spaces," he said.

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That view of the markets is shared by many of the 360 global single- and multi-family offices surveyed for the 2019 UBS Global Family Office Report, which was done in conjunction with Campden Research and released on Monday. A majority expect the global economy to enter a recession by 2020, with the highest percentage of gloomy respondents in emerging markets. About 42 per cent of family offices around the world are raising cash reserves.

‘MORE CAUTION'

"There's more caution and fear of the public equity markets among ultra-high-net-worth investors," said Timothy O'Hara, president of Rockefeller Global Family Office. "That has more people thinking about private investments, alternative investments or cash."

Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said this month he thinks there's a 75 per cent chance of a US recession before the November 2020 presidential election, while economists surveyed by Bloomberg in August predicted a 35 per cent chance in the next 12 months, up four percentage points from a month earlier. Meanwhile, the World Bank cut its 2019 global forecast to the slowest since the financial crisis a decade ago.

Family offices have become a greater force in global financial markets. Campden estimates that such firms manage around US$5.9 trillion. The offices in the UBS survey had an average of US$917 million under management.

Investing results have been mixed for those responding to the questionnaire, which was conducted between February and March. Average family-office returns for the 12 months prior to taking the survey were 5.4 per cent, according to UBS. Developed-market equities were a big disappointment, providing an average 2.1 per cent return. The highest average gains - 6.2 per cent - were for family offices in the Asia-Pacific and emerging markets regions, followed by 5.9 per cent in North America and 4.3 per cent in Europe.

STAR ASSET

Private equity was the star asset class, with an average return of 16 per cent for direct investments and 11 per cent for funds-based investing. Real estate also performed well, returning an average 9.4 per cent, and now makes up 17 per cent of the average family-office portfolio, up 2.1 percentage points from last year's survey. In the year ahead, 46 per cent of families said they plan to put more money in direct private equity investments, with 42 per cent devoting more to private equity funds and 34 per cent funneling more into real estate, according to the survey.

Family offices are also increasingly focused on a different kind of potential disruption: succession planning. This year, 54 per cent of those surveyed said they have a succession plan in place, up from 43 per cent last year. Just one-third of global family offices, however, said they have written plans.

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