One common thread that seems to apply across so many disciplines is that unforeseen shocks and so-called “black swan” events act as accelerants for change. They act to bring about shifts in behavior in a matter of months that would have otherwise taken years or even decades to take hold. Against the backdrop of a global pandemic and the many unprecedented governmental policy measures that flowed from it, we are living through such a period of upheaval. This will trigger the death knell for many age-old businesses and trends and usher in a multitude of new opportunities and working practices.
The most obvious example of this over the past twelve months has been the move to home or “flexible” working which looks to become the norm in many industries for many years to come (although at the time of writing, a number of prominent investment banks are leading the charge in calling their staff back to their offices).
Luxury asset management is changing as we know it
There is, however, another change going on in the luxury asset sector, that we have seen firsthand across the last 12 months. By way of additional context, consider the following:
- The ways in which some classes of luxury goods are used and treated have been changing for some time. In 2000 the London International Vintners Exchange (Liv-Ex) created a stock exchange for investment-grade wine, which has increasingly become viewed as a “store of value” commodity. More recently rare whisky has attracted the same treatment, with the value of the market reportedly growing +564% over the last ten years and +5% in the past 12 months.
- The same is true in the vintage car and luxury watch markets where the right pieces can yield returns that can quite comfortably outperform more traditional asset classes or even fine art, which has more of a history as an “alternative” asset class.
- The COVID-19 pandemic has also pressed many governments to reach for the money printing machine in order to provide much-needed stimulus and support to economies that were essentially switched off pretty much overnight. The knock-on effect for many is the debasement of currencies like the US Dollar, which will lose further purchasing power. One report estimates that almost one-fifth of all US dollars in circulation were created in 2020.
In sum, there is an argument that the stage is set for further and more rapid changes to come in the manner in which luxury goods are used and consumed.
Our recent experiences in working with clients in the UHNWI and family office community suggest two things:
First, perhaps fuelled in part by efforts to beat inflation, there is an increasing appetite to diversify investment portfolios and acquire or increase exposure to “exotic” investment plays in alternative and luxury asset classes. We have seen this take many forms, including a rise in interest in funds that invest in specific classes of fine art pieces, all the way through to the speculative purchase of “distressed” assets (including superyachts and private jets) where they are perceived to be priced at below their intrinsic value.
Second, and looking in particular at the superyacht market, the numbers and transaction volumes suggest that more and more individuals with the means to build or purchase a superyacht are being tempted to do so. Again, it could be that rather than seeing the value of cash reserves being devalued by inflationary pressure, these individuals are seeing more and more of a case for using their cash to enhance and improve their options and opportunities. Put another way, living through a pandemic (and most likely stuck under some form of lockdown measures) has given us all, quite literally, pause for thought. For the UHNWI community, this may have led to many making purchasing decisions with not so much of a “what’s the risk” approach but rather one of “what the heck?!”.
All of this, we would argue, is part of a re-assessment of how the UHNWI and family office community may allocate capital over the coming decade, with an increased emphasis on acquiring value not purely through realizing gains in traditional investments but also through the ‘experiential’ value that might come through the thrill of yacht ownership or the additional comfort and convenience of private jet travel.
Indeed, we have seen clients contemplating purchasing or building yachts not as holiday destinations but even as second or third homes, which will be fully equipped to enable them to live and run their businesses on board for months at a time. This comes at the same time that Somnio, the world’s first self-proclaimed ‘yacht liner’ is in the process of being marketed to the UHNWI community as a new concept in luxury living and travel.
From a legal perspective, our advice to both new entrants and experienced players in the superyacht and luxury asset markets would be not to continue to apply the same level of care and due diligence to, say, a yacht transaction as might be applied to any other high-value deal.
Whilst the purchaser of a superyacht might not, quite rightly, expect that it will increase in value over time there is, as we have sought to demonstrate in this article, a definite value proposition to preserve that starts with protecting the purchaser’s legal rights from the outset. The issues that come up are similar to those that apply in the acquisition of almost any hard asset and will include (by way of illustration only):
- Does the seller hold clean title to the asset? Is there a mortgage or other encumbrance that should be discharged before completion?
- What contractual rights and benefits over the asset does the seller hold and can they be assigned to the buyer?
- Will the sale create a taxable event? If so how might this be mitigated?
The need to deal with these points is as real and warranted in the context of a discretionary luxury asset purchase as it is in any other. As the way in which our understanding of what “value” really is continues to broaden and develop, we expect this to become a universally accepted view.