Jul 02 2019Add to Favorites
I am fascinated by the intergenerational transfer of wealth and how the financial and investment sector will evolve as a result. According to a study by Wealth X, over the next decade or so, one of the largest ever intergenerational wealth transfers will take place. Including all individuals with a net worth of $5million or more, its expected $15.4trillion of wealth to be transferred by 2030 globally. This sum is equivalent to the entire Chinese economy or 17 times the market capitalization of Amazon, one of the world’s most valuable companies.
Millennials now make up the largest sector of the Australian and American population and whilst the recipients of the pending intergenerational transfer of wealth will be a combination of those from Generation X and Millennials, over the course of the next 10 years, the transfer of wealth will see a fascinating evolution of the financial services and investment sector.
This wealth transfer will be carried out by almost 550,000 people, equating to an average of $28.2m being passed on by each individual. While most inheritors are likely to be spouses and the next generation, other beneficiaries will be grandchildren, siblings and other relatives, as well as non-family members, foundations and philanthropic legacies.
The picture differs significantly across wealth tiers. Most of the population passing on their wealth will be Very High Net Worth (VHNW) individuals with a net worth of between $5m and $30m. In total, this group will transfer almost $5trillion. However, despite being much fewer in number, Ultra High Net Worth individuals, with a net worth over $30m, will pass on a collective $10.5trillion, which equates to a startling average of $153million per individual. This has much to do with the fact that wealth rises with age and, as a result, a larger proportion of these individuals is expected to pass on its wealth between now and 2030.
At $8.8 trillion, North America will be home to over half of all wealth transferred globally. This is testament to the scale of wealth in the US, the country with by far the world’s largest population of such individuals. In Europe, a slightly older wealthy population than the global average will pass on a significant $3.2 trillion by 2030, accounting for just over a fifth of all wealth transfers.
Wealth transfer in Asia is smaller than one would perhaps expect. Despite accounting for over a quarter of global wealth among this population, Asia will account for just 12% of all wealth to be passed on, a total of $1.9trn. This is mainly attributable to a substantially younger wealthy population than in most other regions, with emerging economies having created wealth only in the past generation or two. It will take another generation before a significant share of these wealth holdings is transferred. For example, iin China, the average age of individuals with $30m+ in net worth is 55, much younger than the global average of 63; the story is similar in India, where the average is 59. However, this is somewhat counterbalanced by an older than average wealthy population in Japan, the second largest wealth market in Asia.
In the Middle East, Latin America and the Caribbean the aggregate transfer will equate to around $580billion over the next decade.
Among those passing on wealth, the proportion of males to females is even higher than the gender divide among the wealthy population as a whole.
Currently in the Very High Net Worth segment, $5m - $30m; women hold 14.2% of the wealth and men 85.8%. In the Ultra High Net Worth segment; $30-$100m women hold 7.3% and men hold 92.7%, of those with a wealth of $100m or more 7.2% are women and 92.8% are men.
Globally the pending transfer of wealth by age is categorised as follows:
Of the estimated total wealth in this $5m plus sector globally, 85% has been self-made in the Very High Net Worth segment with between $5m- $30m. In the $30m-$100m Ultra High Net Worth sector 76% is self-made, and in the $100m plus Ultra High Net Worth segment, 65 .2% is self-made. The balance is inherited or a combination of inherited and self-made.
Many of those preparing to pass on their wealth have long focused on what they will leave to the world. The next generation, however, are displaying a clear step change in emphasis. Wealth preservation continues to be important, but they are also noticeably concerned about the impact their wealth will make on the world, society and the environment.
There has been a significant increase in interest in impact and responsible investment, the latter aiming to incorporate environmental, social and governance (ESG) factors into investment decisions. There are also changing expectations of such investments, with many believing they should not necessarily under-perform against more mainstream investments and may actually out-perform them. This heightened interest is likely to continue, although the sector has yet to undergo a market downturn and, looking ahead, such a correction could test the next generation’s commitment to such assets.
Those passing on wealth and their beneficiaries share a common concern – shaping and building the family’s legacy via philanthropy. There has been a clear upward trend in global philanthropic activity among the wealthy over the past decade, reflecting an increased awareness of a need to give back to society, whether via charitable organizations or through other means, such as donor-advised funds or impact investment vehicles.
Moreover, families are becoming aware that philanthropic planning can have other benefits – bringing them together, increasing cohesion and getting the next generation on board when considering non-financial matters.
Mandi Prager is the principal of MP Funds Management. MP Funds Management has provided investment funding for over $1.1bn of real estate-based investments across 22 transactions and produced an average annualised investment return of 21-22% (IRR).
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SOURCE: Wealth X
MP Funds Management has provided investment funding for approximately $1.3b in unlisted real estate since 2013 and has provided an investment return of approximately 21% annually. Whilst MP Funds Management focuses on unlisted real estate, I am always fascinated by innovation and I personally will sometimes invest in other areas. Recently I caught up with the founder of a very clever new Australian – based app called Stake https://stake.com.auwhich is a Business-to-Consumer based platform that enables Aussies to get direct exposure to the USA equities market.
United States of America
In November 2014 we co-invested with another Manager into the acquisition of a 13-level North Sydney CBD office tower for a purchase price of $36.75m or $4,665 per sqm. A total of $19.5m equity was invested with a gearing ratio of 65%, debt was locked in at a rate of c.4% for the intended five-year investment period.
MPFM has a key focus on real estate-based investment opportunities specifically along the eastern seaboard of Australia with strong underlying property fundamentals and target investment returns of between 15-40% on a risk-adjusted basis.
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