The Bid for Quality
The “flight to quality” story that has been on full display for the last 12 to 18 months is certainly warranted. The data from Q1 backs this up, record luxury home, collector car, and art sales saw most blue chip markets up double digits. Trophy assets, in nearly every category, are finding buyers quickly and at strong prices.
For these assets, the answer to “how do we ensure a flight to quality?” has been straightforward: keep bidding up the price. Rationale being that the most sought after assets are the most liquid and defensible holdings.
Public Strength, Private Strain
Does the attitude for these assets spill over into the real economy, where price is a function of cash flows and utility, is another matter. In that context, we are beginning to see a strong bifurcation between public and private markets. On the public side, sure, on a relative basis Amazon stock is fairly priced all things considered. On the private side, we think the winners can only protect the losers for so long.
Boiling down hundreds of loaded headlines on private equity and credit into a simple sentence: private equity fundraising is down sharply, and private credit fundraising is flowing, but only to the largest sponsors. As a result, we see a potential for a structural shift that leaves UHNW family offices and investors with an exponentially larger share of exposure to lower middle market businesses – on both the equity and credit side. In this scenario, the truly impressive set of tools that have been created to feed liquidity for blue chip assets (NAV loans, secondaries, etc.) may not function quite as well for this newly orphaned part of the market – which is the cornerstone for lots of value to be accounted for during the “Great Wealth Transfer”.
Positioning for What Comes Next
This is not a reason for pessimism. The families and advisors navigating this well are the ones who have already thought carefully about how their assets will be received by the market. They know their holdings, and how much flexibility around them actually exists.
In this next era, sophisticated RIAs, flexible private banks, and creative alternative lenders will be key for the UHNW cohort.