(Dow Jones) Advisors to ultra-wealthy families are preparing their clients for a protracted climb out of the nastiest, and possibly the longest, economic downturn since the 1930s.
Though the rich may seem better positioned than middle-class investors to endure long recoveries, aspects of this recession are putting some very well-to-do families under strains that could, without proper stewardship, ruin them before the economy finds its legs again.
Though genuine panic didn't set in until late 2008, by late 2007 we were in a full blown "balance-sheet" or "financial" recession. That's a downturn caused not, as they usually are, by cyclical supply-and-demand tensions but by the disintegration of a speculative bubble--this one connected to U.S. residential real estate--that results in broad-based asset-value reductions with no easing on the liability side.
So now what we have is worth less than before the downturn and our liabilities remain the same. This is enough to make the already complex financial situation of some large multijurisdictional families that much more complex.
The problem isn't that families with hundreds of millions of dollars can't afford to pay their debts. It's that they're so big and their holdings so convoluted that they can't see problems or, on their own, understand how best to tackle them.
To make matters worse, wealth managers say that many private investors took money out of a falling stock market to pay down debt or to avoid further losses--and haven't benefited from the 70% stock-market rally of the past 12 months.
One indicator of this downturn's severity is in the way banks are treating some wealthy families. Rick Pitcairn, chief investor officer of the multiclient family office Pitcairn in Jenkintown, Pa., tells of a family that is close to having its note on a large commercial-property investment called "not because they ever missed a payment--they haven't--but because of some obscure coverage ratio that's in the loan documentation somewhere."
And families are coming to his firm as potential clients with lists of banks they refuse to do business with. "That's not something we've seen before," says Pitcairn. "It's a measure of the animosity that's out there now."
The Pitcairn firm advises its clients to seek out alternative sources of credit--like brokerages and, where applicable, specialist lenders like those that back investments in ranches and timberland.
Another problem with balance-sheet recessions is that they last longer. Consumers, businesses and governments are impacted by them at different stages, so that as one segment recovers another is apt to slip into the doldrums, prolonging the downturn.