You take your Ferrari for a spin around Belgravia, your favourite London restaurants are Scott’s and the Square, and you like to drink at George. Your shirts are from Turnbull & Asser and you enjoy the Amalfi coast during summer and skiing in Courchevel. Perhaps that is because your private-equity investments over the last few years have really paid off.
But now you are worried. Until recently private equity seemed invincible. Mouthwateringly large funds and cheap no-strings-attached debt allowed private-equity houses to acquire some of the world’s best known businesses, from Chrysler to Alliance Boots, and multiply your money in the process. Much has changed since. But what are the implications for you, the investor? First of all, private equity has provoked highly divisive debates over taxation in the UK, US (the ‘Schwarzman tax’ debate) and elsewhere.
The recent erosion of tapered capital-gains tax relief – whatever back-pedalling the Chancellor of the Exchequer eventually does – will affect the economics of carried interest, the performance-linked reward of buy-out professionals. But this will not make the industry less attractive to limited partners (the industry term for private-equity investors), relative to other investment opportunities where capital-gains tax also applies
The real worry is this summer’s credit crunch and its after-effects. Since credit markets suddenly dried up and buyers of debt vanished, the major banks have been stuck with hundreds of billions of leveraged buy-out debt on their books. Huge write-downs and public embarrassment for Wall Street have followed. Until this debt is cleared, new deals will be very difficult to finance and large mega-deals virtually impossible to complete.
However, LBOs are by no means a relic of the past. Buy-out activity is cyclical and private equity has proved remarkably resilient at bouncing back. The most astute operators have managed to outperform in virtually any market conditions by reinventing their investment strategies. Private equity still has the power and nerve to tackle opportunities unavailable or unsuitable for other investors.
Their ability to attract and retain the best financial and operating talent has given the likes of Blackstone and KKR a lasting competitive advantage. A recent McKinsey study found that the top US and European private-equity funds have returned an exceptional annual rate of return of over 29 per cent over the last fifteen years. The same study also cautions against smaller, less diversified private-equity houses without successful track records.
These funds have, on average, only performed in line with the equity markets, making their aggressive fees hard to justify. Perhaps the next fund will not be twice the size of its predecessor, but it will still perform – and, with hindsight, you may wish you had invested more.
PAY AS YOU FLY
With queues at London airports reaching record lengths and passenger inconvenience at all-time highs, it is no surprise that some transit commuters avoid the ‘national disgrace’ that is Heathrow to fly via Paris and Amsterdam. Nor is it surprising that in this environment the UK’s private-jet sector is booming and becoming more affordable at the same time.
UK-based European Business Jets offers private CitationJet services within Europe for a mere £2,950 per hour. The fleet ranges from the discreet 5-seater Citation CJ1, ideal for city-hopping around the continent, to the ultra-modern XLS for 8 passengers. Catering to the wealthy but cost-conscious consumer, EBJ has done away with the 25-hour minimum cards customary among its competitors and, unlike charter services, only charges you for the time on board, not the time used for bringing the aircraft to you.
Undercutting the market per hour by as much as 30 to 40 per cent, European Business Jets makes private flying available not only to the super-rich but also to the frantic businessman. And rightly so, for private aircraft travel can no longer be considered an extravagance. As Warren Buffet has put it, private jets are ‘an essential business tool’.
Brent Hoberman is particularly adept at understanding the needs of the cash-rich and time-poor individual. After establishing and selling www.lastminute.com, his landmark internet travel business, Hoberman has moved on to interior design. His new and already award-winning website www.mydeco.com has been an instant hit with the Web 2.0 community and the talk of the luxury industry.
Mydeco is designed for those individuals who, although wealthy and very busy, are still sufficiently enamoured with the idea of DIY not to ring for the decorator. While a number of home magazines such as Country Living, Elle Décor and Better Homes and Gardens already exist, there has not until now been a one-stop redecorating website. Mydeco aims to be just that, complete with remodelling tips, furniture suggestions and even a social network where members will be able to meet and offer one another advice and support. The site might just turn out to be the new Facebook for home lovers.
According to Hoberman, with £5 million in seed capital Mydeco is already one of the largest technology start-ups in Europe. The company’s backers include Tom Teichman of New Media Spark and Thomas Hoegh – both were early investors in Lastminute.com. I guess that having backed a Hoberman winner once before, they were more than willing to place their money behind the new project.
Hoberman clearly has his sights home-grounded, since the dot.com entrepreneur is also backing Moveme, the site that makes moving simple. And why not, with an income-rich society addicted to decorating and home remodelling and property-themed reality-television shows, this indeed seems to be the ideal time to strike?
COST OF LIVING WELL
No-one thought living in London was cheap. CNN Money named London as the No. 2 most expensive city in 2007, pushing it up from the No. 5 spot in the previous year, while the Independent has confirmed that London’s residential property was the most expensive in the world. The latest evidence of this trend is the Stonehage Affluent London Living Index, or SALLI, which reveals that the prices of luxury goods and services in London have risen at roughly double the rate of general price inflation over the past five years.
The index, which was developed by the Stonehage Group (see our Family Office Power Index), compared 57 goods and services, based on the firm’s knowledge and experience of their clients’ spending patterns. The list ranges from private education and property to the more indulgent activities such as spas and wine, uncovered a surprising threefold increase in the luxury market in comparison to its high-street counterparts.
Today, for example, a limited- edition Patek Phillippe Calatrava will set you back £19,000, up 26.7 per cent on its 2006 price. Two days’ grouse shooting costs £3,666 in 2007, as opposed to £2,820 back in 2002, while the cost of a Purdey shotgun has risen by £2,700 during the same period (see the feature on buying guns at auction in our ‘Shooting Special’ section). Three cases of Lafite Rothschild 2000 are yours for £9,250, a staggering 116.9 per cent annual increase (see our feature on fine wine investment). Or perhaps not that staggering when compared to the 150 per cent rise in central London property prices.
SALLI suggests that the CPI (the general consumer price index) is too conservative a measure for the rich, at only 2.3 per cent inflation over the last twelve months against SALLI’s 6 per cent. The 3.7 per cent difference is significant when wealth planning for high- and ultra-high-net-worth individuals who wish to maintain or even enhance their lavish lifestyles. To preserve wealth, earnings from salary income and investments need to outpace inflation. If they don’t, perhaps leaving London is not such a bad idea.
However, the film director and restaurant critic Michael Winner believes that this pheneomenon only affects the middle classes. ‘We rich folk moan and groan about everything,’ he wrote in the Daily Mail, but to tell the truth a price rise of 6.5 per cent [over five years] over what the common folk pay means very little to me.’ Any comments from ‘common folk’ welcome.
TOP OF THE SHOPS
The future of luxury is green and democratic. Luxury Briefing, the influential global luxury market publication, celebrated its tenth annual Awards for Excellence this year. The list of top ten luxury entrepreneurial nominees included, among others, Marc Jacobs, Zaha Hadid and Victoire de Castellane of Dior Joaillerie.
However, despite the presence of these established luxury superstars, when it came to handing out the awards the publication chose the more democratic route, with Topshop and Tyler Brulé as its winners. James Ogilvy, the editor, explained that Luxury Briefing has always aimed at being modern in its definition of luxury and that ‘both Topshop and Brulé embody one of the defining trends of our time, the democratisation of luxury, in the way they have brought great products and great designs to a much larger audience’.
The event therefore became a celebration of Topshop’s ingenuity in employing traditional luxury elements and proving that bespoke service, catwalk shows, and high-end advertising are effective at attracting the high-street and the Bond Street consumer alike. Tyler Brulé, the other laureate, was singled out for his new publication Monocle, which has been working to raise awareness of design and luxury globally and to popularise these disciplines in new markets.
In addition to democracy, the awards captured the new trend of environmentalism. To prove that ‘green is the new gold’, four of the ten nominees were chosen for their environmentally friendly credentials. Nude, the organic skincare brand, and Daylesford Organic, the food manufacturer, featured alongside M-House, the promoter of planet friendly travel, and Tesla Motors, the electric car known for being faster than a Porsche 911.
BARRED IN BELGRAVIA
The two Russian girls swanned into the restaurant off a Belgravia street like a power surge. This boite is a favourite with local grandees in search of a low-key evening out. It has the Posh-Grotto aesthetic, meaning it is so underlit that white shirtfronts glow, face-lifts vanish and you practically have to feel your way to the guaranteed-stimulant-free bathrooms. And now this bolt of Russian lightning.
Magda, who was at a corner table, knew both by sight. One is the daughter of an oligarch, the other is not short on serious moolah either. Both wore six-inch heels and both were in their late twenties but heavily made-up and as plastered with expensive brands as Heathrow Duty Free. ‘Russians like to wear their money on their sleeve,’ said Magda, herself a Russian, but one who has taken on some laid-back Brit colouration.
She allowed herself to speculate on the evening’s pre-history. ‘They were in Harrods,’ she guessed. ‘On the ground floor there is a bar where you can have a pedicure while you are having a glass of champagne. Lost days are spent in Harrods!
The Russians girls asked the maitre d’ for a table. The maitre d’ eyed them. There were several unoccupied tables. ‘Perhaps you don’t want a restaurant,’ he said levelly. ‘Perhaps you are looking for a bar?’ Magda got it instantly.
‘They were in the wrong place,’ she explained.
In Cipriani, Umu, Nobu, or Sketch, the Russian girls would have been instantly recognised for what they were: wives, mistresses or girlfriends of a trader, a hedge-funder or, most probably, an oligarch. But to the eye of a maitre d’ in an old-fashioned classy restaurant they were just Russian ‘models’ angling for clients. Off they sashayed into the evening.
‘They got it,’ Magda said. ‘But why would they care what those people think?’
Those people. Meaning poor millionaires.
There are some stories that you just cannot invent. Here’s one straight from the pages of a storybook. Last year, London Allied Holdings, a private-property investment company run by one Terry Collins, handed over a £1-million non-refundable deposit to a lorry driver named Anthony Lee and a retired contracts manager named Patrick Dolan. Collins wanted to buy the Ritz Hotel from the Barclay brothers, and Lee and Dolan told him they would effect an introduction.
What is more, they said, the Barclays would sell him the hotel for £200 million and he could then sell it on for £250 million, leaving him £50 million richer. All they wanted in return for making the introduction was a £1-million deposit. For some reason, it appears Collins didn’t inquire whether the hotel was actually for sale – it wasn’t and isn’t. Poor Collins sued and this what Judge Terence Etherton told tell him: ‘There was no prospect of Lee or Dolan acquiring the Ritz for £200 million or selling it on for £250 million, nor could they have had any grounds for believing that they did have any prospect.’
It would appear there is little chance of Collins getting his loot back either, since Lee is now bankrupt. But one has to have a sneaking admiration for the dastardly duo. After all, it can’t be every day that a chap like Terry Collins walks into your life.
GET ON THE LIST
If you are the sort of HNW who cannot travel without carrying a customised watch case containing at least a vintage Bvlgari sports watch, an evening de Grisogono watch and a day watch by Patek Philippe, then an essential date in your diary will be the Sotheby’s fine watches sale on December 19th.
To get the hedge-fund and private-equity boys of Mayfair excited about this sale, Sotheby’s Lord Dalmeny has teamed up with Spear’s WMS editor William Cash to host a reception at Sotheby’s on December 11th (the day before the 20th-Century British Art sale) to mark the launch of Sotheby’s new Rostrum Newsletter – a specialist publication alerting VIP London’s prime financial movers and shakers to the best up-coming watch, wine and art sales. Any Spear’s WMS readers worried they are not on the Rostrum Newsletter’s elite mailing list can e-mail me (firstname.lastname@example.org) and I’ll see what I can do to help out.