Where the rich invest

What do rich people do with their money? Let's find out by talking to James Burkitt who's the CEO of something called The Table Club, which is a global group run from Australia of high net worth individuals. How are we defining high net worth? Well, more than 20 million dollars according to James. He is involved with presenting them with investments and helping them network with each other and organise their investing activities.

He can advise us as to what high net worth individuals and family offices are doing with their money, which is a very interesting topic.

Here's James Burkitt, the CEO of The Table Club.

James, perhaps we could just start with a bit about The Table Club.  What is it, what do you do? 

We’re a network for family offices and high-nets that I started in 2009.  We had 18 Sydney-based family offices who were the founding members.  Then we built it out Australia-wide and took it offshore to create more of a global network so when people were travelling they could meet local high-nets, family offices in various parts of the world.  We’ve now got it out to nine other countries apart from Aus and we ran lunches and dinners all around the world, we do about 90 events a year, so quite a few.

Is it just about networking or do people who are looking for investors present to your members?

One component is a club and it’s a membership, we’ve had about 900 different families, high-nets that have participated in coming to our events now since 2009.  We have a speaker/sponsor component of our model and that’s typically an investment manager and they would present on a topic, be it private equity, real estate, small-cap, you name it and they would present over a lunch or a dinner and we would invite from our membership appropriate people who were interested in that topic.  

And the presenters pay to do the presentation?

Yeah, they sponsor The Table Club to organise and they pick up the tab.  The participants, we don’t control what they do.  If they like the manager, they like the topic, they can invest and go offline and engage with them, we just purely act as the facilitator of organising an event for them.  Then the third piece of what we do is we do work on capital raising, but for direct transactions.  We’re licenced, we’ve got an AFSL.  These are quite often, probably 50% of the deals that come through would be originated by families and they might be seeking a co-investor into a particular deal or a club. 

Sometimes they may be acting as a GP for a single asset syndicate and they might be corner-stoning a real estate acquisition and they want others to come in but they’re going to run the deal.  We see those opportunities all around the world and our investors, our Table Club members, are very active in looking for direct transactions.  They’re across all sorts of asset classes, be it real estate, equity, debt, it could be infrastructure, it could be student accommodation, life science, private equity deals…

How do we define high net worth, is it $1 million, $10 million or $50 million?

Probably $20 million is what I’d have as sort of the minimum.  We’ve got a pretty strong contingent of the Rich 200 in The Table Club and then there’s a lot of people who fall under the radar who are also in The Table Club, so it’s a mixture but Table Club is predominantly the sort of $100 million-plus end of the market.

You’ve just – which is the main point of the interview obviously – recently commissioned a report from Deloitte, what did you learn from that report?

We had a feeling that family offices – and I’ll just use it as generic, sort of call it the rich people – are quite tactical in how they invest…

What do you mean by that?

It means that they’re benchmark unaware, they’re opportunistic, they’re thematic and they’re absolute return driven.  They don’t need to look behind them like maybe the superannuation funds now tend to act in a somewhat herd mentality in terms of asset allocation because of the issues of MySuper, they all look kind of much the same.  Whereas, the families, if they don’t like something that’s happening in the market they’ll get out of it and it’s not surprising that you see them – I’m not saying they’re the world’s best market timers, but consistently you’ll see wealthy families exit markets pretty much at the peak and re-enter at the bottom.

Well that’s pretty good.  Do you mean that’s what you thought was happening or that Deloitte’s approved it, or both?

I’ve observed that behaviour over many years having worked with a number of families and the survey effectively proves that.  When you look at subsector of the investment world they’ve got quite high annual returns.  They’re not concerned about liquidity for liquidity’s sake.  They look at cash as an opportunistic allocation.  If you looked at the top 100 family offices by wealth, that takes you down roughly to about $750 million.  They would be sitting somewhere between 20-25% cash at the moment. 

Right.

And these families, they’re saying, ‘Well look, I don’t like some of the risks, I’m taking some money off the table and if I’m right and some markets correct then I’ve got my opportunistic bucket and I can take advantage because I’ve got cash.’ 

Do you know or has Deloitte identified how they pick the tops and bottoms?

Again, just referring to the top 100 as an example, 96% are first or second generation and it’s predominantly kind of north of 75% would be first gen and you add the second gen – so they’re still wealth accumulators, they’ve had core businesses or still have core businesses.  You’ll find investment behaviour, they’ll take quite big investments within core because they’re completely comfortable with it and they understand it.  Whereas, most other things, it’s very small allocation.  They’re not going to bet the farm on something they don’t have the same level of expertise. 

Your classic example is your property guy, knows property really well but if he’s diversifying or she’s diversifying into say venture capital or private equity, they’re probably going to cut a pretty small cheque because they don’t have the same level of confidence and expertise. 

That makes sense.

Yeah, property’s one of your good examples.  You’ve seen the Lowe’s exit, you’ve seen down in Melbourne Sam Alter has sold down some major assets.  Lang Walker has done it several times through the market cycles.  You sort of look through the property guys and they’re saying, ‘Well look, there’s not a lot of value left…’ if you’re putting a three in front of the cap rate, then, ‘I could probably do better elsewhere.’

What sort of returns do they typically get?

We did drill down and we looked at returns.  The expectation across most of the families is to do 15% or better per annum over the long haul and they’ve been pretty good at achieving that.  You’ll have some more conservative who may have made their money and may lower their expectations, lower the risk profile, but they’re probably still looking at doing double digits.  When you’ve still got wealth creators in control then they’re looking for quite high returns and it’s almost double the return expectation of the retail market.  

Certainly the retail supermarket, that’s for sure.

Definitely, yeah.  And they’re not constrained like the super funds are.  You’ll find if you looked at the big supers they’d be unlikely to have more than 3% cash.

Do they put much of their money with other fund managers?

It’s increasing.  You’ll find they allocate where they don’t have expertise, so they’re allocating internationally to private equity real estate, venture capital.  Domestically, they’ll probably outsource small and micro, they’d probably insource large-cap Aussie equities.  Most of them manage their own real estate or they go into single asset real estate syndicates where they can sort of pick and choose what exposure they want.  Few of them will allocate to a blind fund unless it’s in an asset class where they have no expertise and venture capital – we’ve analysed through the report, allocation to venture and at least 80% of the large families would outsource to a manager in that space. 

We find in areas like infrastructure they’re likely to outsource as well because it’s a scale game and they can’t get any diversification so they’ll tend to use managers there.  We’ve seen a lot of the credit markets offshore, they’re using external managers.  Again, they can access huge teams and access that they don’t have.  Domestically, in say, private equity, a lot of them are doing it themselves or they’re going into a single private equity syndicate rather than a blind pool. 

Unless it’s sort of a smaller niche kind of manager, which they quite like in some areas because they feel they get a little bit more love for their dollar because they’re not super models like the big super funds who are looking to allocate $50m $100m-plus.  They’re cutting smaller cheques but they’re very sophisticated and they like to have a good relationship dialogue with the managers.

You said before, 20-25% cash at the moment, I’m just wondering if that’s unusually high and that therefore they’re unusually pessimistic on balance at the moment?

Yeah, they’re taking a view on the markets and they’re not afraid to go to cash.  It’s like asking the guy who’s 65 and he’s worth half a billion and he goes 25% cash.  He get it wrong, well, who cares?  And if he gets it right, well his buying power is amazing.  They act like that.  If you wanted to look at cycles and their building cash positions, this is a point in a cycle.  Coincidentally, it matches all time highs on the S&P and all-time lows in the VIX and volatility, so they’re just taking money off the table.

What I would say is that it’s quite a contrast to say, the big families in the US – I’ve just been in New York and I’ve just been in London, and where you’ve got that third, fourth, fifth gen and they’re not dominated by a wealth creator and they’re more passive, they wouldn’t have such high cash balances and they would be more fully invested across typically more passive strategies.  

Interesting.  What about the exposure to property, would you say that overall high net worth people have got more money in property than in shares? 

Yeah, definitely.  You’ll see there are obviously some chunky property holders and we’ve seen some of them really trim their sales in the last six months.  They’re struggling to find value in Sydney and in Melbourne, particularly with the inflow of offshore investors, institutional investors into CBD property, into retail.  There’s been some conscious decisions to sell into that strength.

With the share allocations, do you get a sense of the international versus domestic?  I mean, are they very much focused on international equities?

There’s been a progressive increase in their international exposure.  Many of them would have had quite reasonable Aussie exposure, they’ve tended to probably underweight a lot of the large cap stocks and go for smaller cap and even micro, they like that end of the market.  They like to back emerging companies and ride the upside.  Internationally, they’ve been accessing a lot of stocks directly, but then they’ve been looking for niche managers that can give them access, say, in a small to mid-cap in markets, particularly the US where there’s been a conscious decision to increase their US Dollar exposure.

I’m just wondering in general, do you think that they tend to think about asset allocation in a similar way to the big super funds?  I mean, I know you said that they’re benchmark unaware, they’re kind of looking for absolute returns and so on, does that mean that they don’t actually structure their portfolios in the same way that a super fund might, with some in infrastructure, some in venture capital, some in private equity, some in property and so on.  Do they look at it like that in general do you think? 

Most of them don’t have an asset allocation model around their portfolio.  It’s more about where can I get the returns that I want within the risk frames that I’m willing to take.  What they tend to do is have three buckets of money.  Bucket one will be core and that could be legacy assets like an operational business or real estate assets they’ve held for a long time or it’s been passed through to them.  Then you’ll have what I refer to as the opportunistic bucket and that bucket receives either rent roll, dividends income from core.  Then they’ll use that and it’s a go anywhere allocation.  It’s, where can I get returns?

If you had an interview with a family office, a CIO or a Principal, you could talk across a multitude of asset classes all around the world and they’re quite comfortable in going in all directions to get returns that they want to forget.  Then the third bucket would be their foundation and that tends to behave a little bit more like a super fund.  It’s not as aggressive, it’s looking to either be impactful and back projects or just generate a return sufficient to meet the PAF rules of 5% of capital and income.

And you haven’t mentioned an income bucket – I mean, for those who are looking to use their wealth as an income generator, where do you think they go for that?  What do they do for income?

The real estate guys have been very active in financing real estate.  The MES market and because of banks pulling back, this is where families have played quite a big role in the financing a lot of real estate.  The real estate guys get the risk of the real estate underlying and most of them are big enough and ugly enough to step in and take out the senior if they need to, so they’ve exploited those much higher returns from that sector.  Developers are finding it harder and harder to get backing from the banks. 

We saw three years ago you’re probably getting 20-22% in MES.  MES is now down into mid-teens, 14-16%.  But you’re seeing stretch seniors coming through up to 14%, so they’ve been playing that market quite a lot.  They’re also not taking interest rate risk, they’re really looking within the credit markets for where they might take a longer duration and get much higher returns.  Discretionary credit’s been very popular, there’s quite a lot that’s been going into various credit options being offered particularly in the US.

Obviously, as you say, there’s been a lot of high net worth money going into developments and that’s where they’re really getting the 15% from isn’t it?

Yeah, there’s been a lot of backing from the high-nets, developers looking for MES, stretch senior now – that’s been very popular.  Then other forms of yield, we’ve seen student accommodation, they’ve been looking at a lot of trade finance, all types of credit where it’s giving a yield.  The new acquisitions is just not providing the yield return, where maybe legacy assets they’re getting really good yields on but when you look at the cap rate some of them are saying, ‘It doesn’t get much better than this, it’s a good time to sell.’ 

And what they’re not doing is putting it on term deposit with the bank, I guess.

No, no.  I mean, there’s very little there, they’re looking at alternative buckets that they can get via higher returns.  One of the groups that we actually had in our study on our steering committee was the Future Fund, we had David Neal.  You’d probably know David well, the CEO…?

Yeah.

And I went to the Future Fund because we’ve sort of collaborated on other research they’ve done on long term investing and they believe that family offices behave in a different way to institutional investors and they wanted to learn, so they were happy to contribute and be part of it.  To me, the Future Fund is a bit like a big family office, they don’t have to worry about what the other guys are doing and they’re fairly well unconstrained and they’re looking for an absolute return.  There’s a lot of similarities there.

For that reason they have been producing a better return than the super funds. 

Yeah, it’s just simple, they’ve got a much higher allocation to alternatives which is where you’ll get the longer term returns.

I’ll have to leave it there, James, it’s been great talking to you, thanks.

That’s all right, Alan, any time.

That was James Burkitt, the CEO of The Table Club.