Nobody could have anticipated the Covid-19 outbreak and its devastating economic devastation. In an instant, many fortunes were lost on Wall Street, and millions of jobs were lost on Main Street.

Although no one could have anticipated a pandemic-induced recession, there was a class of investors prepared for some economic retreat – ultra-wealthy investors.

With amazing foresight, ultra-wealthy investors anticipated a recession or some recession-like event in 2020.

They couldn’t tell you what would set it off; they only knew it was around the corner. After all, the economy had been expanding for far longer than any previous expansion in history. It was bound to end. They had no idea it would come from a virus imported from China, but they had strong clues; it was due time for one.

Here’s proof:

According to a June 2019 UBS Global Family Office Report, 55 percent of wealthy families surveyed – worth an average of $1.2 billion – anticipated the U.S. would slide into a recession within the next year. They were right.

In preparation, these families were doing two things:

  1. They are hoarding cash for rising opportunities.
  2. They are shifting their investment strategies even more towards long-term, asset-backed income-producing assets – mostly through private equity investments.

Ultra-wealthy investors and institutional investors have a knack for sensing economic disasters before they strike, and when they do strike, they don’t retreat like the average investor, they pounce. They’ve been preparing for months now, biding their time for the right opportunities.

So, where are the wealthy moving the cash that they had been hoarding?

Surprisingly, towards the private debt market as opposed to the private equity market, they favored in 2019. Not surprisingly, the fundamentals remain the same. They’re investing with a long-view in an income-producing asset that’s secured by a tangible asset.

So why debt?

Because the opportunity presented itself – pure and simple. With the financial markets upended by the pandemic and conventional lenders tightening their borrowing requirements, a window has opened up for the private lending market, and the ultra-wealthy with money to burn are pouncing.

Don’t get the impression that the ultra-wealthy are just funding any deals with high yields coming their way. Their fundamentals remain the same. They ask the hard questions that mainstream investors don’t ask; namely, what is the worst-case scenario? And that’s where the asset-backed component comes into play. And that’s why they’re funding almost exclusively real estate.

With real estate, the ultra-wealthy know the worst-case scenario is that they seize the real estate in case of default and either sell the real estate on the open market to recoup their investment or operate it themselves.

Unlike stock market uncertainty where an investor can watch their portfolio vanish in an instant, the ultra-wealthy have the comfort of knowing that will never happen with real estate.

The ultra-wealthy lenders like family offices and institutions offer commercial real estate developers speed and flexibility the banks can’t offer right now.

Private lenders allow developers to mobilize large amounts of cash in a short amount of time to fund their large office, hospitality, multifamily projects, etc..

In return, these savvy investors command above-market interest rates with the security of an asset-backed loan that provides consistent cash flow from interest payments.

Most of the private debt being provided by the ultra-wealthy have long-term windows, but that’s nothing new for them. Even in their private equity forays, lock-up periods have always been a minimum of five years.

This suits them just fine since the ultra-wealthy are always investing with a long-term window. Their aim is higher than the rest of the investing public – it’s to grow fortunes across generations.

The ultra-wealthy are always investing like a recession is around the corner.

The vehicle might change (i.e., equity to debt), but the fundamentals are the same. In good times and bad, they’re always seeking income-producing investments secured by tangible assets with long-term windows.

These assets are ideal for withstanding pandemics, economic upheaval, and any other disaster that might come their way.

Mike Ayala