How do the wealthy invest today, and what can we learn from them? While there is no single approach, there are lessons to be learned from how ultra-high net worth and high-net-worth investors manage their wealth and transfer it to future generations. From traditional stocks and bonds to commercial property and other alternative investments, how the wealthy invest—particularly during uncertain economic times—can provide lessons in not just preserving wealth but growing it.
First, what does it mean to be wealthy? The financial industry defines wealthy investors as high-net-worth (HNW) individuals with at least $1 million in liquid personal assets. Money managers make a further distinction for an increasingly influential group of ultra-high net worth (UHNW) investors, which asset management firm KKR defines as holding more than $30 million in assets. Currently, 62% of wealthy investors are baby boomers, with Generation X at 20% and millennials and the silent generation at 9% each, according to a 2022 report by Bank of America (BOA) on wealthy Americans with more than $3 million in investible assets. Investment practices vary by level of wealth and by age. One percent of Gen Z is considered wealthy, but these households are getting wealthier as a historic generational transfer of wealth passes from older generations through 2045.
Ron Diamond, who heads an eponymous wealth advisory for family offices with more than $250 million in assets and is the family office chair for national HNWI network Tiger 21, said this unprecedented transfer of wealth is pulling capital toward private equity. Like BOA, he sees HNWIs investing differently depending on their age.
Investment Strategies Favored by the Wealthy Have Changed
There is no single approach to investing, but some generalities do apply. Historically, HNW investors have allocated around 50% of their assets to stocks, 20% to bonds, 25% to alternatives and 5% to cash, global investment firm KKR noted in 2021. However, Diamond said alternatives have begun to claim more of the UHNW portfolio in the past 10 to 15 years. UHNW investors have allocated around 30% to stocks, 10% to bonds, 50% to alternatives and 10% to cash, according to KKR.
Asset Allocation as Percentage of Total Portfolio
Source: KKR 2020 HNW Survey
According to BOA’s report, the generational shift shows portfolios with a higher percentage of real estate, private equity and other alternatives: Young, wealthy investors allocate three times more to alternative investments and half as much to stocks. These younger households with early wealth are more likely than older households to have started with an inheritance or achieved atypical private market success from startup, crypto or other ventures. Their extraordinary circumstances may lead them to favor nontraditional alternative or private equity investments.
Notably, the allocation to real estate and other alternatives seems to be positively correlated with the amount of wealth someone has. In a 2021 Ernst & Young survey, 29% of HNW households and 81% of UHNW households rely on alternatives in their portfolio, compared with only 14% of mass affluent households.
Clearly, investing in alternatives is a strategy the wealthy are using more than less affluent investors to grow and preserve their wealth. With more investible cash, connections and other resources at their disposal, ultra-high net worth investors are better positioned to acquire and hold real estate and other illiquid assets. But it is important to note that these individuals usually manage their money with the assistance of financial professionals or family offices, and their high net worth qualifies them and gives them access to additional opportunities and benefits. Sustaining a family office usually takes about $250 million on average, but many HNW individuals with $10 million to $200 million use multi-family offices for money management, Diamond noted.
How the Wealthy Invest in Real Estate
Wealthy investors have always been attracted to real property, but in the past generation real estate and development have claimed a greater share of their portfolios. Private equity real estate assets have achieved a 10% compounded annual growth rate over the past decade, Bain Capital’s 2023 Global Private Equity Report noted. The emerging infrastructure and construction segment, viewed as less cyclical than real property, grew 18%.
“Historically, real estate has been the most lucrative asset class for high-net-worth individuals,” Diamond said. “So not surprisingly, more family offices are investing in alternative assets. It’s more difficult to create alpha in the public markets and much easier, in my experience, to create alpha in the private markets—private equity, real estate, venture capital or credit.”
While institutions pulled back on new real estate investments by 28% in 2022’s unsettled economic climate, wealthy private equity investors were less defensive, pulling back only 8% from the previous year’s record fundraising levels, the 2023 Knight Frank Wealth Report showed. Private capital accounted for a record 41% of the $1.1 trillion committed by all investors last year; private investment was dominated by allocations to residential (43%), offices (18%) and logistics (15%).
Altogether, high-net-worth investors put more in real estate than equities: 32% of their wealth on average is invested in residential property, 26% in equities and 21% in commercial properties, Knight Frank’s report said. Offices were the most common type of commercial property, with 35% of that in the health care sector. Environmental factors were significant in how the wealthy invest, with 57% of wealth advisors surveyed saying their clients look at whether the property has a green energy source.
Private real estate supports UHNW individuals’ investment strategy in multiple ways. It offers investors:
- Diversification and risk management through low-volatility, low-correlation alternatives to public equities;
- Passive income that can provide a stable cash flow from rents;
- An inflation hedge;
- Returns that can provide stability in uncertain economic conditions;
- The greater control and value-add opportunities of direct investment; and
- Tax advantages from depreciation and the way capital gains are taxed.
How Do Economic Downturns Impact HNW Investing Habits?
In Bain’s view, the current economic uncertainty will lower the appetite for limited partners to take on new deals after several years of record allocations to private equity. Private investors were the most active buyers in global commercial real estate markets in 2022 with $455 billion invested, 41% of the total, according to Real Capital Analytics.
The slowdown also signals the increasing market dominance of high-net-worth investors. For the first time, private buyers were responsible for the highest share of global commercial property investment, overtaking institutions. Multifamily residential, offices and industrial assets attracted the most interest in Knight Frank’s Wealth Report Attitudes Survey of wealth managers.
Deals done in a downturn can generate superior returns over time. According to the Bain report, this pattern held up after the tech bubble burst in 2000 and coming out of the Global Financial Crisis of 2008 as well. A deal for a good asset at a good price may make sense even with a larger equity allocation or higher debt costs.
According to our own research here at Origin Investments, we have found this to be true as well: Investors with a time horizon of five or more years who are willing to shoulder a degree of risk can achieve returns of more than the risk-free-rate over the long term—even during downturns and recessionary periods. In two out of the three most recent downturns, private real estate generated a 6.8% annualized return for investors over the three five-year investment periods. That’s compared with a 4% return using the Treasury note strategy.
If interest rates decline later this year, market sentiment may shift quickly. With the continued dearth of deals, investors will need to be well-placed to take advantage of opportunities emerging across global real estate markets.
What the Future Holds for High-Net-Worth Investors
Inflation will be a significant factor driving investment decisions in 2023. Eighty percent of respondents to Knight Frank’s HNW Pulse Survey said it would influence their investment decisions either significantly (37%) or to some extent (43%). To navigate the higher inflationary environment, investors may favor commercial property for its appreciation potential, which informed Knight Frank’s conclusion that “real estate and alternatives will be where wealth is grown over the coming decade. … We are bullish on residential, industrial and warehousing.”
Private investors from the U.S. were the largest source of commercial real estate capital last year, with $302 billion invested—more than a quarter of total commercial real estate investment and 66% of private investment, Knight Frank’s 2023 Wealth Report noted. (However, investment from U.S. private buyers was down 3% year-on-year.)
The appeal of commercial property clearly remains, despite the economic backdrop. The Knight Frank Wealth Report indicated 19% of global UHNW investors planned direct investments in commercial real estate in 2023, while 13% were seeking to invest indirectly through vehicles such as private REITs or funds. Almost half saw real estate as an opportunity for wealth creation as they diversify and seek capital appreciation as their primary goal.
Real estate represents the top opportunity for high-net-worth investors seeking diversification and a hedge against inflation, according to the private bankers, wealth managers and family offices cited in Knight Frank’s 2023 Attitude Survey of more than 500 private bankers, wealth advisers, family offices and industry experts. David Bailin, chief investment officer of Citi Global Wealth Management Investments, told Knight Frank that real estate and alternatives will be “where wealth is grown over the coming decade.” With strong fundamentals, Citi is bullish on residential, industrial and warehousing.