How the Super-rich Will Be Spending Their Money as Wealth Trends Fluctuate

As part of its upcoming 2020 Global Wealth Migration Review, New World Wealth examines the potential impact of coronavirus on the spending habits of millionaires.

According to New World Wealth, there are some 13 million high-net-worth individuals in the world as of June this year. Together, they account for over 35 percent of the world’s wealth.

“Wealth” in this context refers to the net assets of a person. Emerging high-net-worth individuals (HNWI) trends to look out for will affect travel, property, tourism and transport.

A recent report by New World Wealth anticipates a move away from commercial airlines and towards private jets. It also predicts that many HNWIs will choose to work remotely and live in smaller towns. It also foresees a drop in tourism and the use of public transport.

Many London-based HNWIs may choose to move to towns such as Taplow and Marlow, and country areas such as the Cotswolds could also become more popular.

Less international tourism is already a factor of life with Covid. The luxury hotel sector of each country is likely to become more dependent on local HNWIs.

The fact that HNWIs will probably avoid public transport in big cities will come as no surprise.

Luxury residential estates, such as the Yellowstone Club, could become more popular, and trends such as online shopping, boutique hotels and outdoor pursuits such as cycling, golf and fly-fishing are likely to continue.

Wealth vs GDP

Wealth includes all assets (property, cash, equities, business interests) less any liabilities. The report considers wealth to be a far better measure of an economy’s financial health than GDP.

In many developing countries, a large portion of GDP flows to the government and therefore has little impact on private wealth creation.

GDP counts items multiple times (for instance, if someone is paid $100 for a product/service and they then pay someone else that $100 for another product/service, then that adds $200 to a country’s GDP, even though only $100 has been produced).

GDP ignores the efficiency of the local banking sector and the local stock market at retaining wealth in a country.

GDP largely ignores the impact of property and stock market moves. These two factors obviously have a massive impact on wealth.

GDP is quite a static measure — it tends to move only slightly year-on-year. As a result, it is not a great gauge of the performance of an economy.

Wealth figures do not have any of these limitations, making them a better measure of financial health.

New World Wealth provides information on the global wealth sector, with a special focus on high-growth markets. Its reports focus on HNWI demographics, such as city and suburb wealth breakdowns. It also reviews the luxury market in each country, with a special focus on fine art, classic cars, luxury hotels, prime residential property, family offices and wealth management.

The company is based in Johannesburg, South Africa. For more information, visit newworldwealth.com.

About the Author

Andrew Amoils founded New World Wealth in 2013. He previously worked as a wealth analyst for Progressive Media (now Globaldata) in London. His focus areas include statistical modelling and wealth intelligence gathering. His work has been featured in media outlets including the BBC, The Financial Times, CNN, Fox News, Bloomberg and Forbes.


UK Struggles with Economic Illiteracy as Crisis Worsens

Britons’ grasp of basic economics is tenuous at best and more likely than not, virtually inexistent. A report commissioned by the Office of National Statistics (ONS) found that most people in the UK lack the ability to assess economic performance and are unable to judge how well, or badly, the government is doing. Economic illiteracy means that concepts such as national debt, deficit spending, inflation, and GDP are alien to most and often considered part of the mumbo-jumbo proffered by experts who are almost universally distrusted.

The findings of the Economics Statistics Centre of Excellence, an ONS-linked thinktank, are disconcerting and go a long way to explaining the public’s lack of interest in the dire economic consequences of Brexit. A YouGov poll conducted on the eve of the 2016 referendum on the UK’s membership of the European Union found that over half of the respondents supporting the ‘leave’ camp would switch to ‘remain’ in case Brexit would imply in a personal loss of income of just five pounds.

Earlier this year, an analysis by the London School of Economics (LSE) concluded that the economic cost of Brexit could be two to three times higher than the impact of the Corona pandemic. Using models similar to those employed by the government, LSE researchers put the long-term economic hit of a no-deal Brexit at 8% of GDP – equivalent to about £160 billion – or £2,400 per person. Even the Bank of England’s short-term forecast of an additional 1.7% contraction in economic output attributable to Brexit next year, equates to a per capita loss of around £600 – or 120 times the maximum ‘leavers’ were willing to pay for their love of sovereignty and determination to ‘take back control’.

LSE researchers cautioned that the consequences of the UK leaving the EU are likely to be felt over a much longer period as the country’s business climate deteriorates due to added administrative burdens and trade friction. The authors of the report also warned that EU-based businesses will seek to avoid exposure to UK suppliers and markets in an attempt to steer clear of red tape.

Aversion to Data

However, these and other considerations repeated ad nauseam failed to impress British voters suffering from economic illiteracy. According to the ONS study, only 47% of the over 1,600 people queried for the survey were able to properly explain the meaning of gross domestic product. The less enlightened respondents thought GDP was a measure of exports, wages, taxes, or the value of the pound.

Senior fellow Johnny Runge of the National Institute of Economic and Social Research said that economic jargon was a ‘turn-off’ for most people who usually flip the page, change the channel, or otherwise tune out at the first mention of GDP. Runge blamed his peers for being unable to present their thoughts and data in a manner that captures and holds the attention of their audience.

The prevalence of economic illiteracy also helps explain the baffling lack of alarm and urgency felt on the street as the United Kingdom struggles with its biggest economic crisis in three centuries. The Office of Budget Responsibility (OBR), the country’s fiscal watchdog, predicts a contraction of national output by 11.3% for 2020 in its ‘central forecast’ which balances the institution’s more pessimistic and optimistic predictions. The OBR warns that any post-pandemic recovery would be significantly slowed in the case that Prime Minister Boris Johnson fails to secure a trade deal with the European Union – slicing at least two percentage points off next year’s economic growth.

In a sign of mounting frustration, EU Chief Negotiator Michel Barnier signalled earlier this week that he no longer considers the talks either useful or meaningful and said that he’ll call an end to the negotiations if no progress is made over the coming days. EU officials privy to the talks said that Barnier is particularly irked by the apparent lack of interest on the British side to strike a deal.

Trust Trounced

Meanwhile, European Commission President Ursula von der Leyen emphasised the need for ‘robust regulatory safeguards’ and a strong governance system to ensure compliance. After the British government moved to unilaterally suspend articles of the Withdrawal Agreement it signed with Brussels late last year, the European Union has become much more insistent on the need for a fail- and fool-proof dispute settlement mechanism to immediately resolve any future regulatory divergence between both parties. The matter gained urgency after members of the Johnson Cabinet insinuated that the UK may yet opt for a low-regulatory business environment that would skew the playing field and give the country an artificial competitive edge.

Though Barnier has actively sought to address British concerns regarding external oversight of its post-Brexit industrial policy, the negotiator was warned not to cede any ground after a number of EU member states expressed discomfort about concessions reportedly offered to the UK. The Netherlands and France in particular, celebrating a remarkable détente since the UK’s departure, reminded Brussels that outside access to the union’s single market is to remain dependent on a strict alignment of environmental and social policies and must also include restrictions on state aid to industry.

The almost-consensus in London is that Prime Minister Johnson will not budge. Johnson expects Brexit’s impact to pass relatively unnoticed as a footnote to the much larger economic crisis caused by the Corona pandemic.

As Chancellor of the Exchequer Rishi Sunak set out his spending plan in parliament, he revealed that government borrowing is set to reach a peacetime time record high of £394 billion, raising the national debt to well over £2 trillion or almost 101% of GDP – a level not seen since the early 1960s when the country was still paying off its war debts.

Chancellor Sunak fears that 2.6 million people (7.5%) will be out of work when the UK economy bottoms out in Q2 2021. Sunak expects his exchequer will need to borrow an additional £164 billion next year as well. The dire outlook and widening fiscal deficit did not prevent the government to earmark an extra £24 billion for investments in defence over the next four years, the biggest sustained increase of military spending in three decades.

Admittedly, the Conservative government did have a change of heart on culture, providing more funding for libraries, museums, and art galleries. Since 2010, successive Tory-led cabinets have slashed the budgets of local councils, causing the closure of more than 800 public libraries and resulting in a discrete yet tragic burning of books. After a library closes, usually up to 90% of its collection is destined for the incinerator, possibly adding to the ignorance of public affairs.


The Value is in the Solution: A Firm Protecting the Things that Can Never Be Replaced

[caption id="attachment_18113" align="alignright" width="300"] New Caledonia: CCD Tank Farm in a Nickel Mine[/caption]

FLI Global is an environmental services and technologies business focused on the protection of air, land, and water.

Its experienced team, knowledge base, expertise and focused approach — using Cleantech and Greentech integrated solutions — sets the firm apart as a sustainable solutions partner with its clients.

“Our particular expertise are in Brownfield and Contaminated Land Remediation, Industrial and Municipal Water and Wastewater Treatment, Semi Modular Precast Concrete Infrastructure , Mining Waste Containment and Engineered Landfill Construction,” says CEO and executive chair Michael Flynn.

FLI, born in the 1980s, operates from locations in Ireland, UK, France and China; the headquarters is in Waterford, Ireland. It passed through the millennium and all the excitement of that period, lived through a couple of global economic crashes, left the industrial age, grew through the technological age, and now lives happily in the information age. “We have gained extensive experience and witnessed significant changes in our sectors of operation,” says Flynn. “Adaption to change has become a core part of our evolution as a business.” Data Centre communications infrastructure manufactured off site is now part of our core technology offering, whereas data centres did not exist back in the 80’s – and nor did the technology for high quality off site manufacturing of concrete infrastructure.

"We also have to recognise our limitations — we cannot create water, land or air."

The core values and character traits in FLI are grounded in teamwork, experience, knowledge-sharing, open communication, innovation, adaptability, reliability, flexibility, dependability and respect for staff and clients. The firm supports personal and professional development, embraces technology, and plans for the future through talent development and the strengthening of leadership and management structures. Change is a constant that must be embraced.

Society and the natural world are in a long-term relationship of balance and trust, says Flynn: “If one party is dominant then the other is insignificant.” The natural world does not have a voice; it can communicate only through signs. Cracks in the relationship are fuelled by a failure to listen. “In our private lives, or in our business or corporate lives, two-way communication and active listening are key components in the process of reconciliation, finding a resolution, making decisions and moving on. The human race and the natural world are inextricably linked and can find a balance that works if we focus on achieving it.

“Our ability to reflect, see the other parties position, accept that the status quo is not working, have a willingness to change, agree to compromise and adjust our expectations will help contribute to re-establishing balance in our relationship with nature.”

In 2020, there are 7.8 billion people in the world, and this will grow to 9.9 billion by 2050. The natural world has been sending messages of distress for some time now, that are saying it cannot cope and is under severe stress.
“These are messages that we can all understand and interpret: climate change, global warming, melting ice caps, rising sea levels, flooding, food shortages, droughts and disease, more plastics than fish in the sea. Clean air, land and water are finite resources, and we cannot continue to abuse and exploit them and not expect consequences.”

The information data base that we as humans have amassed is constantly being analysed and updated. If viewed as a diagnostic dashboard, it can provide indicators of imbalances and shortfalls — and opportunities. Damage to our environment is being registered and recorded as part of this data collection. “We are well on the way to creating advanced devices and computers driven by algorithms that can do many good things to enhance our lives,” says Flynn. “Globalisation has created demand for consumer goods and has exaggerated the imbalances in our global society, fuelled further by the information age.” This has caused several red light warnings that society is not currently acknowledging.

As stakeholders in society we have responsibilities to each other and to the natural world, he believes. “We also have to recognise our limitations — we cannot create water, land or air. No App can solve this problem. We have to find a balance in the relationship with nature so that we can extend and re-use the resources that nature has provided.”

Population growth will create even greater strains on the natural environment. “The opportunities and potential for continued wealth generation across society are immense,” says Flynn, “but the disparity between human ambition and the limitations of the finite elements of air, land and water must be recognised and addressed so that balance can be restored in our relationship with nature.

“Nature sent us its most recent message in the form of the Covid-19 pandemic. We have all been forced to change the way we live and work. Technology has enabled us to adapt and work from home as part of the social distancing process and to stay connected as families and as businesses. The pandemic has also highlighted our vulnerability to an airborne disease that had the power to bring society as we knew it to a halt, despite our advanced technological confidence and our collective belief that we are unstoppable.”

The ESG investment community has an important role to play in the building-back process and could be instrumental in shaping the model. “The FLI Global business model is built around the core values of ESG, as these are traits in the company DNA” he adds.

“Our sustainable solutions can ensure that the majority of the contaminated soil and water can be cleaned and retained on-site. We avoid the removal of significant quantities of materials to landfill, reducing the carbon impact of transporting materials and helping to ensure that the greenfield land and groundwater can be protected and brownfield land re-used as part of the brownfield first policy in the UK.

“There is a chronic under supply of housing in many countries. The use of brownfield land, promoted over other land uses, allows houses to be constructed on previously developed land. Coupled with the FLI Global off-site residential homes manufacturing capability, it can help reduce the housing shortage in the UK and Ireland and rapidly accelerate delivery.”

FLI is heavily involved in the treatment of wastewater, both municipal and industrial. Zero Liquid discharge (ZLD) ensures that all water is returned for re-use, and the solids that are retained are re-used in other process streams. Recycling and re-using process water has to be part of the big industry response to limited water supplies and can be achieved.

FLI engineers focus on technologies that improve the quality of wastewater while minimising the carbon footprint of the equipment used. Value engineering is a critical part of providing sustainable solutions, where existing technology can be repurposed or coupled with new technology to improve operating efficiencies.

[caption id="attachment_18116" align="aligncenter" width="900"] Landfill Mining UK: Residential Development on a former and recently remediated landfill site[/caption]

Investment in R&D to develop alternative renewable fuels such as hydrogen, biomethane, wind and solar is hugely important for reducing the world’s dependence on fossil fuels into the future. “There should also be an awareness that the technologies are already available for recycling industrial-process water to potable standard,” says Flynn, “and to bring brownfield land back to greenfield value. And to build off- site. Big industry requires vast amounts of water and the technology exists to treat and recover process water so that growth and expansion can be accommodated without drawing further from our water resources.” Creating integrated solutions is value engineering and performance enhancing.

The technology already exists for modular, passive energy homes, rapidly constructed on site with less labour, reducing health and safety risks and accelerating building programs. Continuing investment in off-site construction methods and technologies will be an integral part of the drive to address current and future accommodation needs globally. “Getting drinking water and housing to regions of the world where droughts occur and where our data tells us population growth is going to occur is the collective responsibility of all of us,” he says. A global co-ordinated call to action of all stakeholders is required to solve this challenge.

“The collective and co-ordinated worldwide initiatives to fight the Covid-19 pandemic have been extraordinary – and proof that we can work together for the greater good. To protect and enjoy our environment and maintain the continuing development of mankind we have to work in tandem with the natural world, and not to attempt to conquer it.

“The FLI Global culture and unique selling point is to offer its clients solution focused action and enhanced efficiencies and performance based on its experience and knowhow. The value is in the solution.”

For more information, please visit www.fli-group.com


Wealth on the Move: HNWIs Continually Searching for their Own Little Piece of Paradise

There is continuous movement of wealth around the world. And the wealthy migrate both away from — and towards.

Last year, high net worth individuals (a HNWI has personal net assets exceeding $1 million) in the emerging and frontier economies migrated, in particular, to the developed world and the top Anglo countries (except the UK, which lost HWWIs). The recipient countries benefitted from this imported wealth and human capital, while the developing world experienced loss of assets and brain drain.

The biggest winners were the liberal western democracies, while the losers were the more authoritarian governments such as China, Russia, and Turkey. Law-and-order countries with reliable institutions and good governance benefitted from an influx of rich people. Less institutionally strong countries, such as Lebanon, Nigeria and Venezuela, saw an exodus. In Europe, low-tax countries such as Switzerland, Monaco and Malta gained while higher taxing UK and France lost out. The world’s HNWIs continue to gravitate towards stand-out shining (but smaller) stars such as Monaco, Singapore, UAE and Mauritius.

The five wealthiest countries in the world — all with per-capita wealth of over US$175,000 vs the $24,000 world average — are Monaco, Luxembourg, Switzerland, Australia, and United States. They all saw a new influx of HNWIs last year.

A recent report, Global Wealth Migration Review, by wealth intelligence firm NWWealth (newworldwealth.com) and AfrAsia Bank (afrasiabank.com) examines recent worldwide wealth migration trends. AfrAsia Bank is a financial services provider with innovative solutions connecting Africa, Asia and the World using Mauritius as the gateway for investment.

The period covered in the report for the global rankings is 2019, i.e. before the pandemic. Andre Amoils, from NWWealth, the principal behind the research, says “the pandemic will most likely have slowed down migration this year.”

HNWIs can be divided into four bands: billionaires (>$1bn), centi-millionaires (>$100m); multi-millionaires (>$10m) and millionaires (>$1 million). Generally, mobility is mostly observed with tiers two and three above, as billionaires tend to roam little, regardless of their and politicians’ public threats. Millionaires cannot always afford uprooting. Billionaires may be quite comfortable, and the castle or mansion cannot travel, or they may be culturally tied-in from a multi-generational set-up — and rich enough to pay their taxes (or afford clever trust accountants).

HNWI’s motivation to change residence may have to do with moving away from current conditions or seeking new opportunities – or a combination of factors. In the words of the report, wealth migration figures are “a particularly important gauge of the health of an economy”.

It reads: “For instance, if a country is losing a large number of HNWIs to migration, it is probably due to serious problems in that country (i.e. crime, lack of business opportunities etc.).It can also be a sign of bad things to come as HNWIs are often the first people to leave — they have the means to leave, unlike middle-class citizens. If one looks at any major country collapse in history, it is normally preceded by a migration of wealthy people away from that country. Conversely, countries that attract HNWIs tend to be exceptionally healthy and normally have low crime rates, good schools and good business opportunities.”

The main reasons HNWIs travel often have to do with safety: escaping an oppressive government, crime, civil unrest or war. There are also financial concerns, including expropriation, extorsion and taxes.
Some wealthy people are drawn to a better lifestyle with improved climate (northerners seeking sun); less pollution (think China); and to enjoy space, nature and scenery (Greek attractions). Then again, HNWIs are also drawn towards work and business opportunities, better schooling, healthcare system, and education for their children as well as better standard of living (life in USA and Australia is great for multi-millionaires and the better-off).

Popular Destinations

Australia was the most popular country last year for HNWI inflow, with Sydney the dominating city of the world and Melbourne in the number three spot. There was also an influx to Brisbane, Perth, Gold Coast and the Sunshine Coast. Australia’s points-based immigration system favours business owners and professionals such as lawyers, accountants, doctors and engineers. No wonder Boris Johnson has advocated for such a system.

Australia with its 25 million inhabitants ticks plenty of boxes with its attractions: personal safety, low crime rates, climate, nature and scenery. There are good education options, it’s an English-speaking country (almost all HNWIs from around the world speak English as a first and second language). Australia also has a first-class healthcare system, unlike the US, which can be expensive and complicated. It’s one of the fastest-growing economies, and positioned next to surging South East Asian markets.

United States (#2 ranked) has for recent modern history been one of the most favoured destinations, and had a net inflow of 10,800 HNWIs. Many cities welcome HNWIs, including Houston, which also benefits from intra-US general and HNWI movement due to no state taxes; e.g. California has high-taxes (and homeless, crime and forest fires). Benefitting from foreign HNWs on the west coast are Los Angeles, San Francisco, Seattle (jobs and entrepreneurship) and the Silicon Valley region. On the east coast, chosen destinations are New York City, Boston and towns such as Greenwich.

The US is the world economic leader which dominates many sectors, including banking, asset management, technology, media, entertainment, education. The US also shares some of the attractions as Australia; Canada (#4) has seen the arrival of 2,200 HNWIs.

Switzerland (#3 ranked) has for decades been a haven for the well-off, with 4,000 HNWIs moving there last year, predominantly to Geneva, ranked city #2 after Sydney. Switzerland enjoys safety status and a high standard of living. It is the second-largest wealth management hub in terms of AuM. HNWIs can stay close to their money, which is convenient with new cross-border agreements.

This dynamic also attracted 1,500 HNWIs to Singapore, country #5 and city #4. Reads the study: “Singapore continues to attract HNWIs, mainly from the rest of Asia. Notably, Singapore is emerging as the top wealth management centre in Asia, which could assist in attracting many more HNWIs in the future.”

Dubai (city #5) has for some years been a chosen city for HNWIs and anybody who has been there will know why. It has futuristic architecture, smart organisation, and many attractions. About 85 percent of Dubai’s population is comprised of expats, so there is cultural diversity. The UAE is an appealing destination for wealth preservation and commerce.

Some southern European countries have benefitted from investor visa programmes, in particular Portugal, Greece and Malta. Tiny Monaco still enjoy inflows of 100+ HNWIs per annum.

Mauritius enjoys comparable influx. It has attracted a steady stream of HNWIs over the past decade, perhaps due to the ease of doing business there. Mauritius ranks first in Africa and 13th worldwide in the World Bank’s 2020 ‘Doing Business’ report. Mauritius is also known for safety and a fast-growing financial services sector. The country is now home to around 4,000 HNWIs (as of June 2020), compared to 2,500 a decade ago.

Outflows

The UK (#6 outflux) has seen about 6,000 HNWI leaving annually for the last few years. Recent Non-Dom legislation and other new taxation may have contributed. Or perhaps wealthy Brits just retire in the sun.

China (#1 in global outflux) had a 16,000-net outflow of HNWIs in 2019. However, it is creating new HNWIs so fast they outpace the migration. The outlook is murky with the coronavirus, protests, trade wars and geopolitical tension with US and Australia.
Hong Kong (outflux #4) lost 4,200 HNWIs. Instability related to the recent Hong Kong protests has almost certainly damaged Hong Kong’s long-term appeal. But Hong Kong remains one of the wealthiest cities in Asia with over 140,000 HNWIs.

Other countries with large outflows include India (#2), Russia (#3) and Turkey (#5). Developing and frontier countries including Iran, Pakistan, Nigeria, Vietnam, Lebanon, and Venezuela saw outflows exceeding 100+ HNWIs each.

Some people in the poor countries want to migrate too, but millionaires can afford to: wealth migrates.


EY: Threats and Opportunities in a Post-Covid-19 Economic Context

A statement currently circulating on social media warns that "it is strange that certain world economies easily collapse when consumers buy only what they need".

Statements like this often contain some degree of truth. The social isolation linked to the pandemic has generated forced changes in the consumption habits of millions of people. But it has also encouraged those consumers to question their objectives.

The economy in general, and private companies and family business in particular, are subject to an unprecedented degree of pressure. Except for some particular industries, many sectors and segments of the economy must reinvent themselves to survive. Airlines, restaurants and tourism service-related fields have faced massive layoffs as revenues or prices have collapsed. However, other sectors are on the rise: medical equipment, telehealth, streaming, videoconferencing, collabo-ration tools, cloud services and on-line retail stores. An EY study found, for instance, that 50 percent of consumers will change their consumption habits in the post-Covid long term, prioritising the affordability, health and environmental im-pacts of their decisions. Companies will need to reconfigure their value proposition around these objectives.

Every day, social media and networks show the magnitude of ongoing changes which will surely modify habits and cus-toms. Changes involve not only consumers’ formats but also the way in which many businesses produce and generate added value. We are facing a turning point that questions and challenges supply and demand assumptions.

Those leading transformation of their market will eventually win. Those failing to invest their energy and resources in innovation will probably see decline in their sectors. Agility and resiliency are key values or elements.

Business innovation is no longer a “nice-to-have”; it is now a need. Companies and family enterprises must innovate and define changes in their business strategy or models. One of the main aspects to be factored-in is the consequences of tax associated with the changes.

Companies’ lack of resources to invest in designing and defining strategic changes, without a safety net or an alternative plan, is a limiting factor. In this context, tax is also key in designing a business strategy. The tax variable is present in Ar-gentina and cannot be disregarded. Recently, the Argentine congress passed a tax moratorium or amnesty law (including application restrictions for multinational enterprises) and amendments to the legislation that promote the knowledge-driven economy.

As if the scenario were not complex enough, changes in the tax system are being analysed from a holistic perspective. Central Bank regulations intend to maintain governments’ hard currency reserves by restricting the free trade of currency. Today the only source of foreign currency reserves for Argentina are private-sector exports, because sovereign indebted-ness is not available in foreign markets. The “decision tree” to be created under these circumstances is complex. This is particularly so not only because changes to business strategy foundations are being accelerated, but also because they are part of an uncertain and volatile tax and economic context.

Textbooks teach us to model economic and tax scenarios and to sensitise the related variables to draw conclusions. This is having an impact on how expected changes should be arranged and weighted to define appropriate courses of action. If we intend to put the factors affecting decision-making in order, we should emphasise first of all that the tax concept fol-lows the business. If the intention of a company is to modify the tax treatment of a specific taxable event by providing it with characteristics that are not consistent with the substance or economic reality of the new business, or the transaction in question, the structure may be challenged by authorities.

Summing-up, the search for tax shortcuts may generate consequences that outweigh the potential benefits. Probably, however, a specific change to a business model may not be economically viable because the tax cost makes it ineffective. It is true that the unco-ordinated accumulation of federal and local taxes in Argentina over a specific value chain may cause a business to be non-competitive.

In these cases, the tax factor should be reviewed with a view of efficiency — without modifying the substance of the busi-ness. Today more than ever, tax alternatives should be studied to allow for the proper performance of new business mod-els concerning direct and indirect taxes. This puts the company in a position to build alternative scenarios to factor-in pos-sible consequences.

The search of tax efficiency in a business model should not be construed as illicit behavior. The Argentina Supreme Court of Justice has already ruled in favour of taxpayers’ rights by establishing that "the honest effort of the taxpayer to limit their taxes to the legal minimum is not reprehensible".

And what about technology? In another research, EY also noted a heightened focus on digitalisation. Many business lead-ers and family enterprises’ next-generation members view the pandemic as the point that will allow them to redefine themselves, placing new emphasis on data, robotics and other new technologies. More companies are accepting the home-office as an option, and may lead to changes in requirements for office space.

The decision by some companies to cut back on travel prompted a major surge in demand for virtual-meeting technology. Cybersecurity can also become more of a business resource and transformation enabler: norms and government regula-tions on data and intellectual property could require changes or adjustments.

A willingness to adapt to consumer demand, readiness and resiliency, transformation and innovation, are essential values. Time is short, and hardship tough. But strong decisions now may pre-empt a brighter and more resilient future. i

About the Authors

[caption id="attachment_15880" align="aligncenter" width="269"] Author: Sergio Caveggia[/caption]

Sergio Caveggia is a tax partner currently in charge of Transaction Tax area in Argentina. He joined EY Argentina in 1994 and has developed expertise over 24 years in international taxation and merger and acquisition matters. Sergio is also focus on servicing clients in the Private Client Services (PCS) area. He is highly experienced in inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax area.

Sergio has served in a variety of industries and has also been involved in many due diligence procedures performed in the past 20 years. He has given lectures in national universities and is a frequent speaker in tax seminars. He has also written several articles dealing with Argentina tax issues.

He is a Certified Public Accountant who graduated from University of Belgrano in Argentina. He obtained his Tax Specialist’s Degree at the University of Belgrano and has a postgraduate certificate in Business and Management from Universidad Catolica Argentina (UCA). He is also member of the Professional Council of Economic Sciences of Buenos Aires and the Argentina Fiscal Association.

[caption id="attachment_15881" align="aligncenter" width="268"] Author: Jimena Rocío García[/caption]

Jimena Garcia is a Manager currently working in the International Tax and Transaction Services (ITTS) and Private Client Services (PCS) areas in Argentina. She joined the firm in 2014.

She has extensive experience in social security & labor law buy-side and sell-side due diligence services in numerous companies in different industries. She also participated in the coordination of many cross-border engagements, dealing with foreign labor and social security legislation matters on each transaction. Jimena participates in numerous seminars related to payroll taxes and labor law matters.

Jimena is a Lawyer graduated in 2010 from UNLAM (Universidad de La Matanza). She is enrolled in the Bar Association of the City of Buenos Aires.


Stock Markets Celebrate Whilst Real Economy Mourns

Stock markets celebrate, ending November on record highs as cash poured into equities to deliver an early Christmas to investors. The Nikkei enjoyed its best month since 1990 with a gain of 16.7% only to be bested by Italy’s FTSE MIB which jumped a staggering 26% in just 21 days of trading. Broader indices also barrelled ahead. The MSCI world stock index rose 13% whilst the S&P 500 ended the months 11% higher after successive record-breaking trading sessions. In Europe, the Stoxx 600 climbed 14.8% in November – its largest monthly point gain since December 1986. Analysts now predict two weeks of consolidation before the start of the customary Santa Rally.

The excitement is palpable, bordering on the insane, and culminating – arguably – on the op-ed pages of the Financial Times where senior editor John Plender dared argue that the current monetary environment and the rally it produced vindicates the venerable John Maynard Keynes who announced the ‘euthanasia of the rentier’ in his landmark General Theory of Employment, Interest, and Money. Keynes argued that as rates fall, the privileged few drawing an income from interest would struggle to survive.

Perhaps Plender may want to reopen the tome lest his analysis disturbs Keynes’ peace. If he thinks rentiers heading towards extinction is cause for celebration, then what about their heirs: investors shifting positions on the flimsiest of artificially generated pretexts without having a clue of underlying values and their human dimension apart from a few ‘key performance indicators’ crunched and extrapolated by algorithm-powered bots. The added value to the real economy as expressed in labour, machines, and bricks-and-mortar is nil – or at best marginal. However, the exercise of shuffling vast volumes of data and money for a fictional yet tangible outcome is highly lucrative – much more so than the mundane business of producing actual wealth as opposed to its paper variety.

Data Rules

Just consider the $44 billion S&P Global on Monday plopped down for London-based financial analytics powerhouse IHS Markit. Both companies are in the business of collecting, assessing, distilling, and distributing information to investors. As such they may, perhaps, be likened to a wire service on steroids. It is a most lucrative pursuit too: the London Stock Exchange is in the process of acquiring Refinitiv, founded only in 2018, for a cool $27 billion. In the US, Intercontinental Exchange, owner of the New York Stock Exchange, paid $11 billion for Ellie Mae, a software company that processes mortgage applications – and not to be confused with a pin up model.

Getting rich effortlessly no longer requires peddling miracle knives on late-night television but merely entails pushing data onto a network, adding a whiff of mystique that passes for wisdom, and voilà your wallet magically swells to a great many times its original size. And yet, Plender and other learned pundits insist that Dire Straits pinned the yo-yo’s number – or at least up to the ‘chicks for free’ bit.

Keynes, a forex trader in his day, would not look kindly on that enormous mismatch between markets and the economies they are supposed to mirror. The money-for-nothing crowd, driven to near ecstasy by Panglossian optimism, is doing little for the households and businesses that suffer the nasty effects of the Corona pandemic and its lockdowns.

Entire sectors are being ‘euthanised’, including the hospitality sector, the travel industry, and the arts. Fiscal policy tries as best it can to minimise the damage whilst central banks – never too quick on the uptake – keep pumping untold billions into the stock market, providing an ocean of liquidity where it is needed least and prompting scores of publicly traded companies to resume dividend pay outs even as they offload workers by the thousands.

Enter the Scrooge

Daring to speak truth to monetary power equates to blasphemy and invites name calling of which ‘scrooge’ is possibly the least offensive moniker attached to those slightly less impressed by the bull run. Judiciously studying the entrails, market watchers promise an even better 2021. Vast amounts of money hoarded by corporate zombies and households unaffected by job losses – estimated at anywhere between 7.5% and 10% of GDP – are to be released as soon as large-scale vaccination campaigns get underway and infection rates plummet.

What happens next does not require a crystal sphere to predict: markets reach for new highs whilst governments clamp down on spending in an attempt to rebalance their fiscal accounts, causing considerable social pain and dealing yet another blow to small and medium-sized companies that are unable to tap the financial markets.

Thus, prepare for additional consolidation and greater inequality. The silver lining is that the World Economic Forum’s flagship Davos Summit has been postponed by six months which spares us all the sight of CEOs and assorted billionaires piously engaging in an Alpine ritual of penitence at the altar of sustainability, lamenting and deploring the sorry state of the world whilst suppressing a wicked smirk.

Central banks must, however, receive some praise for taking a more proactive approach to the current crisis than they did to the previous one. Kudos to Lagarde, Powell et al. Now, please back off, or – if you insist on spreading the dough – please resort to helicopters for distribution. Better yet: why not adopt one of the world’s great monotheistic religions all of which feature some form of debt jubilee.

After all, do central bankers really expect all the world’s $277 trillion debt load to be repaid eventually? Of course not, it’s just a bunch of digits on a balance sheet, albeit a rather bloated one. Nobody expects that debt to be paid – not even partially – for it’s not how the monetary system inspired by Keynes works – or is meant to work.

Enter Captain Mainwaring

Whilst Keynes did recognise the need of stimulus spending in ‘uncertain times’, he presumed that such spending would benefit ‘economic actors’ clamouring for liquidity. Those were innocent times indeed when your friendly high street banker – think Captain Mainwaring – knew his customers and their needs without the resorting to spreadsheets, algorithms, or artificial intelligence.

The trouble now is that the world was already awash in liquidity before the Corona pandemic struck. In fact, most advanced economies had become quite addicted to quantitative easing. With markets already saturated, the monetary support measures sparked by the emergency only caused asset price inflation whilst simultaneously driving down bond yields, thus providing most economic actors – save for the ones trying to do the actual work – with a windfall.

Though some funds did trickle down to reach struggling households and entrepreneurs, most of it got stuck along the way, vindicating not Keynes but the likes of Friedrich Hayek and other theorists of the Austrian School who always questioned the use of central banks. One might almost think they were right after all.


Whilst Trade Talks Falter, Brits Celebrate Vaccine First

Mind the paradox. Thanks to EU law, the UK has become the first country to certify for clinical use the coronavirus vaccine developed jointly by US biopharmaceutical company Pfizer and its German partner BioNTech. Under the provisions of the 2012 Human Medicines Regulations, more precisely Article 174, EU member states are authorised to fast-track temporary licensing approval in the event of an emergency, such as a pandemic.

However, that tiny detail was lost on UK Education Secretary Gavin Williamson who excitedly attributed the first to his country’s detachment from the EU and its newfound ability to strike out on its own for a world-beating performance on all fronts. Though no longer formally a member of the bloc, the UK is bound by the full extent of its laws and regulations under the terms of the Withdrawal Agreement which is set to expire on 31 December.

Williamson, who failed as defence secretary and was dismissed from his job only last year after leaking confidential information to the press, was in a celebratory mood and told listeners of London’s LBC Radio that the UK is a ‘much better country than every single one of them’.

Williamson went on to pour scorn on US, French, and Belgian scientists who, he said, were left in the dust by their British colleagues. The same holds true, Williamson assured, for the continent’s regulators who were not ‘getting on with things’ as the ‘brilliant and much better’ British clinicians were.

Earlier in the week, UK Health Secretary Matt Hancock had propagated the same alt-truths by attributing the lightning-quick approval procedure to Brexit, prompting the Amsterdam-based European Medicines Agency (EMA) to issue a statement suggesting the UK had prioritised speed over winning public confidence.

Hancock enjoys somewhat of a reputation for being slightly fast and loose with facts. In April, he ordered a change in the counting methodology that allowed him to claim credit for enabling 100,000 daily covid-19 tests to be carried out. The UK Statistics Authority immediately challenged Hancock’s claim and labelled his policy a ‘Potemkin testing regime’.

By Jove and Jingo

Williamson and Hancock are amongst the overexcited exponents of jingoism, a quintessentially British form of rabid nationalism that entails taking liberties with verifiable reality in order to demean, deride, and dismiss anything and anybody deemed inimical to the interest of, or offensive to, the realm.

The term was introduced and popularised by a song that resonated in pubs and music halls during the Russo-Turkish War of 1877-78 when the Russian army’s advance was stopped at the gates of Constantinople by the great western powers. This last-minute intervention denied the Russian Empire control of the Bosporus and the Dardanelles and kept its navy bottled-up in the Black Sea. It also prevented the collapse of the Ottoman Empire, though that was considered a mere footnote to the proceedings.

We don't want to fight but by Jingo if we do

We've got the ships, we've got the men, we've got the money too

We've fought the Bear before, and while we're Britons true

The Russians shall not have Istanbul!

Little seems to have changed in the intervening decades. The present rallying cry of Britons true – ‘The Europeans shall not have fish!’ – reverberates from Land’s End to John o’ Groats with EU chief negotiator Michel Barnier assigned the role of the ‘rotten’ tsar’s envoy.

Armed with the patience of a saint, Barnier this week inadvertently stepped into the crossfire after a number of EU member states raised the alarm over reports from London that concessions had been made to the UK. On Wednesday, Barnier was summoned to attend an inquest of EU ambassadors to explain his latest moves. The representatives of France, Belgium, The Netherlands, and Denmark impressed on Barnier the need to insist on a ‘robust, workable, and enforceable’ mechanism to ensure the UK honours its commitments – and is immediately sanctioned if it fails to do so.

Megaphones

The four more outspoken member states are backed by others, including Germany, less inclined to employ megaphones to publicly voice their concern. In September, the UK government tabled an ‘internal market bill’ that overrides key parts of the Withdrawal Agreement (WA) signed and ratified just months earlier. It also is preparing a finance bill that violates the UK’s treaty obligations. Officials in Brussels hinted that the EU will instantly pull out of all talks should this second attempt to undermine the WA be pursued any further.

In London, Barnier assured the ambassadors that he is well aware of the risks in dealing with a government that flirts with backtracking on its commitments and reportedly said adequate remedial provisions will be included in any future deal.

The main stumbling block in the negotiations is no longer access to British fishing grounds, but the imposition and monitoring of ‘level playing field’ conditions aimed at keeping the UK aligned with the EU on labour and environmental standards as well as rules on state aid. Irish Foreign Minister Simon Coveney said that a deal is still possible if the EU side ‘holds its nerve’ and trusts Barnier to deliver a satisfactory outcome.

Just before meeting with his French counterpart in Paris, Coveney warned that the next few days will be full of ‘tension and standoffs’ but expressed optimism that a barebones free trade agreement can yet be sealed. He also dismissed the possibility that talks could resume quickly next year in case of a breakdown this week: “That is a very dangerous assumption because of the political tension that will follow a collapse of the negotiations.”

Meanwhile, Prime Minister Boris Johnson remains hopeful that a deal can yet be reached but is equally confident that trade between the UK and the EU can continue on terms set by the World Trade Organisation (WTO). In a gesture of goodwill, Johnson lowered his demand for the share of fish taken from British waters by EU trawlers to 60%. However, the EU rejected the offer out of hand and seeks to retain 80% of the catch.


Justin Yifu Lin: Eastern Perspectives, Western Preconceptions, and Prospects for Shared Economic Growth

[caption id="attachment_18197" align="alignright" width="300"] Economist Justin Yifu Lin. Source: ineteconomics.org[/caption]

Justin Yifu Lin made history in 2008 as the first non-Westerner appointed as chief economist and senior vice-president of the World Bank.

Lin, one of China’s most renowned economists, currently serves as an official advisor to the Chinese government and as dean of Peking University. He is a regular guest on television news programmes, helping to demystify the East’s economic approach for Western audiences.

Over the past half-century, China has gone from a poor country to global superpower. “China is becoming a major power, not necessarily a dominating power,” Lin says. “The responsibility that comes with that is that when you become more developed, you have the obligation to help those left behind.”

According to the principles of New Structural Economics — which were introduced by Lin in 2011 and officially endorsed by the government shortly thereafter — China’s success could be exported, and replicated.

“The rise of China will not only be good for China but provide a great opportunity for other countries,” Lin asserted in an interview with The Harvard Gazette. He based this belief on his nation’s commitment to Confucianism, which stresses that the path to prosperity lies in uplifting others and sharing successes. “For example, the Belt and Road Initiative, with its focus on infrastructure connectivity, is not a debt trap to achieve new colonialism, but an opportunity to remove the infrastructure bottlenecks of growth for countries in South Asia, Central Asia, Africa and many parts of the world.”

The simmering trade dispute between the US and China hurts everyone, Lin says, from countries to consumers. “Trade is a win-win, and a trade war isn’t a win for anyone. China did not have any intention to have a trade war with the US. From many prominent economic theories, we know that protectionism is not good, and globalisation would be a better win-win for everyone.” Lin added that the economic woes of the US resulted from internal problems, “like the stagnation of wages of blue-collar workers and the declining size of the middle class” and that better trade terms with China would do little to address those shortcomings.

“You cannot use restrictions or trade protectionism to address those kinds of structural problems,” he said. “I think trade war is not good for China; it’s not good for the US, and it’s not good for the world.”
The economist has written 32 books and has been awarded honorary doctorates from 10 universities around the world. He weighed-in with People's Daily Online to comment on China’s economic “report card” for the first six months of 2020. The results, he said, prove that the Chinese economy can cope with uncertainty.

“It can be said that [the Chinese economy] is even better than we originally expected. The COVID-19 epidemic has had a great impact on the global economy, and the economies of most countries are in the doldrums.”
Although China experienced a 6.8 percent drop in GDP in the first quarter of this year as compared to last year, it showed a 3.2 percent jump in the second quarter.

“It can be said that China is the only country in the world with such an achievement,” he said. “As long as we continue to do a good job in the prevention and control of the epidemic, make full use of the conditions conducive to economic growth, maintain our strength, and concentrate our efforts on doing our own things, I believe we can still become the main driving force for global economic growth.”


Thirdway Africa: ‘Thinking Anew’ about Alternatives and Innovations for Investment in Africa

In 2014, ThirdWay Africa set out to fundamentally change the investment landscape in Africa.

[caption id="attachment_18263" align="aligncenter" width="900"] Wanza Farms S.A., Mozambique[/caption]

The investment and advisory firm driving sustainable development was founded by Alejandro Tawil (Chairman) and Gonçalo Neves-Correia (CEO). They were seeking a new formula to better address the challenges facing investment in the continent.

Tawil and Neves-Correia have seen two distinct pools of money being directed to Africa: development aid and private capital. Both sought varying degrees of return, either commercial or impact-related, yet had historically worked independently of each other.

This ambition gave birth to ThirdWay’s ethos of “think anew; act anew”; it would come to underpin all the firm’s activities. The organisation would position itself as the moderator to the ecosystem, and ensure that all groups were united with stakeholders such as governments and local entrepreneurs.

This philosophy would be realised by promoting blended finance solutions to drive sustainable development. With the African continent plagued by a substantial funding gap — an estimated $130bn-$170bn is required in the infrastructure sector alone — there is a focus on structures such as blended finance vehicles to drive capital flows. This requirement is all the more necessary to combat the effects of the COVID-19 pandemic.

As a firm, this desire to create and implement a new formula for investment is stitched into every thread of the ThirdWay fabric. Other businesses have begun following this pioneering approach, and it is increasingly common for organisations to imbed sustainability into their day-to-day activities. As ThirdWay Africa knows, it is these business models which are subsequently able to attract more capital.

The convergence of sustainability and blended finance will ultimately enable robust, economic development of the continent. Africa is becoming a global standard of sustainable development — and more attractive from an investment standpoint — and will soon provide an exportable framework.

[caption id="attachment_18265" align="aligncenter" width="1024"] Gonçalo Neves-Correia CEO and Founding Partner Alejandro Tawil Chairman and Founding Partner Guy Lafferty CIO and Partner[/caption]

As a proponent to this ThirdWay Africa thinking, the firm has built out three distinct businesses: impact consultancy, corporate finance and asset management. This model has allowed the firm to establish a presence, and provides an opportunity to learn and perfect its focus on blended finance and collaborations between private sector players and the philanthropic world.

The impact consultancy business works with development aid organisations, governments and NGOs on implementing their programmes to maximise private sector involvement, and by designing sustainable business models. Over recent years, this offering has expanded to multinational corporations wanting to create impact-aligned initiatives within their operations. Recent work has included supporting a leading international, FMCG bottling company, on its distribution and points-of-sale in West and North Africa.

This is complemented by the firm’s advisory business, its corporate finance arm. ThirdWay Africa work closely with businesses, entrepreneurs and investors aligned with the UN’s Sustainable Development Goals (SDGs). The teams work closely with a number of entrepreneurs working on projects — from renewable energy solutions to a leading FSC-certified forestry business — to support growth, access adequate finance, and scale operations.

ThirdWay Africa’s asset management business allows the firm to put the philosophy it gives to clients into action. Two assets, a stone quarry business and a permanent capital vehicle which invests in nucleus farms — the Rural Development Corporation (RDC) — allow it to bring sustainable investments to rural communities.

The quarry is now the key supplier to the largest oilfield servicing company in Mozambique, and not only leads the sector nationally but has an impact with the employment it creates. Following 2010’s discovery of 65 trillion cubic feet of liquefied natural gas off of the northern Mozambican coastline means the country is poised to benefit from increased investment flows, and creates an immediate demand for high-quality building materials for necessary infrastructure developments.

The RDC set out to realise Africa’s strong agricultural fundamentals and provide the catalytic investment required to grow the region’s agribusinesses. With 60% of the continent’s population accounting for small-holder farmers and Africa currently importing an estimated $50bn worth of food a year, a drastic rethink to agricultural agendas across the continent needs to happen. A serious level of investment in basic infrastructure needs to take place, including irrigation and storage facilities, to supercharge domestic production. With increased stress placed on food security across the continent from the COVID-19 pandemic, the time is now. The RDC works with local communities and the public sector to ensure that investment into its assets is executed not solely for commercial return, but to provide access to growth opportunities for its partner smallholder farms.

The three businesses complement each other seamlessly and provide a holistic approach to enabling sustainable investment in — and throughout — Africa.

Sustained growth is on the horizon for ThirdWay, as the partner of choice to entrepreneurs, philanthropic funds and impact focused investors. It intends to take Africa’s sustainable development global into the future.


Matein Khalid: A Random Walk Down Silicon Valley's Pre-IPO Deal Flow

[caption id="attachment_18271" align="alignright" width="300"] California: San Jose[/caption]

2020 was a spectacular year for investing in late stage technology unicorns and I am proud to have led significant investor syndicates from the Gulf for Elon Musk's SpaceX, the e-learning marketplace Udemy and Swedish fintech Klarna Bank. The secondary markets for the world's most successful, most coveted, fastest growing and most disruptive technology companies have now come of age and offer extraordinary opportunities for wealth creation for the select few GCC family offices and institutional investors who have the intellectual bandwidth and Silicon Valley networks to access, analyse and design private investments in this elite constellation of unicorns and decacorns.

The pandemic has accelerated the world's adoption of New Age technologies and thrust the history of digitalisation fast forward. The IPO market for the world's hottest technology companies is white hot, as the sixfold rise in cloud software data warehouse startup Snowflake's current market cap attests since its penultimate private market funding round.

The Airbnb IPO next week will see the birth of the world's preeminent home rental sharing colossus at a $35 billion valuation on NASDAQ. Food delivery firm DoorDash will also go public at a $32 billion valuation next week. I know one lucky investor in the UAE whose $10 million stake in Airbnb when it was valued at a mere $1 billion in 2012 is now worth at least $350 million at the IPO offer price. Financial fairytales on this fabulous scale can only happen in Silicon Valley. This is the reason why I am obsessed with the deal flow, deal makers and deal narrators in technology's Mount Olympus that straddles San Francisco Bay.

Inspired by the Amazon IPO in 1997, I went deal hunting on Sand Hill Road, the home turf of the world's leading venture capitalists, this journey will resume as soon as a vaccine makes it safe to fly from Dubai to San Francisco to revisit my familiar haunts in San Fran and the Valley (Silicon - and Napa!).

Entire industries are being reinvented by the sheer ferment of the fourth Industrial Revolution. The global mania for electric vehicles, cloud infrastructure and artificial intelligence assets provides myriad opportunities to hunt for triple baggers in the late stage or even pre-IPO deal flow I encounter in the Valley. Industries like finance and education are being disrupted beyond recognition by the likes of PayPal, Square, Sofi, Udemy and Coursera. Who would have thought that a startup founded by a Malayalam math teacher from an unknown Kerala village named Byju would metastasise into a $12 billion e-learning colossus that raised money at 27 times revenues with a VC list that included Mark Zuckerberg, Naspers Ventures, Tiger Global, Tencent Holding, DST, Sequoia and Silver Lake?

Who would have thought that Flipkart founder Binny Bansal would grab e-commerce market share from Amazon, recruit Walmart as a strategic partner and morph into an Indian billionaire? I was thrilled to meet Ritesh Agarwal, a Marwari kid from Orissa with big dreams who founded Oyo Hotels and is now India's youngest self made billionaire at 26. This was only possible because both Binny and Ritesh were smart enough to plug into the Silicon Valley venture finance grid at an earlier stage in their careers.

Who would have thought that the Millennial/Gen-Z generation, the biggest and richest in human history, will enable Robinhood to amass 15 million online brokerage accounts, more than the incumbent Big Four combined?

There are few industries more ripe for large scale technological disruption than education, as the pandemic and soaring cost for private schools/universities demonstrate. Global education is a $6.3 trillion industry alone and economists estimate the $200 billion edutech unicorns could be worth $800 billion in the next five years. This was the strategic rationale for our investor syndicate in Udemy, an e-learning marketplace with a footprint in 190 countries, 55 million students, 70% revenue growth and an exponential growth treasure trove of user generated content in 65 languages. Udemy's IPO in 2021 will be a Wall Street and global finance sensation. The pandemic has disrupted the careers of hundreds of million young people around the world for whom e-learning is not a luxury but a lifeboat for survival in a Darwinian global job market.

As a client of various UAE retail banks since the 1990's, I have personally experienced the nightmare that visiting a bank branch or executing a complex transaction entails. Being charged some of the highest banking fees on earth for the privilege of less than mediocre service only adds insult to injury. Luckily the fintech revolution will turn conventional banking models just about as anachronistic as brontosaurus, the horse carriage and black & white TV. The value of a select few fintechs I track in California will rise 10 to 20 fold in the next decade.

In a world with 6 billion internet users, with satellite access and 5G now a reality, 50 billion smart devices, fintech unicorns have the potential to achieve valuations comparable to mega banks like J.P. Morgan and BNP Paribas on the stock exchange. That much, at least, is certain.

My deal hunting focus in Silicon Valley is on special situations or pre-IPO investment opportunities in proven hyper growth technology businesses that are pioneers in their respective industries. This necessitates the ability to access founders, venture capitalists, growth fund managers and C-suite executives across the tech investing spectrum. The private capital markets in technology are opaque, fragmented, difficult to access and driven by incumbent networks with whom a pre-existing relationship is mission critical.

A credible global exchange for private market technology deal flow simply does not exist and price discovery is often a matter of trial and error permutations. These asymmetries in information and access mean naïve investors can and will be skinned alive by the cognoscenti as the poor lambs who purchased private shares at a 30% premium on EquityZen and other such online retail platforms will find out the hard way to their bitter regret. In this treacherous minefield, price is often a variable of an irrational seller such as an employee with large tax liabilities or a divorce settlement and a buyer clueless about the real corporate valuation metrics in the private market netherworld of the global tech village.

Technology funds often sell stakes in companies at attractive levels due to partnership disputes or the need to raise new capital. Executing a successful transaction often necessitates a plethora of relationships with angels, VCs, growth fund managers, investment banks, board power brokers, founders and C-suite executives. It often means dealing with a volatile cast of characters and an even more volatile private market driven by a seismic pace of change. I simply adore this great game of finding Silicon Valley's next big gorilla.

Yet while I love the sheer intellectual thrill of playing the gorilla game in Silicon Valley's pre-IPO market, I never forget the Roman philosopher Cicero's advice from two millennia ago - not to know history is to forever remain a child.

About the Author

[caption id="attachment_18272" align="alignleft" width="206"] Author: Matein Khalid[/caption]

Matein Khalid is the Chief Investment Officer & Partner at Asas Capital in the DIFC, he is responsible for global investment strategies, merchant banking and the development of the multi-family office investment platform. He advises ultra-high net worth royal and family offices in the UAE on global equities markets and foreign exchange. He liaises with the world’s leading asset managers, hedge funds and investment banks in the design and implementation of multi-asset class portfolios. He also acts as the Chief Economist for Asas Capital and advices the firm’s clients on real time financial markets decision making. He has worked in Wall Street money center banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal family investment offices in the Gulf for 10 years.

Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He serves on the board of Advisory Council of the School of Business Administration at the American University of Sharjah and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University in Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business, Oman Economic Review and the Property Chronicle in the UK.

This article first appeared LinkedIn Pulse.


Appreciation of ESG Values Has Increased During Pandemic, says Asset Manager of Goldman Sachs Sheila Patel

[caption id="attachment_18512" align="alignright" width="300"] Chairperson, Asset Management, Goldman Sachs: Sheila Patel[/caption]

As a keen angler, Sheila Patel knows that the secret to hooking a big trout is to deliver the fly in a precise and careful manner. So when Covid-19 lobbed a rock into the financial world’s waters, one might have expected a degree of frustration from the recently-installed chairman of Goldman Sachs’ asset management arm.

But while many assumed the sudden impact of the pandemic on the world’s markets would shake investors into abandoning social and environmental values, Patel knew better. The champion of ESG and Carbonomics says the pandemic has actually sharpened investor focus. (Carbonomics helps businesses realise the potential of carbon offsets in the US and international emission-trading markets.)

“At the beginning of the crisis, large institutional investors were asking me: ‘Is this the pause for ESG, sustainability and climate?’ Because the crisis was overwhelming. What we found was that people more than ever felt a clear focus on ESG investing, not just from large institutions but from retail too.

“Many people think that sustainability is the focus of Millennials and the younger generation, but in fact during the pandemic in Europe there was a 100 percent increase in Baby Boomer adoption and focus on flows into ESG funds.”

There is debate on whether the purpose of ESG is to drive better returns or better societies, but Sheila Patel believes it can be both. “It’s been a dramatic shift. The pandemic has really given people the time to step back and question what they value most.”

Patel joined Goldman Sachs, one of the world’s largest investment banking organisations, in 2003, and was made a partner in 2006. In September 2019, she became chairman of the Wall Street giant’s $1.3tn asset management arm. She had previously worked for Morgan Stanley, leading its trading strategy.

She began her career in finance as an analyst at an investment bank in New York. She went on to earn an MBA at Columbia University before climbing the career ladder. In one of her first appraisals, she was advised to focus on client relationships and communication, as these were key to business success.

Patel believed at the time that her analytical skills were her strength, and discounted that feedback. “As I matured I realised the truth of that early advice,” she says. “Businesses of all kinds are about people — your colleagues and your clients — and fostering those relationships and networks is the foundation of any successful career.”

Patel is a member of the 100 Women in Finance initiative, and says her role as a partner sponsor of the Asia Women MD’s Network — supporting and advising women to grow and advance in business — is particularly satisfying. “What makes finance evolve is the intersection of people, capital and ideas. Women at all stages of their careers need to drive that evolution.”

Her extensive knowledge of portfolio solutions, sustainable finance, emerging growth themes, governance and other key long-term trends, has made her advice to clients indispensable, especially in these unusual times.

Since the beginning of the pandemic, large amounts of capital have begun addressing carbonomics, she says. Companies across the world have been responding with ever greater innovation, and investors are taking notice. But how the pandemic changes behaviours, the needs of consumers, and the way we work are trends that need patient monitoring, she believes.

As every angler knows, patience is the key to success.


UniCredit’s Roberta Marracino: Banking with a Social Impact

[caption id="attachment_17327" align="alignright" width="300"] Head of Group ESG Strategy & Impact Banking: Roberta Marracino[/caption]

Determined to help shape the post-pandemic ‘new normal’, UniCredit is stepping on the accelerator to redouble its efforts at sparking meaningful change in the lives of accountholders and in the wider society.

UniCredit’s Social Impact Banking programme, first launched in 2017 and now present across 11 markets of the Group, is being deployed and strengthened as a vehicle of positive societal change. The programme leverages the bank’s vast pan-European branch network to connect communities, exchange experiences, and build ‘social impact ecosystems’ supported by aggregative financial schemes that fulfil the requirements of all stakeholders.

Overseeing the programme – and pushing the limits of its envelope – is Roberta Marracino who in July took over as head of the group’s ESG Strategy and Impact Banking department with a seat on the bank’s executive management committee. “The current situation is further accelerating the transformation of the entire society in a more sustainable direction and we will continue to play a frontrunner role,” says Marracino before emphasising that environmental, social, and governance (ESG) criteria represent an ‘important’ opportunity for long-term growth by bridging and matching the interests of the bank’s customers and other parties such as shareholders, employees, and communities.

“Our current goal is to disburse a total of €1 billion of financing through Social Impact Banking by 2023. ESG targets and ambitions are a fundamental part of UniCredit’s strategic plan, including the commitment to have a positive social impact across our local markets.”

Marracino accentuates that the group has set a number of concrete ESG targets such as a full stop to the financing of coal-related businesses by 2028: “Furthermore, we will boost our support to the renewable energy sector by 25 percent over the next three years as well as increasing loans for projects that improve energy efficiency to SMEs and private individuals. UniCredit already granted €2.1 billion of such loans in Western Europe over the first half of 2020. Our bank is also ranked at the top of the league tables for global sustainability-linked loans and green bonds.”

According to Marracino, the group aims to tailor its approach to specific local conditions and circumstances, matching its initiatives to identify and address the most pressing needs: “This ranges from support of social entrepreneurship or micro businesses through impact finance and microcredit, to large scale financial education programmes and financing aimed specifically at supporting young people or women.”

UniCredit has made a long-term commitment to ESG which sits at the very core part of its business model: “We support our clients, communities, and partners in becoming increasingly sustainable. This is an important challenge, but we firmly believe that every company must do more than ‘business as usual’ to have an impact towards a sustainable future.”

UniCredit has been widely recognised as an ESG pioneer and an early adopter of sustainability principles. Its experience in these fields is now being rallied to help both the institution and its stakeholders navigate the choppy and largely uncharted waters of the pandemic. Marracino explains that UniCredit has already disbursed more than €6.4 billion to European SMEs to help mitigate the pandemic’s impact and ensure their survival. Meanwhile, the UniCredit Foundation offers support to hospitals and other non-profit entities manning the frontlines of the battle against the novel virus.

“The Social Impact Banking programme will continue to identify and directly promote the most deserving social entrepreneurs and micro businesses with a dedicated impact finance and microcredit offer. We will continue to do the right thing and support businesses and communities through this difficult time.”


Building the Bridge Between Non-financial and Mandatory Reporting

BP

CEO Bernard Looney's courageous announcement that BP will transition to becoming a green energy pioneer shows the need for a new supporting logic for a standard measurement system. If BP is prepared to publicly commit to do the right thing, as society wants it to, then the logic must evidence and incentivise BP's investments made to transition, otherwise it must have an inherent flaw.

Rethinking Capital and the Impact-Weighted Accounts Initiative at Harvard Business School have developed a normative accounting approach for intangibles and impact to provide this logic. It is designed to increment non-financial reporting and act as a bridge between non-financial and mandatory reporting.

Codifying BP's Logic

Codified through the lens of intangibles and impact, what is BP doing in its decisions to transition?

Mitigating risk to reputation by decisions to do the right thing, and to break free from the association of its reputation with legacy Big Oil

Recognising a constructive obligation to reduce its emissions to conform with social norms

Investing to mitigate this liability and to strengthen its social licence

Properly discharging the fiduciary and other duties of decision-makers to manage assets, liabilities and risks.

Before moving on, please read this logic again. Does it make sense? If so, then reverse this logic by placing 'not' before each of these four statements. It then becomes clear that decision-makers deciding not to transition are at risk of not properly discharging their fiduciary and other duties.

Non-financial reporting may find a solution to apply this logic into a standard measurement system through the growing number of alignment initiatives, committing to reach common standards during 2021, but this is a very crowded area with competing philosophies which may prove hard to reconcile.

Rather than yet another framework, would it not make more sense to first determine the extent to which technical accounting and the double-entry system could be applied? Current accounting practice will damn BP for doing the right thing by treating its investments into making the transition as an expense on the Income Statement or investments into depreciating equipment and therefore a deterrent to BP's management.

There is another way for accounting to fairly show BP's decision logic. But finding it means first understanding how capitalism got into this mess in the first place and why accounting practice has lost its way.

Root Cause Analysis

Why is the world systematically unfair?

“We've gone back to the root cause,” says Robert McGarvey, co-founder of Rethinking Capital and author of Futuromics: A Guide to Thriving in Capitalism's Third Wave: ”We believe that systemic inequity is a consequence of the historic paradigm shift from an industrial to an intangible economy and the failure of economic theory and its derivative systems to adapt to the commercial reality. By derivative systems we include accounting, auditing and reporting each of which take their lead from economic theory. Neoclassical economics and its dated orthodoxies, including the now discredited law of scarcity, misdirect capital and incentivise the wrong kind of growth; it's no surprise that the effects include systemic climate and social inequity.”

The intangible economy already exists but has yet to be secured into rules, systems and norms. Specifically, the Balance Sheet has lost its relevance as the primary resource for management and other stakeholder decision-making. Without the Balance Sheet, decision-making has instead focused on the Income Statement and the short-term. Rethinking Capital believes that this has led to a belief system that is quite literally upside down, rewarding and incentivising bad behaviours whilst giving no credit for and often punishing good ones. Imagine the chaos if that approach was applied to disciplining children or a pet.

The Practice of Accounting in 2020

Current accounting practice will treat BP's investments as costs on the Income Statement or short-term depreciating assets, reducing Balance Sheet equity and profitability. This is both illogical and plainly unfair. BP is investing into its reputation and into its social license, thereby mitigating a strategic risk, and into an asset.

Current accounting practice has not kept up with the change in the economy and does not recognise intangibles as accounting grade assets. Analyst consensus is that between 30-40% of SG&A is not really SG&A but could instead be classified as investments into intangible assets. Deductive logic says therefore that accounting practice is showing a substantially unfairly negative view of assets, equity and profitability.

Globally it is estimated that more than $108 trillion of intangible value not properly recognised on Balance Sheets. A Rethinking Capital analysis of Bayer AG identified over €129 billion of undisclosed equity in just one division alone, illustrating a point of view that although an eye-wateringly large number, even $108 trillion materially understates the true scale of the intangible economy.

Current accounting practice is also failing to properly recognise intangible liabilities, including climate risk, on Balance Sheets and arguably not properly applying IAS37 (the International Accounting Standard on Provisions, Contingent Liabilities & Contingent Assets). IAS37's logic is simple: If a liability ('the potential for future economic outflows as a result of past events') exists, then one of three actions must be taken.

If the liability is remote (according to the Cambridge Online dictionary the probability of Martians landing on Earth is remote) then the entity does nothing. It the liability is possible, it must disclose a contingent liability in a note including details of the financial exposure. If probable, it must recognise a provision as an entry in the financial statements.

In giving their respective true and fair view statements, directors and auditors appear to be concluding that liability for climate risk is either remote or incalculable.

It is surely near impossible to credibly reach a conclusion that climate risk is a remote liability for Big Oil. It also seems very hard to conclude that the liability is incalculable. Do the largest carbon emitters not have internal scenario analyses that could be disclosed? Could comparables not be applied? Big Tobacco would be a fair comparable, having paid out nearly $300 billion in settlements. Unlike climate risk where there is no choice but to breathe, the Big Tobacco was able int111o successfully argue that punitive damages settlements should be mitigated by the user's choice to smoke. In which case $300 billion would be on the low side for Big Oil.

This current accounting practice of not properly accounting for intangible liabilities, is therefore showing a material unfairly positive view of liabilities, equity and profitability.

If, for whatever reason, the practice of accounting is not fairly showing the assets and liabilities of an organisation, what can be done? The answer from the accounting profession and audit firms has been to call for Standards change. But in fact, when read in detail, the principles-based International Accounting Standards on intangible assets and liabilities are actually a very good place to start.

The Most Simple Corrective Action

Concluding that the problem is not the Standards but the practice of accounting and realising that accounting practice is steadfastly refusing to show a fair view of the intangible assets and liabilities of an organisation forces us to rethink.

A promising solution is provided by the concept of normative accounting. Normative accounting has been theorised in academic literature since the 1950s representing:

'theories of accounting, based on deductive reasoning or logic that prescribe the accounting procedures that should be followed rather observing or describing those that are followed in practice'.

As all value is subjective from the perspective of each stakeholder, normative accounting enables multiple alternative fair views to be shown.

Having established BP's decision logic, normative accounting treatment has many clues in existing accounting standards.

Digging deeply into IAS37, we concluded that the IWAI's annual climate impact costs could be properly recognised as a contingent liability on the Balance Sheet.

And that the definition of an 'Asset' under the IASB Conceptual Framework ('a resource controlled by the entity…..from which there is potential for future economic benefits') could treat transition costs as investments into BP's reputation and social license on the Balance Sheet.

Further model-matching established how to apply IAS38 and impact measurement to determine the boundaries of the firm.

The outcome is believed to be the first framework that incorporates impact into traditional accounting. And the first to apply existing GAAP, to update double-entry bookkeeping and be informed by existing International Accounting Standards and the IASB Conceptual Framework. The result is to properly recognise and show the current value of all intangible assets and liabilities.

This is a leap for impact measurement and has created a methodology that can be applied to represent other impact costs as liabilities, including product costs and a living wage, areas where the IWAI has focused its energy.

The elegant logic of the framework is that investments made to reduce climate and social equity will increase Balance Sheet equity, and decisions that increase climate and social inequity will reduce Balance Sheet equity.

What Next?

The ambition is to create a standard for normative accounting of intangibles and impact. There is a long way to go.

The framework is being tested with companies. Encouragingly, it is already being described as 'logical',' intuitive', 'familiar' and 'common sense'.

Resistance to a technical accounting solution is expected. Resisting though means having to explain why the logic is wrong.

[caption id="attachment_18313" align="aligncenter" width="300"] Author: Andrew Watson[/caption]

[caption id="attachment_18314" align="aligncenter" width="280"] Author: Robert Zochowski[/caption]

By Rethinking Capital co-founder Andrew Watson and Rob Zochowski, Program Director, Impact Weighted Accounts Initiative at Harvard Business School


OECD: Advancing the Global Agenda on Blended Finance and Sustainable Development Impact

[caption id="attachment_18333" align="alignright" width="300"] Image: Rosieponting, CC BY-SA 4.0[/caption]

In its efforts to implement the 2030 Agenda for Sustainable Development[1] and the Addis Ababa Action Agenda[2], the international development community has been working to promote the mobilisation of financial resources beyond official development assistance, across both the public and private sectors.

However, progress is slow and uneven. According to the UN, a USD 2.5 trillion financing gap for the Sustainable Development Goals (SDGs) persists[3]. This is further complicated by the unprecedented consequences of COVID-19, which risk widening that gap and reversing hard-won gains made towards the SDGs. One year into the ‘Decade of Delivery’, this heightened sense of urgency compels development actors to work harder than ever. The OECD advocates a three-step approach to fulfilling the 2030 Agenda, centred upon (i) the mobilisation of greater resources, (ii) ensuring every penny is aligned and compatible with the SDGs, and (iii) reaching consensus on standards, frameworks and tools to effectively measure and manage the impact of investments on sustainable development.[4]

"Today, impact is a crowded landscape that remains characterised by sweeping disparity between actors."

The OECD Development Assistance Committee (DAC) is committed to moving the needle on this agenda, both in times of crisis and beyond. In November 2020, the OECD, together with the United Nations Development Programme (UNDP) and French Presidency of the G7, formally launched a framework to better align finance to the SDGs[5]. Likewise, earlier this year, the DAC committed to continuing work on emerging themes related to blended finance and impact[6] . To this end, a new Community of Practice on Private Finance for Sustainable Development (CoP-PF4SD) facilitates dialogue between the public and private sectors on a work programme centred upon blended finance and impact. More broadly, this process constitutes part of an overall drive to ‘build forward greener’ post-COVID-19.

In just under a year, the Community of Practice has achieved landmark progress on its two main objectives: the adoption of the Blended Finance Principles Guidance and considerable work towards the forthcoming Impact Standards for Sustainable Development.

In order to help investors operationalise the 2017 Blended Finance Principles[7], the DAC adopted the Guidance[8] in September this year. This detailed document builds on years of detailed research and consultations with donors, development finance institutions (DFIs) and civil society organizations (CSOs), on how to push capital more effectively into SDG-aligned programmes, projects and markets.

Another key to liberating the potential of blended finance for sustainable development is to improve the measurement and management of the impact of investments. Today, impact is a crowded landscape that remains characterised by sweeping disparity between actors.[9] Altogether, donors do not receive ODA-equivalent levels of transparency and accountability concerning their investments made with the private sector.

A consensus is emerging on the critical need for a DAC-specific response to the impact challenge. The OECD is therefore developing Impact Standards for Financing Sustainable Development (IS-FSD), which will be presented to the DAC for adoption in the first quarter of 2021.  Drafted in collaboration with the UNDP, a fellow member of the Impact Management Project[10], the Impact Standards seek to provide a common framework for donors and their private sector partners to manage the impact of their investments. This includes helping them optimise their positive contribution towards the SDGs, promoting impact integrity, and avoid “impact washing”.

Grouped around impact strategy, management, transparency, and governance, the Impact Standards are contextualised within the broader impact ecosystem populated by existing initiatives such as IFC’s Operating Principles for Impact Management (OPIM)[11] and the Impact Management Project (IMP). The Standards are also accompanied by detailed guidance on implementation, identifying what success looks like according to different governance arrangements and resource availabilities.

Ultimately, the Standards constitute a best practice guide and self-assessment tool, and as such will be made freely available following adoption for subscription on a voluntary basis. In recognition of the current disparity in impact measurement and management processes, as well as to facilitate uptake amongst donors, new players and the private sector, subscription to the Standards will not entail any reporting requirements to the OECD. Rather, the aim is to facilitate the sharing of best practices through forums such as the CoP-PF4SD in order to improve collective performance of the DAC and beyond.

The OECD is committed to the idea of broad applicability. This desire to provide a framework applicable to all organisations with a desire to demonstrate public accountability regarding impact, is further reflected in the wide-ranging consultation process used to inform the Standards.  Now in the sixth round, the Standards incorporate a wealth of insights provided by a variety of relevant stakeholders both within and outside the CoP-PF4SD. As well as donors, this process involved DFIs, private sector representatives, and CSOs, as well as impact measurement and management experts.

In February 2021, the OECD will be celebrating the first anniversary of the establishment of the Community of practice. Beyond this and throughout 2021, we look forward to continuing to debate the Community’s work on blended finance and impact, to officially launch the Blended Finance Overarching Guidance, and discuss the forthcoming Impact Standards for Financing Sustainable Development.

[1] https://sustainabledevelopment.un.org/post2015/transformingourworld

[2] https://www.un.org/esa/ffd/ffd3/wp-content/uploads/sites/2/2015/07/DESA-Briefing-Note-Addis-Action-Agenda.pdf

[3] https://www.un.org/press/en/2019/dsgsm1340.doc.htm

[4] https://oecd-development-matters.org/2020/01/09/shifting-public-and-private-finance-towards-the-sustainable-development-goals/

[5] https://sdg.iisd.org/news/paris-peace-forum-rethinks-multilateralism-to-build-back-better/

[6] https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/Co-%20FSD-Brochure.pdf

[7] http://www.oecd.org/development/financing-sustainable-development/blended-finance-principles/

[8] http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DCD/DAC(2020)42/FINAL&docLanguage=En

[9] https://www.oecd-ilibrary.org/development/blended-finance-funds-and-facilities-2018-survey-results-part-ii_7c194ce5-en

[10] https://impactmanagementproject.com/

[11] https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/development+impact/principles/opim

About the Author

[caption id="attachment_18336" align="aligncenter" width="300"] Author: Esme Stout. Photo: LinkedIn[/caption]

Esme Stout is a Junior Policy Analyst working in the Private Finance for Sustainable Development Team at the OECD, where she primarily works issues relating to the measurement and management of impact. Prior to this, she worked for the UK Foreign, Commonwealth and Development Office in Paris and Brussels. Esme holds a Master’s Degree in International Security from Sciences Po Paris and a Bachelor in History from Oxford University.