Alex Ruffel,founding partner of legal wealth advisory firm, Berkeley Law, spells out the implications of a rise of wealthy individuals from emerging countries with a taste for international spending and investment.

Editor's note: Alex Ruffel, founding partner at UK-based specialist private client law firm Berkeley Law, considers some of the implications of an increasingly wealthy group of ultra-high net worth individuals from emerging market countries with international asset allocation and wealth planning needs. As ever, while this publication does not necessarily agree with all of the comments here, it is delighted to share these insights.

In 2000, Forbes listed the top six countries for billionaires as the US, Japan, Germany, Canada, France and Switzerland. In 2011, the list consisted of the US, China, Russia, India, Germany and Brazil.  The emerging economies appear to have finally emerged.

The number of billionaires reflects the growth of the BRIC countries but also that a significant proportion of their wealth is in private hands. What do you do when you have that much money? Leaving aside fantasies of buying/destroying Manchester United, for the private wealth industry, what is most interesting is that this private wealth is becoming internationalised, why and how.

The private wealth of the BRIC UHNW individuals typically flows from a specific geographic place or market, such as the natural gas and oil fields in Russia and large-scale manufacturing using local labour in China. These “domestic enterprises” have been the foundation-stone of the wealth of the majority of the BRIC countries’ richest. 

For the very wealthy in these emerging market nations, these local enterprises continue to make eye-watering profits: the Brazilian steel company CSN, which is privately owned, had a net income of $1.9 billion in 2011. However, despite these economies providing fast profits for entrepreneurial individuals, they also come with significant risks. With all their eggs in one basket, investors are vulnerable. One of the most dramatic illustrations was the Baltic Dry Index, which measures the cost of sea freight. It collapsed by 94 per cent between May 2008 and December 2008, leading to significant shipping company losses.

Turmoil

It is not just economic risk that concerns these HNW individuals. Several emerging market countries are emerging only now because they have a history of significant political turmoil, lack of the rule of law and/or systems of government that inhibited or banned private enterprise. The new wealthy grew up under the old system or are not entirely convinced (often with good cause) that those days are over. 

The individuals from these markets retain their original businesses but take the cash they generate abroad to invest: they internationalise it in order to trade high profits but high volatility for less spectacular returns but reduced risk. As long as their governments allow them to do so - and probably even if they don’t - this trend will continue.

How such individuals internationalise their wealth varies from country to country. While Russian entrepreneurs are likely to extract cash from their companies and use it to build a pot of wealth that will stand independently of their business, Chinese and Indian entrepreneurs often diversify through their businesses rather than outside them. In many cases, this is due to exchange control: for example, domestic regulations mean that moving money out of China is not always easy.

There are also cultural and historical differences between the BRIC countries that affect how they internationalise. India has a strong tradition of global trade and migration with NRI populations in many countries, particularly where English is spoken. There is a large settled NRI population in Africa, for example.  Indian private wealth is often automatically internationalised through existing trade links. By contrast, China has historically looked inwards and the process of internationalisation requires a greater conscious effort. 

So where are HNW individuals from BRIC nations putting their money? Their motivation and their appetite for risk will determine this. Most have an emergency fund: a pot of gold and cash in Switzerland, where they will enjoy a relatively low return but where their money will be safe and immediately available. UHNW individuals are also likely to have large portfolios of conventional equity and bond investments, usually managed through Switzerland for privacy reasons. They can be fully diversified, provide some return and are highly liquid.

Residential property in London and other “safe” European cities such as Berlin and Paris has proved highly attractive. It is almost guaranteed to provide a return on letting or sale and can be used by the family, for whom globalising their wealth often means globalising themselves as well.

Dream investors

The emerging market UHNW individuals made their money from making building their own business and private equity will usually constitute an appreciable part of their non-domestic investment. As other sources of funds have dried up, private individuals from the emerging markets have become the dream investor for many promoters. They are cash-rich and looking for opportunities. 

As well as the choice of investment, private individuals have become increasingly sophisticated in the way in which they own, manage and monitor their wealth. We have seen the accelerated rise of the family office, consisting of professionals recruited to look after the family’s wealth outside the business. London has benefitted from its reputation as an investment hub: it houses numerous family offices from which billions of pounds are run for families whose links with the UK may be minimal. These family offices also help deal with another major concern of most UHNW individuals, wherever they are from: disclosure and privacy issues. Often family wealth will be held through companies and trust structures to maximise anonymity and asset protection.

While the BRIC nations continue to grow and previously underperforming economies strengthen, they will produce a generation of UHNW individuals who actively look across the world for investments and jurisdictions in which to place their wealth. If handled properly, cash from Kazakhstan may stimulate growth in Kilmarnock and Kinshasa to the benefit of the investor and the investee.