Casey Whalen formerly served as the CEO and CIO of Truvvo, a strategic advisory firm. Truvvo merged with Lazard Asset Management this past spring to create what is now known as Lazard Family Office Partners. Whalen talks about how family offices can actively participate in private markets and how real assets and inflation come into the equation.
Let’s talk active participation in the private markets. Can ultra-high-net-worth individuals benefit from this approach?
Yes. We believe ultra-high-net-worth investors, who can handle the illiquidity, can greatly benefit from participation in private markets. In many ways, skilled private investors have the potential to add more value in private markets, where they have the ability to be strategic and enhance a company’s earnings stream away from the scrutiny of public market shareholders. Because of this, these investments have the potential for higher expected returns.
Private markets — across venture capital, buyouts, real estate and natural resources — play an important part in a UHNW client’s portfolio and, when managed properly, can provide sufficient compensation for the illiquidity and risk, as well as diversifying the type of equity risk.
However, private markets exhibit the largest dispersion of returns among asset classes and require expertise to discern among the plethora of investment options. Evaluating and securing access to the best private managers is paramount in the successful execution of a private program.
Where do real assets fit within that picture?
Real-assets exposure can serve a number of key functions within a client’s portfolio, including as a source of diversification with several different subasset classes that are less correlated or noncorrelated with broader public and private equity markets, downside protection through hard-asset ownership, current income and protection from unexpected spikes in inflation.
Importantly, we focus on real asset strategies that have the potential to generate attractive returns through cash flow and add operational value at the asset level, not betting on higher commodity prices or valuation environments to reach the return targets.
Can you provide an example of how someone can invest in real assets successfully?
We believe real assets are best accessed through the private markets, where you can control the asset and directly benefit from the cash flow while being less reliant on capital market forces.
We like to back experienced teams with repeatable strategies and differentiated operating capabilities. Timing the market is all but impossible; however, strategies that are disciplined about buying assets below replacement cost, creating value through more efficient operations (revenue enhancement, capital improvements, cost initiatives, etc.) and taking advantage of windows of liquidity have proved successful. Access to efficient financing and prudent use of leverage has always been a staple of our real asset managers but is even more paramount in today’s environment.
We prefer smaller managers who are aligned with LPs, driven by performance-based incentive fees as a wealth creation opportunity, and who show discipline in asset growth.
Family offices are primarily worried about inflation at the moment. What can they do about it?
The largest components of CPI growth are related to housing, energy and commodity costs. We have worked with our families to position their portfolios to take advantage of several themes that confront these areas: affordable rental housing, scarce global resources and energy transition. We expect that these areas should provide portfolios with some level of inflation protection.
When it comes to affordable rental housing, we continue to believe in the long-term fundamentals of the workforce housing space (multifamily and manufactured housing), especially as supply of all types of housing continues to lag and demand for flexible and affordable living space has surged. Post-2020, we have witnessed a number of factors supporting continued rental growth, including outsized wage growth, significant home price appreciation and increased cost to build new apartments.
As for energy transition, the transition from fossil-fuel-dominant to renewable, intermittent generation will not be a straight line and creates opportunity for more flexible assets that will be necessary in the medium term as the grid evolves to a higher percentage of renewables.
When you look at the latter half of the year, how should family offices be positioning their portfolios?
Unlike the last couple of decades, as maturities come due and companies or assets need to be refinanced, some capital structures with higher leverage could become challenged and facilitate ownership transitions. Family offices can take advantage of these dislocations by investing in strategies like hedge funds, where managers can invest both long and short; and in the private space, as that marketplace goes through an expected period of change and transition. Having patient and thoughtful capital while backing experienced and skilled teams can allow families to take advantage of the dislocations while further diversifying their portfolio risk.