Since the early days, family offices have long been enamored with investing in artificial intelligence. But today many are becoming skeptical, Marcus Baram reports in this week’s feature. Some big names, like Stanley Druckenmiller, are cashing out, while others remain cautiously optimistic. For those still curious about AI, one expert lists his "red flags" to look out for when evaluating AI deals.
We also tackle another concept surrounding the ultra-high-net-worth arena: Can luxury travel actually be sustainable? Through my reporting, I’ve found that it can be and in ways that I never thought of before. Many global luxury properties incorporate sustainability in their food and beverage programs as well as help local communities educate and employ individuals. So before you book that next trip somewhere fabulous, you may want to consider the type of property or tour you’re choosing and see how they convey their sustainability goals before you spend your dollars there.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: Here's why AI isn't a bubble
By MARCUS BARAM
As AI startups continue to proliferate and the sector rallies the stock market, family office investors are increasingly wondering whether artificial intelligence is a bubble that’s about to burst.
This year, AI has been the one hot area in tech, climbing to $17.9 billion in startup investments in the third quarter while overall investments fell 31% during that time.
But some high-profile setbacks have also occurred.
Startup Olive AI Inc., which made AI-powered software to automate hospital administrative tasks, raised $848 million in venture capital before shutting down this month. And Jasper, a generative-AI darling that raised $125 million in a Series A round last year and helped fuel the AI funding fever, just cut its internal valuation by 20%.
Some prominent investors are cashing out.
Stanley Druckenmiller, whose family office profited from its shares in chipmaker Nvidia Corp., just sold about 75,000 shares for $37.2 million. Likewise, Soros Fund Management exited Nvidia in the third quarter, selling stock for $4.9 million. Some family offices, such as that of hedge fund billionaire David Tepper, are still confident, buying more Nvidia stock in the quarter.
The AI hype cycle’s rosy financial predictions and the role of a few big players like Nvidia in boosting the Nasdaq are exactly what you’d expect to see in a bubble, said Allyn Robins, a senior consultant at Brainbox, a think tank specializing in law, technology and policy. “There is a strong financial incentive for companies of every size to hype AI, to make investments in it and to claim that they're 'AI leaders,' " Robins said. "Because at the peak of a bubble, doing so can deliver quick boosts to their stock price.”
Other potential signs of a bubble cited by analysts who look at AI startups: high capital requirements to train their models, which can limit growth and innovation; hesitancy in adopting generative AI by companies; and legal, ethical and intellectual property concerns surrounding the data that AI systems are trained on.
Paul Hsu, the founder and CEO of Decasonic, a blockchain and AI venture fund, said many of his family office clients are asking questions about the AI hype cycle and whether it compares to the dot-com bubble of the late 1990s.
“There will be businesses that will be decimated and new upstarts that will help build the future,” said Hsu, whose firm makes up to 10 deals a year. “AI is moving so fast now, it’s a question from an investor standpoint: How fast can you iterate or pivot to these exponential changes? Those that can’t change fast enough will die a fast death.”
The comparison with the dot-com bubble is a natural one but unwarranted in the case of AI, said Beerud Sheth, the CEO and founder of Gupshup, a conversational messaging platform for commerce. “The Internet 1.0 bubble was caused by a number of factors, including overinvestment in speculative companies and unrealistic expectations about the growth of the Internet,” Sheth said. “However, the AI market is more mature, and there is more understanding of the challenges and opportunities associated with AI.”
Strategists such as Peter Oppenheimer at Goldman Sachs agree, noting that the valuations of the stocks leading the market are not as stretched as in previous periods, such as the internet bubble that collapsed in 2000. Today's companies have unusually strong balance sheets and returns on investment, he said. “We believe we are still in the relatively early stages of a new technology cycle that is likely to lead to further outperformance,” Oppenheimer wrote in a recent research report.
May be overhyped, but not a true bubble
It’s possible to be overhyped without being a true bubble, said Jake Miller, the co-founder of the private markets platform Opto Investments. “How can you avoid crossing over that line?”
Miller highlights a few red flags for family offices to look for when assessing AI startups, including some that involve more gut instincts and art than science:
- If you see that most of the activity is insiders selling to outsiders — “why are the people who know the most trying to get out?”
- If most of the purchases are on leverage, then any small downsizing can knock them out. “How do I have faith that you have the collateral to pay this back?”
- Do the founders need the world to change fundamentally for the value to be created? “I like to know how my investments can make money in the world as it exists,” Miller said.
- Does it solve real-world problems?
“When you put those things together on AI, it doesn’t check a lot of those boxes," he said.
"Has it replaced human beings? No. But is it useful? Absolutely,” said Miller, pointing to biotech, cybersecurity and infrastructure as areas that will be transformed.
In a way, family offices and other long-term pools of capital are the ones to invest in the space since there is risk involved, but they have more patience.
Decasonic's Hsu advises some of his clients, such as Jason Pritzker, to sort out the hype and look for opportunities that are truly innovative.
“There may be strong signals or faint signals," Hsu said. "With general-consensus faint signals, the returns aren’t as attractive. But nonconsensus faint signals have opportunity” and the potential to be transformative, with a larger vision to shape the industry and transform the tech architecture.
“Does this forward valuation match the potential in the vision you’re sharing?” he said.
Hsu said his firm sees potential in AI’s intersection with blockchain, such as solving for bias, and with mixed reality and the metaverse, such as deploying generative AI to build characters for virtual reality or augmented reality and other immersive experiences.
Can luxury travel be sustainable?
By KRISTEN OLIVERI
The luxury travel industry has expressed its deep commitment to sustainability, but many industry onlookers wonder: Can this be true?
Colin Heinrich, impact director at the boutique travel planner Indagare, believes it is. “There's a misconception that luxury travel means excess and therefore cannot be sustainable,” he said. “And while that's true for some destinations, it's far from the norm.”
Sustainability in luxury travel can take many forms — including waste management, reduced carbon emissions, local employment and environmentally responsible fine dining.
Lauren Alba, vice president of global marketing and communications for The Leading Hotels of the World, said her organization views sustainability through the lens of three categories: supporting local communities, preserving local culture and protecting the environment.
Hotels, tourism boards, travel tours and experiences globally have stepped up to showcase their sustainable efforts and commitment to taking care of the world around them. “Even if a property is the type to have somebody in white gloves opening your doors for you, there's a high chance that same property is looking into solar power or water recycling, and it probably funds community engagement or conservation programs as well,” Heinrich said.
Kirsten Dixon, owner of Tutka Bay Lodge, sees a deep connection between sustainability and Alaskan travel in particular. “Luxury travel in the modern age focuses on experiences, not decadence," Dixon said. "The concept of luxury travel has transcended its traditional meaning into a more profound and all-encompassing experience that considers, certainly, comfort and security, attention to detail and exceptional service."
Dixon has launched a nonprofit, “Be the Wild,” that purchases wild land that is at risk of being developed. Guests of her property can experience places like this firsthand to see why they are important to preserve and can even go a step further and get involved in those projects.
“For us," she said, "luxury lies within the natural world.”
Cheetah Plains, which opened in 2018, is a sustainable-safari experience nestled in South Africa’s Sabi Sand Nature Reserve. The safari lodge is carbon-negative, which it does entirely through its own renewables, and operates 100% off-grid using solar power and electric land vehicles, said owner Japie van Niekerk. “A bold advance toward zero-emission game viewing is what drives the sustainable-safari experience,” he said.
Besides embracing sustainability on many levels — from architecture to reusable water bottles to ensuring that the lodge is self-sustainable — Cheetah Plains also creates local employment opportunities and supports early childhood development centers in its neighboring communities.
Similarly, the Leading Hotels of the World properties also get involved with local organizations and childhood education. “In Chile, Nayara Alto Atacama engages with local schools by organizing donations of supplies, participating in [DEI] talks on campus and granting yearly scholarships to young people to finish high school,” Alba said.
Another way in which luxury travel can show its sustainable efforts is through food and beverage programming. At The Hotel Christopher in Saint Barth, for example, the hotel is on a mission to spearhead environmentally responsible fine dining at its restaurants, pledging to cut food losses by 50% by 2025 and committing to cuisine based on local, organic and fair-trade products.
“These efforts promise an additional measure of environmental protection on all levels of hotel management and are a part of a sustainability plan to create positive change while disrupting years of standard hotel practice for the better,” said Olivier Leroy, general manager of the Christopher.
Indagare's Heinrich points out that tourism as an industry depends on being sustainable to ensure its very security, adding that “the luxury sector generally has a greater amount of capital to devote to these initiatives.”
Tourism brings a huge economic benefit to many communities in the developing world, said George Morgan-Grenville, founder and CEO of Red Savannah, a luxury travel company that specializes in tailor-made experiences and luxury villas. In 2022 alone, he said, tourism created 22 million jobs and contributed to almost 8% of the global GDP. It also aids in the “protection of wildlife and endangered species, empowerment of women through training, microfinance projects and education, support of schools, employment and hospitality skills,” he said.
LOOSE CHANGE
Prospera Financial expands advisers’ succession planning options: The models include customized support to advisers who are developing an associate adviser, a guided adviser-to-adviser process, and the use of an in-house Prospera adviser.
Sotheby’s auction to feature jewelry from Mary Tyler Moore: The collection features a range of jewels — from “sparkling old mine-cut diamonds, to lustrous pearls, to the rich warmth of 18-carat gold pieces by Van Cleef & Arpels.
Richest woman in Eastern Europe unites family assets in new company: Renata Kellnerova and her family announced a new corporate structure to house all assets owned by the heirs of the late Czech billionaire Petr Kellner.
Help us with a story: We’re working on a story about the emotional toll of wealth. If you have any comments on the topic, reach out to [email protected].