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Private public investment is more inter-dependant than ever

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Private public investment is more inter-dependant than ever 1

By Konstantin Sidorov, CEO and Founder of London Technology Club

Today, one thing unites the majority of governments around the world: their fiscal position is destitute. COVID 19 has seen an extraordinary, forced expansion in public sector expenditure, which has come just as the world was getting back on its feet following the Global Financial Crisis. The financial strains are already showing and will become more apparent as we move through the pandemic into social and economic recovery.

If you want to understand the impact that the re-focusing of public sector spending is having, then there is no better example than the space economy. In the US and Europe, we are becoming increasingly reliant on the space rockets and space launch companies pioneered by private investors and entrepreneurs.

NASA, that powerhouse and flag bearer for American national pride, is having to partner with the private sector in order to fulfil their missions. Private investors, the likes of Elon Musk, and Jeff Bezos alongside smart use of new technologies have brought the economics of space down and the excitement around what’s possible up. With it comes a whole satellite manufacturing, launch and servicing industry growing to $271bn in revenues in 2019. Of the total revenues in the space economy ($366bn in 2019), government space budgets made up $95bn of that.

Commercial entities, being patiently built and backed by private capital willing to dig deep and progress their own missions has helped fuel the space economy. Many are realising now just how crucial space is for the future of a country’s protection, position in the world and prosperity. In China, India and Russia we still see significant public sector expenditure in space projects as an agent for military and economic expansion. The role of private investors in plugging major gaps in public sector funds and national pride in Western economies is therefore increasingly important.

Private and public investment must be seen as a partnership. We should not forget that Elon Musk’s SpaceX survived from the brink of collapse only because of a ten-figure NASA contract awarded at the last minute. Musk, since then, has looked for public infrastructure contracts to fuel his companies, the likes of The Boring Company winning the contract to build a downtown-to-airport loop, a  government program for high-speed transport in Chicago. Musk proves his products and services work and then secures lucrative government contracts in order to quickly scale which in turn leads to transforming whole industries.

It’s not just space infrastructure where we see this redefinition of the role of public and private finance. The Chinese have invested at least US$160 billion in infrastructure projects as part of the Belt and Road Initiative, creating roads, ports, energy infrastructure and providing aid to foreign governments to create the most ambitious infrastructure project the world has yet seen.

Konstantin Sidorov

Konstantin Sidorov

For Western countries, access to that scale of public finance is not fiscally-possible, a new solution is needed and just as the space race has been redefined by private capital, so will the development of new industries, infrastructure and the reinvigorating of economies facing structural change that has been accelerated by COVID.

Private capital has the huge advantage of being driven by conviction and competence. It can cost-effectively be deployed, fast and targeted with a laser-like focus by entrepreneurs who know exactly what they want to achieve. Private capital, currently, is also in abundance.

In a world which is providing slim returns across multiple traditional asset classes, private capital is being stockpiled and is waiting for the opportunity to be invested for growth. We need private investors to have the confidence to deploy their capital to fuel the system once again.

This new world, post COVID, won’t see public capital replaced. Its role is likely to focus more heavily on health, welfare and critical infrastructure. However private investors will step in where gaps appear. Ten years ago, the scale and ambition of private space companies would have been greeted with snorts of derision and looks of disbelief. Today governments embrace the private capital, and regard the companies that have deployed it as systemically important national assets.

As we look to the future, huge macro trends emerge that demand significant investment: the aging population, the threat of pandemic, the drive to create a sustainable economy and lifestyle, the need to decarbonise, the digital revolution. The list goes on.

Public finance cannot hope to provide the finance and pioneer the bold thinking and accept the risks required to find new solutions that drive us forward in a world of change. That role goes to the private investor and private capital.

For the investors themselves the opportunities are immense, and for society as a whole they are just as big. As we look forward public and private sector needs to embrace private capital. Rather than fearing private investors as locusts who strip organisations and opportunities of profit then fly away, a narrative that gained traction after the last great economic crash. This time we need to see private capital as agents for positive transformation. Private-public partnerships fuelling each other.

Private money is already building rockets that send people and payloads into space, but that isn’t the final frontier for entrepreneurial investors or the societies and economies that benefit from their boldness.

Investing

Are clients truly getting value from their BR solution?

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Are clients truly getting value from their BR solution? 2

By Matt Dickens, Senior Business Development Director at Ingenious

Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?

1. Total fees and charges

Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.

Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.

2. Real investment returns

Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment.  Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.

While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.

3. The relationship between fees and risk

Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.

 Are clients truly getting value from their BR solution? 3Manager 1

Annual performance target, net of fees: 3%

Annual fees: 3%

Gross performance target: 6%

 

Are clients truly getting value from their BR solution? 4Manager 2

Annual performance target, net of fees: 4%

Annual fees: 1%

Gross performance target: 5%

Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.

Market comparison

In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.

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Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions

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Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.

This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.

Click for more information and for complimentary registration to the online edition

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Eileen Murray, Chair, Finra
  • Philip Lane, Chief Economist, European Central Bank
  • Gregory Davis, Chief Investment Officer, Vanguard
  • Hanneke Smits, CEO, BNY Mellon Investment Management
  • Pascal Blanque, Chief Investment Officer, Amundi
  • Desiree Fixler, Group Chief Sustainability Officer, DWS
  • Joe Lubin, CEO, Consensys
  • Bahren Shaari, CEO, Bank of Singapore
  • Mark Machin, CEO, Canada Pension Plan Investment Board

The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.

View the full agenda here

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Halliburton & Baker Hughes CEO’s join Reuters Events: Energy Transition 2020

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Reuters Events – today announced that CEO’s of two of the world’s leading energy service companies, Halliburton and Baker Hughes, will join the speaker faculties for their flagship Energy Transition Summit.

The event will explore the creation of the future energy ecosystem and offer companies, from across the asset spectrum, a definitive guide to their net-zero strategies. The alignment of the two biggest O&G global service companies, Halliburton and Baker Hughes, represents a significant step in the transition to low-carbon energy

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Alongside their CEO speaker representation, Halliburton join as Platinum sponsors of the North American edition. Baker Hughes join as gold sponsors for the European edition of the flagship energy transition program.

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Lorenzo Simonelli, Chairman & CEO, Baker Hughes
  • Jeff Miller, CEO & President, Jeff Miller
  • Tristan Grimbert, CEO, EDF Renewables
  • John Pettigrew, Chief Executive, National Grid
  • Pratima Rangarajan, CEO, OGCI Climate Investments
  • Alex Schneiter, CEO & President, Lundin Energy
  • Gretchen Watkins, President, Shell Oil Company
  • Calvin Butler Jr., CEO, Exelon Utilities
  • Francis Fannon, Assistant Secretary ERB, S. Department of State
  • David Lawler, Chairman & President, bp America
  • Andreas Schierenbeck, CEO, Uniper

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Governance & Cooperation – Does the energy transition face a ‘governance deficit’? To understand how the energy transition will develop over the next decade, it is crucial to understand the driving governing forces behind it. Will the Green Deal provide the first domino, how can we ensure progress in the shadow of Aberdeen and ensure that we translate targets into action?

Financing Energy Transition – We must address the elephant in the room; who is going to pay for it all? An understanding of where the funds are likely to come from is key to staking claim to the infrastructural projects that will redefine the modern world in the 21st century.

New Energy Infrastructure – Low-carbon energy supply and consumption will need a radical overhaul of infrastructure. As well as revamping the old, we’ll need entirely new assets and new systems of energy delivery. It’s an unprecedented opportunity with estimated spending at $70 trillion over the next decade. Knowing which technologies are ready to be scaled first is the key to understanding opportunity

Business Model Innovation – Who will provide leadership through the age of transition and how do we want our future energy system to look? Speed and timing will be crucial if you are to stay on the right side of the transition. Join us in setting business led, evidence based, targets as industry drives towards net-zero

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

At Reuters Events, we’re committed to tackling the Energy Transition head on; to shed light on the defining issue of our time and help energy companies meet a uniquely difficult challenge. That is, to be both an energy company of today, and the energy companies of tomorrow. In a period that will be defined by uncertainty we can, together, lighten the way forward.” – Owen Rolt, Head of Energy Transition, Reuters Events

Contact

Owen Rolt

Head of Energy Transition

Reuters Events

UK: +44 (0) 207 375 7596

E: [email protected]

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