How do the wealthy invest today, and what can we learn from them? While there is no single approach, there are lessons to be learned from how ultra-high net worth and high-net-worth investors manage their wealth and transfer it to future generations. From traditional stocks and bonds to commercial property and other alternative investments, how the wealthy invest—particularly during uncertain economic times—can provide lessons in not just preserving wealth but growing it.
First, what does it mean to be wealthy? The financial industry defines wealthy investors as high-net-worth (HNW) individuals with at least $1 million in liquid personal assets. Money managers make a further distinction for an increasingly influential group of ultra-high net worth (UHNW) investors, which asset management firm KKR defines as holding more than $30 million in assets. Currently, 62% of wealthy investors are baby boomers, with Generation X at 20% and millennials and the silent generation at 9% each, according to a 2022 report by Bank of America (BOA) on wealthy Americans with more than $3 million in investible assets. Investment practices vary by level of wealth and by age. One percent of Gen Z is considered wealthy, but these households are getting wealthier as a historic generational transfer of wealth passes from older generations through 2045.
Ron Diamond, who heads an eponymous wealth advisory for family offices with more than $250 million in assets and is the family office chair for national HNWI network Tiger 21, said this unprecedented transfer of wealth is pulling capital toward private equity. Like BOA, he sees HNWIs investing differently depending on their age.
Investment Strategies Favored by the Wealthy Have Changed
There is no single approach to investing, but some generalities do apply. Historically, HNW investors have allocated around 50% of their assets to stocks, 20% to bonds, 25% to alternatives and 5% to cash, global investment firm KKR noted in 2021. However, Diamond said alternatives have begun to claim more of the UHNW portfolio in the past 10 to 15 years. UHNW investors have allocated around 30% to stocks, 10% to bonds, 50% to alternatives and 10% to cash, according to KKR.
Asset Allocation as Percentage of Total Portfolio
Source: KKR 2020 HNW Survey
According to BOA’s report, the generational shift shows portfolios with a higher percentage of real estate, private equity and other alternatives: Young, wealthy investors allocate three times more to alternative investments and half as much to stocks. These younger households with early wealth are more likely than older households to have started with an inheritance or achieved atypical private market success from startup, crypto or other ventures. Their extraordinary circ*mstances may lead them to favor nontraditional alternative or private equity investments.
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Notably, the allocation to real estate and other alternatives seems to be positively correlated with the amount of wealth someone has. In a 2021 Ernst & Young survey, 29% of HNW households and 81% of UHNW households rely on alternatives in their portfolio, compared with only 14% of mass affluent households.
Clearly, investing in alternatives is a strategy the wealthy are using more than less affluent investors to grow and preserve their wealth. With more investible cash, connections and other resources at their disposal, ultra-high net worth investors are better positioned to acquire and hold real estate and other illiquid assets. But it is important to note that these individuals usually manage their money with the assistance of financial professionals or family offices, and their high net worth qualifies them and gives them access to additional opportunities and benefits. Sustaining a family office usually takes about $250 million on average, but many HNW individuals with $10 million to $200 million use multi-family offices for money management, Diamond noted.
How the Wealthy Invest in Real Estate
Wealthy investors have always been attracted to real property, but in the past generation real estate and development have claimed a greater share of their portfolios. Private equity real estate assets have achieved a 10% compounded annual growth rate over the past decade, Bain Capital’s 2023 Global Private Equity Report noted. The emerging infrastructure and construction segment, viewed as less cyclical than real property, grew 18%.
“Historically, real estate has been the most lucrative asset class for high-net-worth individuals,” Diamond said. “So not surprisingly, more family offices are investing in alternative assets. It’s more difficult to create alpha in the public markets and much easier, in my experience, to create alpha in the private markets—private equity, real estate, venture capital or credit.”
While institutions pulled back on new real estate investments by 28% in 2022’s unsettled economic climate, wealthy private equity investors were less defensive, pulling back only 8% from the previous year’s record fundraising levels, the 2023 Knight Frank Wealth Report showed. Private capital accounted for a record 41% of the $1.1 trillion committed by all investors last year; private investment was dominated by allocations to residential (43%), offices (18%) and logistics (15%).
Altogether, high-net-worth investors put more in real estate than equities: 32% of their wealth on average is invested in residential property, 26% in equities and 21% in commercial properties, Knight Frank’s report said. Offices were the most common type of commercial property, with 35% of that in the health care sector. Environmental factors were significant in how the wealthy invest, with 57% of wealth advisors surveyed saying their clients look at whether the property has a green energy source.
Private real estate supports UHNW individuals’ investment strategy in multiple ways. It offers investors:
- Diversification and risk management through low-volatility, low-correlation alternatives to public equities;
- Passive income that can provide a stable cash flow from rents;
- An inflation hedge;
- Returns that can provide stability in uncertain economic conditions;
- The greater control and value-add opportunities of direct investment; and
- Tax advantages from depreciation and the way capital gains are taxed.
How Do Economic Downturns Impact HNW Investing Habits?
In Bain’s view, the current economic uncertainty will lower the appetite for limited partners to take on new deals after several years of record allocations to private equity. Private investors were the most active buyers in global commercial real estate markets in 2022 with $455 billion invested, 41% of the total, according to Real Capital Analytics.
The slowdown also signals the increasing market dominance of high-net-worth investors. For the first time, private buyers were responsible for the highest share of global commercial property investment, overtaking institutions. Multifamily residential, offices and industrial assets attracted the most interest in Knight Frank’s Wealth Report Attitudes Survey of wealth managers.
Deals done in a downturn can generate superior returns over time. According to the Bain report, this pattern held up after the tech bubble burst in 2000 and coming out of the Global Financial Crisis of 2008 as well. A deal for a good asset at a good price may make sense even with a larger equity allocation or higher debt costs.
According to our own research here at Origin Investments, we have found this to be true as well: Investors with a time horizon of five or more years who are willing to shoulder a degree of risk can achieve returns of more than the risk-free-rate over the long term—even during downturns and recessionary periods. In two out of the three most recent downturns, private real estate generated a 6.8% annualized return for investors over the three five-year investment periods. That’s compared with a 4% return using the Treasury note strategy.
If interest rates decline later this year, market sentiment may shift quickly. With the continued dearth of deals, investors will need to be well-placed to take advantage of opportunities emerging across global real estate markets.
What the Future Holds for High-Net-Worth Investors
Inflation will be a significant factor driving investment decisions in 2023. Eighty percent of respondents to Knight Frank’s HNW Pulse Survey said it would influence their investment decisions either significantly (37%) or to some extent (43%). To navigate the higher inflationary environment, investors may favor commercial property for its appreciation potential, which informed Knight Frank’s conclusion that “real estate and alternatives will be where wealth is grown over the coming decade. … We are bullish on residential, industrial and warehousing.”
Private investors from the U.S. were the largest source of commercial real estate capital last year, with $302 billion invested—more than a quarter of total commercial real estate investment and 66% of private investment, Knight Frank’s 2023 Wealth Report noted. (However, investment from U.S. private buyers was down 3% year-on-year.)
The appeal of commercial property clearly remains, despite the economic backdrop. The Knight Frank Wealth Report indicated 19% of global UHNW investors planned direct investments in commercial real estate in 2023, while 13% were seeking to invest indirectly through vehicles such as private REITs or funds. Almost half saw real estate as an opportunity for wealth creation as they diversify and seek capital appreciation as their primary goal.
Real estate represents the top opportunity for high-net-worth investors seeking diversification and a hedge against inflation, according to the private bankers, wealth managers and family offices cited in Knight Frank’s 2023 Attitude Survey of more than 500 private bankers, wealth advisers, family offices and industry experts. David Bailin, chief investment officer of Citi Global Wealth Management Investments, told Knight Frank that real estate and alternatives will be “where wealth is grown over the coming decade.” With strong fundamentals, Citi is bullish on residential, industrial and warehousing.
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FAQs
The minimum investment in private equity funds is relatively high—typically $25 million, although some are as low as $250,000. Investors should plan to hold their private equity investment for at least 10 years.
How do 90% of millionaires make their money? ›
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago.
Will private equity make you rich? ›
Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.
How do the rich get richer with real estate? ›
The most popular way is to buy an investment property and slowly build up your portfolio. Generally, there are two primary ways to make money from real estate assets — appreciation, which is an increase in property value over a period of time, and rental income collected by renting out the property to tenants.
What is the 8 20 rule private equity? ›
The 20% performance fee is the biggest source of income for hedge funds. The performance fee is only charged when the fund's profits exceed a prior agreed-upon level. A common threshold level used is 8%. That means that the hedge fund only charges the 20% performance fee if profits for the year surpass the 8% level.
What is the 2 20 rule private equity? ›
At its most basic, the two and twenty is basically the standard fee structure for venture capital firms to charge their investors. The 2% is the annual fee that the fund charges investors to manage the fund. And the 20% is the percentage of the upside that the fund managers take.
Is it true that 90% of millionaires make over $100000 a year? ›
Choose the right career
And one crucial detail to note: Millionaire status doesn't equal a sky-high salary. “Only 31% averaged $100,000 a year over the course of their career,” the study found, “and one-third never made six figures in any single working year of their career.”
What is the 1% of wealth net worth? ›
People with the top 1% of net worth in the U.S. in 2022 had $10,815,000 in net worth. The top 2% had a net worth of $2,472,000. The top 5% had $1,030,000. The top 10% had $854,900.
Is $2 million a multi millionaire? ›
Dated ways of describing someone worth n millions are "n-fold millionaire" and "millionaire n times over". Still commonly used is multimillionaire, which refers to individuals with net assets of 2 million or more of a currency.
What pays more than private equity? ›
Hedge Fund Compensation:
Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity.
Amid a booming year for the industry, the 22 private equity tycoons on The Forbes 400 are now worth more than $150 billion combined. I t is shaping up to be a stellar 2021 for private equity, with the industry on pace for a record-breaking year.
Why do people in private equity make so much money? ›
Private equity owners make money by buying companies they believe have value and can be improved. They make money by improving the company, which generates more profits, making them money. They also make money when they eventually sell the improved company for more than they bought it for.
Why 90% of millionaires invest in real estate? ›
Federal tax benefits
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
How much do top 1% realtors make? ›
Each real estate office sets its own standards for top producers, but it's safe to say that a top producer would have to sell at least one home per month to qualify. Top producers earn around $112,610 a year to start, according to the BLS. 1 Mega-stars could earn $500,000 per year and up.
What are the 4 P's of private equity? ›
Our roundtable discussion was framed by the 4 P's of investing: Product, People, Potential, and Predictability.
Does private equity always buy 100%? ›
Private equity firms are not passive investors. They often buy 100% of a target company, or at least a controlling stake, and may do a lot of work to streamline its operations, cut costs or improve performance.
What is the average private equity exit? ›
The aggregate value of private equity exits globally came in at $391.44 billion for the year, down 32.1% from the 2021 total, according to private markets data source Preqin Pro.
What is the best way to break into private equity? ›
Private equity firms usually look for entry-level associates with at least two years of experience within the banking industry. Investment bankers usually follow the PE firm career path as their next job and typically have a bachelor's degree in finance, accounting, economics, and other related fields.
What percentage does private equity take? ›
Calculated as a percentage of the profits from investing, typically around 20%. These fees are intended to incentivize greater returns and are paid out to employees to reward their success.
What is the minimum fund size for private equity? ›
Firms generally require a minimum investment of $200,000 or more, which means private equity is geared toward institutional investors or those who have a lot of money at their disposal. If that happens to be you and you're able to make that initial minimum requirement, you've cleared the first hurdle.
There are 5.3 million millionaires and 770 billionaires living in the United States. Millionaires make up about 2% of the U.S. adult population. While an ultra-high net worth will be out of reach for most, you can amass $1 million by managing money well and investing regularly.
What percentage of Americans have over $100000 in savings? ›
Most Americans are not saving enough for retirement. According to the survey, only 14% of Americans have $100,000 or more saved in their retirement accounts. In fact, about 78% of Americans have $50,000 or less saved for retirement.
What percentage of US population has $5 million dollars? ›
Somewhere around 4,473,836 households have $4 million or more in wealth, while around 3,592,054 have at least $5 million. Respectively, that is 3.48% and 2.79% of all households in America.
What is the top 2% net wealth? ›
Additionally, statistics show that the top 2% of the United States population has a net worth of about $2.4 million. On the other hand, the top 5% wealthiest Americans have a net worth of just over $1 million. Therefore, about 2% of the population possesses enough wealth to meet the current definition of being rich.
What is considered upper middle class? ›
Many have graduate degrees with educational attainment serving as the main distinguishing feature of this class. Household incomes commonly exceed $100,000, with some smaller one-income earners household having incomes in the high 5-figure range.
Does the richest 1% own half the world's wealth? ›
The richest 1 percent grabbed nearly two-thirds of all new wealth worth $42 trillion created since 2020, almost twice as much money as the bottom 99 percent of the world's population, reveals a new Oxfam report today. During the past decade, the richest 1 percent had captured around half of all new wealth.
What percentage of US population has $3 million dollars? ›
What percentage of the U.S. population has $3 million dollars? According to The Kickass Entrepreneur, there are about 5,671,000 households in the U.S. that have a net worth of $3 million or more. This represents 4.41% of all U.S. households.
What percentage of US population has $2 million dollars? ›
About 1 percent of the US population have net worth of $2 million or more.
How can you tell if someone is a millionaire? ›
A millionaire is somebody with a net worth of one million dollars. It's a simple math formula based on your net worth. When what you own (your assets) minus what you owe (your liabilities) equals more than a million dollars, you're a millionaire. That's it!
Are private equity people smart? ›
Private Equity Career Training
PE firms tend to be relatively small, tight-knit and full of extremely smart and highly motivated people.
Investment Banking vs Private Equity Salaries
Both investment banking and private equity are well-paid jobs but the compensation ceiling is far higher in private equity than it is for investment banking. This explains why most investment banking analysts choose private equity as their exit option.
Which is better hedge fund or private equity? ›
Private equity funds are less risky as compared to hedge funds. Hedge funds carry higher levels of risks since these emphasize more on deriving huge returns and that too within a shorter period of time. The gains earned in private equity funds are not subjected to tax rates.
How old is the average private equity partner? ›
The Private Equity Career Path
| Position Title | Typical Age Range | Time for Promotion to Next Level |
|---|
| Senior Associate | 26-32 | 2-3 years |
| Vice President (VP) | 30-35 | 3-4 years |
| Director or Principal | 33-39 | 3-4 years |
| Managing Director (MD) or Partner | 36+ | N/A |
2 more rowsAverage Blackstone Consulting, Inc Human Resources Business Partner yearly pay in the United States is approximately $69,822, which is 22% below the national average.
What is the average private equity CEO salary? ›
Private Equity Ceo Salary
| Annual Salary | Monthly Pay |
|---|
| Top Earners | $180,000 | $15,000 |
| 75th Percentile | $165,500 | $13,791 |
| Average | $110,089 | $9,174 |
| 25th Percentile | $55,000 | $4,583 |
Learn more about the nine types of private equity funds below.
- Leveraged Buyout (LBO) A leveraged buyout fund strategy combines investment funds with borrowed money. ...
- Venture Capital (VC) ...
- Growth Equity. ...
- Real Estate Private Equity (REPE) ...
- Infrastructure. ...
- Fund of Funds. ...
- Mezzanine Capital. ...
- Distressed Private Equity.
Investment banking and private equity are two of the most prestigious and competitive areas in finance, offering significant opportunities for advancement and high compensation.
Is Berkshire Hathaway a private equity? ›
Berkshire Partners is an American private equity firm based in Boston. It has invested in over 100 middle market companies since 1986 through nine investment funds with aggregate capital commitments of more than $16 billion.
Is it smart to invest all your money in real estate? ›
Real estate has proven itself a worthy investment that provides cash flow and appreciation over time. Whether you're an aggressive or conservative investor, it's a great way to diversify your portfolio and can pay off in the short-term and long-term.
How much of net worth should be in real estate? ›
Experts say between 25-40% of your net worth should be in real estate because that asset class allows investors to capitalize on the benefits of real estate ownership—like passive income, equity, and appreciation—as you pursue other methods of investment and wealth development.
There are many ways to invest $1 million dollars of your own money in real estate, including through:
- Multifamily Real Estate Syndication.
- Purchasing Rental Properties.
- Fix & Flipping Properties.
- Purchasing Office, Retail, or Industrial Buildings.
- Private Lending.
- Investing in REITs.
Ben Caballero, a current Guinness World Record title holder and No. 1-ranked real estate agent in the U.S., set a new record for home sales in Dallas-Ft.
What type of realtor makes the most money? ›
Real Estate Broker
A real estate broker is permitted under law to negotiate and organize real estate dealings. A career as a real estate broker is one of the highest paying and lucrative professions in the real estate industry. On average, experienced brokers take home a six-figure pay.
What is the highest-paid realtor? ›
The highest-paid real-estate agent is a luxury broker.
Luxury brokers earn an average salary of $142,000 per year with commissions reaching up to $10M annually. As a luxury broker, you would specialize in multimillion-dollar deals and work closely with developers, architects, and designers.
What bank do most millionaires use? ›
Some of the most popular banks for millionaires and billionaires include JPMorgan Chase, Bank of America, and UBS. Other examples of banks that may be popular among the ultra-rich include: Private banks: Private banks are banks that offer specialized financial services to high net worth individuals and families.
What do super rich invest in? ›
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
Do most millionaires inherit? ›
Dave Ramsey, personal finance expert and founder of Ramsey Solutions, says this myth of primarily inherited riches is “flat wrong.” When Ramsey's National Study of Millionaires asked where the riches came from, they found that a whopping 79% didn't receive any inheritance from parents or other family members.
Is it worth it to invest in private equity? ›
Private equity is an attractive investment option for high-net-worth individuals and institutional investors because of its potential for high returns. Private equity falls under the category of alternative asset classes.
How much does the average person make in private equity? ›
Private Equity Salary
| Annual Salary | Monthly Pay |
|---|
| Top Earners | $160,000 | $13,333 |
| 75th Percentile | $111,500 | $9,291 |
| Average | $99,280 | $8,273 |
| 25th Percentile | $65,500 | $5,458 |
The Private Equity Career Path
| Position Title | Typical Age Range | Time for Promotion to Next Level |
|---|
| Associate | 24-28 | 2-3 years |
| Senior Associate | 26-32 | 2-3 years |
| Vice President (VP) | 30-35 | 3-4 years |
| Director or Principal | 33-39 | 3-4 years |
2 more rowsOne of the main disadvantages of private equity is the lack of liquidity. Unlike publicly traded stocks and bonds, private equity investments are not easily converted to cash. This can make it difficult for investors to exit their position if they need to do so.
What is the downside of private equity ownership? ›
The cons of private equity investing
One of the major cons is the lack of liquidity – once you invest in a private equity firm, it can be challenging to sell your shares or exit that investment. Another disadvantage of private equity is the high fees involved.
What is the highest salary in private equity? ›
What is the highest salary for a Private Equity Analyst in India? Highest salary that a Private Equity Analyst can earn is ₹30.7 Lakhs per year (₹2.6L per month).
Is it hard to get into private equity? ›
Landing a career in private equity is very difficult because there are few jobs on the market in this profession and so it can be very competitive. Coming into private equity with no experience is impossible, so finding an internship or having previous experience in a related field is highly recommended.
What pays more private equity or investment banking? ›
Private equity associates are usually older individuals who started out and were successful in investment banking in their earlier years. While there is sometimes quicker money to be made in investment banking, usually associates in private equity have higher salaries and make more in the long term.
What is the rule of 72 private equity? ›
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
How many hours do private equity people work? ›
Investors need to know they can rely on what you say and the analysis you're producing. The average during a busy time for associates and analysts is usually around ~60-70 hours per week. But it's all dependent on how many deals and investments are on the go. The above hours will vary based on if there's a live deal.
What GPA do you need to get into private equity? ›
What Does a Good Private Equity Resume Look Like?
- Top undergraduate school with stellar grades (3.7 GPA or higher).
- If you're still in school, you can highlight key finance courses you take. ...
- You should have relevant extracurricular activities on your resume. ...
- Other extracurriculars that show relevant characteristics.
