Wealthy hunt for value in turbulent markets
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High US inflation figures have dashed hopes that the Federal Reserve will soon ease off on its interest rate hikes — sending many stock and bond investors rushing for the exit.
Billionaire hedge fund managers and other ultra-rich people have been among those selling up fast. But not everyone, of course. Some wealthy individuals are eyeing the plummeting values as buying opportunities, especially in the hard-hit technology sector.
While they can see as well as anyone the multiple economic risks facing the US and the world, they are hoping to buy long-term growth at low prices: the tech-focused Nasdaq Composite was down 32 per cent for the year to September, with widely held tech stalwarts Alphabet and Microsoft down 30 per cent.
For now, these bold investors are in a minority. While sentiment changes week by week, in an August survey of ultra-high-net-worth (UHNW) individuals (those with wealth of more than $50mn), just 4 per cent of respondents said they were investing in technology stocks, according to Tiger 21, a US-based club for multimillionaires. Some 13 per cent of respondents said they had sold technology stocks this year. By comparison, 23 per cent said they were ploughing cash into property.
“There is absolutely a sense of concern and cautiousness in our group,” says Michael Sonnenfeldt, Tiger 21’s founder. Among safe haven assets his members have discussed, “residential real estate is still a core strategy”, he says.
The UHNW population of the US is large and diverse, comprising more than 140,000 individuals, according to Credit Suisse — from business founders to heirs in many different sectors. Not surprisingly, their appetite for risk is equally varied. Nowhere is this truer than in tech. As the Covid-19 pandemic eased, the value of technology companies surged — peaking in early 2022 when Apple became the first company to reach a market capitalisation of $3tn.
The sector then went into freefall. In May, SoftBank’s Vision Fund, one of the world’s largest tech investors, announced an annual loss of $27bn, and Tiger Global, a hedge-fund known for investing in start-ups, reported a $17bn loss. In late summer, Klarna, a Swedish buy-now-pay-later company, then at less than half its peak $46bn valuation, tried to raise fresh cash. Similar downgrades are squeezing venture capitalists that are struggling to collect money for young tech companies.
Cautious wealthy investors have stayed well clear of the fallout. They have instead kept their money in cash or gone for the traditional redoubt of the very wealthy, property. Now that the pandemic has eased, New York has enjoyed “one of the most remarkable transformations in the history of real estate”, Sonnenfeldt says. Manhattan property prices hit a record median value of $1.25mn this summer, up 10.6 per cent from the year before, according to appraiser Miller Samuel and brokerage Douglas Elliman. In July, Elliman represented the buyer of a $74mn penthouse on Fifth Avenue, the most expensive deal of the year so far. Prices in other wealthy centres, from Boston to London, have also boomed this year.
Energy assets are proving popular with rich individuals, too. Investors are taking account of the persistent low investment in oil and gas development in the past decade and the disruptive impact of Russia’s invasion of Ukraine. They note that, as of the end of September, the energy sector was the only S&P 500 category in positive territory this year, up 30 per cent.
Despite the Biden administration’s preference for clean energy and global concern about the effect of fossil fuels on climate change, wealthy individuals have not been shy to invest, notably in Texas, which is in the midst of a new oil boom. “While energy has done well, it is in part because of the massive uncertainty about the energy sector with the Ukraine situation,” says Richard Warr, a finance professor at North Carolina State University who specialises in studying the stock market. “There are undoubtedly opportunities to make money here, but the risks are high.”
For bolder investors, this is a moment to buy tech. They even see parallels with the start of the decade-long tech boom that began around 2011-12. “2022 has been a reckoning,” says Jason Ingle, co-founder and general partner at Closed Loop Capital, an early-stage venture capital firm. “[But today] there are some of the same things you saw in 2011 and 2012, which were huge opportunities across a number of sectors, without the overvaluation.”
But even the enthusiastic Ingle, a great-great grandson of Henry Ford and an early investor in Beyond Meat, a plant-based meat substitute manufacturer, warns that a lot of cash is still moving around the sector, resulting in some poor investments. He compares today’s conditions with earlier times in the tech boom, when “you had capital flowing in that really probably should not have been, and now you are having that with a lot of hedge fund money”.
Other high-net-worth investors also worry that tech valuations might still be too high. Matthew Salloway, who manages a family office and a venture capital firm, says that in the summer he was approached by a tech company in search of a main investor. “The valuation had dropped more than 60 per cent from what was initially proposed. And we still did not end up doing it because we felt the valuation was still too high,” he says.
Opportunities have emerged, however, including for the cautious Salloway. For example, he has invested in Lightmatter, a Boston-based company that is developing light-powered microchips to speed up artificial intelligence computing. These chips use half the energy of those in the benchmark, according to Salloway. “If you can have more powerful processing, but at many magnitudes less energy usage, you are really creating a commercial opportunity but also a net-zero [carbon emissions] impact,” he says.
Salloway’s reference to net zero highlights how environmental, social and governance concerns remain important to many wealthy Americans, despite the resurgence in Texan fossil fuel investments and the general caution triggered by the overall stock market sell-off.
Liesel Pritzker Simmons, who with her husband Ian Simmons runs US-based Blue Haven Initiative, an impact investing-focused family office, says she is continuing to invest in one of her favourite places in the global tech market: African fintech. One of Blue Haven’s African bets was Paystack, a cashless transactions processor. In 2020, Paystack was bought by Stripe, also a payments processor and currently one of the world’s biggest unicorn companies.
“Africa has not yet seen the slowdown in venture funding that the rest of the world is seeing, which is extremely surprising to me because you would think that [continent] would be the first to go from investors’ portfolios as they flee to more conservative allocations,” Pritzker Simmons says.
A member of the Chicago Pritzker business dynasty, Pritzker Simmons remains committed to early-stage African fintech via Blue Haven. However, she says she started to shift her portfolio from growth stocks to value stocks last year. “Given the turbulence in the markets now, we have been tactically rebalancing toward more value stocks over growth and that means shifting a little bit away from tech,” she says.
But that does not mean avoiding all tech. In the venture portion of her portfolio, Pritzker Simmons is eyeing opportunities in innovative climate technology. “We have always had climate as a theme in our portfolio, but we are going big in that area,” she says.
Like many other rich investors, Pritzker Simmons hails Joe Biden’s climate law, the Inflation Reduction Act, as a “game changer” that will create investment prospects in countering climate change with technology — a $370bn market opportunity, analysts say. “Broadly speaking, we are looking at climate infrastructure, but we are still narrowing that down,” she says.
Nor is the global market uncertainty putting wealthy US investors off impact investing, or investing with an eye on achieving ESG aims as well as making money. A January report from Silicon Valley Bank found that 79 per cent of family offices were making venture capital investments with impact or ESG strategies in place. In 2020, fewer than half the family offices surveyed by the bank were looking for both investment returns and social or environmental impact from their venture capital investments.
Rich individuals now see potential in impact investments. For example, Wall Street investment company KKR has raised a second global impact fund totalling $1.3bn. Its first, $1bn, impact fund recorded a 29 per cent increase in returns (including fees and carried interest) for the year ending June 30, according to regulatory filings.
In 2017, Lukas Walton, grandson of Sam Walton, founder of the Walmart retail empire, founded Builders Vision, an impact investing organisation with a philanthropic division, Builders Initiative. In September of this year, the division said it was shifting about $900mn, or 90 per cent of the endowment’s assets, into impact investing from traditional philanthropy. Despite the gloomy market conditions, “we are certainly not pausing” impact investing, says Noelle Laing, Builders Initiative chief investment officer. “I definitely agree with the idea that it is a buying opportunity.”
In its early days, impact investing was shunned by some investors who said people would be sacrificing returns to achieve laudable aims. But those impressions are fading, according to Pathstone, a US family office. In an overview of 2022 it said: “The idea of sacrificing returns to invest thoughtfully can now be argued with facts and results.”
Salloway agrees. “Truly, this decarbonisation movement we are seeing we believe is really a once-in-a-generation opportunity [to] really impact the entire world. But it also has a strong opportunity for economic gain,” he says.
Amid the market anxiety about more immediate concerns — including interest rates, inflation and gross domestic product growth — such confidence is hardly universal among wealthy Americans right now. But it is there.
This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment