Tatiana Nevard offers family office her advice
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By Shahnaz Mahmud, Family Office Review, 17th Apr 2013
On the travel.state.gov site, which is the State Department’s consular services for citizens traveling abroad, it offers a list of tips. Among them, “familiarize yourself with local conditions and laws” and, of course, “contact us in an emergency”. The site also devotes a section to entry requirements of foreign countries as well as information resources on How to Obtain Country Specific Information, Travel Warnings and Travel Alerts.
Family offices interested in investing in the BRIC countries might take something valuable from these particular tips. Brazil, Russia, India and China continue to remain attractive as investment opportunities to high net worth investors. But, foreign territory is still tough to navigate.
Interest Despite Economic Slowdown
These emerging markets, arguably no longer truly fitting that category, have not diminished in the eyes of many investors despite the global economic slowdown. Just last month, dated March 28, the International Herald Tribune published an article titled: BRIC, BRICS or BRICSI? The Growing Challenge. The article discussed how BRIC more recently morphed into BRICS, adding South Africa and then adding Indonesia, turning it into BRICSI.
Says a London-based investment manager working for a UK-based single family office on alternative investments: between 2000 and 2008, the BRICs contributed almost 30% to global growth in US dollar terms, compared to around 16% in the nineties.
The investment manager’s research determined that the BRIC countries account for 80% of emerging markets overall. Investors, he says, believe that the BRIC economies hold real potential over the next five to twenty years, compared to Western economies. By 2050, the combined economies of these four countries would overtake the current riches of the world. “It’s considered to be the driving force of the new global economy,” he says.
Other attractions? The BRIC countries are rich in resources, not saddled with debt, and home to young and increasingly educated populations, these economies are predicted to enjoy boom years that could deliver chunky returns for investors, he also says.
New York-based David Bailin, managing director and global head of Managed Investments at Citi Private Bank, speaking specifically about private equity and real estate, says the opportunity set is “pretty extraordinary”. The global drivers of economic growth — rapid consumerization, commercialization and urbanization — “are all trends that are sustainable and acceleration, generating numerous investment opportunities.”
London’s Tatiana Nevard, solicitor/director at Red Square London, a multi family office that focuses predominantly on Russian clients, points out that she has not witnessedany type of slowdown in investing in BRIC. “The more the global economy experiences an economic slowdown, the more people will focus on alternative jurisdictions and alternative industries to compensate,” she says.
There is a widely held belief that the opportunities and financial rewards are rife if you successfully venture into the BRICs. But the trick is you need to know how to succeed in a foreign jurisdiction, she emphasizes. That’s another matter altogether.
On the Ground
Nevard says key to this success is having a trusted partner on the ground. That could other family offices who are already established within these regions. “You really need to know what you are doing and how you are doing it, she says. “You need advice and support from people who don’t just speak your language, but they actually know how the country operates and how things are done.”
Citi Private Bank’s Bailin takes it a step further, pointing to the institutionalization of the private equity business. The global quality of management, the value added strategies the PE firms, the standards of audit and accounting are becoming more “Western” in scope. For example, local PE firms are creating ventures with industry players, like the Blackstones of the world, to form numerous partnerships. Bailin says he is witnessing numerous global partnerships. “That obviously creates a positive environment for family investors because the standards that are used for accounting and due diligence, common in Western Europe and the US, are becoming more the norm,” he says.
So, let’s take a look at some attributes that make these countries so appealing. The Centre for Economics and Business Research says the next decade will see Brazil, Russia, India, and China ” cement their economic dominance as Europe suffers a gradual decline in standing.” Brazil is predicted to become one of the five largest economies in the world, notes the London-based investment manager, adding its mergers and acquisitions activity between 1993 and 2010 has a value of $707 billion. Russia’s wealth distribution is spreading more evenly across its population and its reputation is shifting away from its once unfriendly Communist state. The country is also highly industrialized, with rich deposits of of oil, gas, strategic minerals and timber. India is one of the world’s fastest growing economies with an average annual GDP growth rate of 5.8% over the past two decades, reaching 6.1% during 2011 and 2012. Its middle class is projected to number around 580 million by 2030. Additionally, its telecoms industry is the world’s fastest growing and its among the top 12 biotech destinations of the world, says the investment manager. China, he adds experienced an economic growth rate equivalent to all of the G7 countries’ growth combined between 2007 and 2011. Its middle-class population (defined as those with annual income of at least US$17,000) had reached more than 100 million by 2011and while the number of individuals worth more than 10 million yuan (US$1.5 million) was estimated to be 1.02 million in 2012.
But, as much as there are opportunities, there are challenges. The geopolitics can be tough to navigate. The London-based investment manager is cautionary about Brazil. Corruption, he says, costs Brazil almost $41 billion a year alone, with 69.9% of the country’s firms identifying the issue as a major constraint in successfully penetrating the global market. Modern-day China, he also says, is mainly characterized as having a market economy based on private property ownership and is one of the leading examples of state capitalism. Here, the investment manager warns that the state still dominates in strategic “pillar” industries, such as energy and heavy industries.
Political risk, political instability, as well as bureaucracy – nothing that comes as a surprise, notes Red Square’s Nevard, for investors seeking opportunities in Russia. On the legal front, legal transactions are getting better. “The courts will consider grievances,” she says. “However, enforcing is still a big issue.” Here, again, is where your local partners may assist in knowing how to negotiate before you even get to the Russian court system. if someone is investing a lot of money. that’s all fine andwell. they have to trust the system that the investment will be safe. and that can only be achieved through proper document s or negotiated documents backed up by a legal system in the county.
Citi Private Bank’s Bailin agrees that global regulatory oversight is increasing as is the focus on legal rights and adjudication. For example, Bailin says clients have a much more cautious view of Russia and China, where the law and investor rights can be unclear and adjudication lengthy. “In Brazil, it’s very clear what rights you have, although the adjudication process is slow. In India the rules are often clear, but there are many political complexities. Because the legal constructs do not provide you with the same recourse that you have in the West, institutional sponsorship is all the more important, in terms of its value to a family office. I would say that the maturation of legal protection is happening to varying degree and is an important investor consideration.”
Getting Down to the Basics
Overall, Bailin advises to do deep and analysis and work with a global advisor. “A lot of families come to the private bank and have those conversations with us,” he says. “They rely on us for global due diligence, economic analyses and investment analysis. They ask us to vet partners and to identify the right partners or fund sponsors in each of those countries. This is not something that most family offices can or should do on their own.”
For Red Square London’s Nevard, she also says you must begin with the basics, questioning what is your main interest. Analyzing risk is critical; what your perception of risk is and do you want high risk high returns or low risk, moderate returns. There’s always two sides when approaching investments, she says. One is considering your risk tolerance and the other is what industries you are interested in and what you understand about them. “Never invest into an industry that you don’t understand, unless you invest with an advisor,” says Nevard. The thing to keep in mind with foreign territory, too, is “not to expect that things will work the same way as in the West because things work very differently. And it really is a massive education process, so it’s of the utmost importance to find the right advisors and the right trusted partners on the ground,” she also says.