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Preparing the High Wealth Family for a Recession

Preparing for a Recession

In the recently released sixth edition of the UBS Global Family Office Report, produced in partnership with Campden Wealth Research, 55% of family offices believe we will enter a recession by 2020. In preparation for the next economic downturn, 45% are realigning their investment strategies to mitigate risk, while 42% are increasing their cash reserves.

The report details how nearly half of those surveyed are currently re-aligning their investment strategy to mitigate risk (45 percent) or take advantage of opportunistic events (42 percent). Another two-fifths (42 percent) are increasing their cash reserves, while a fifth (22 percent) are reducing leverage exposure within their investments.

Public and private businesses, foundations and individuals that take the critical step of developing separate plans for business, organization and family wealth management, and within those plans, create constitutional covenants, will find that although a recession environment may occur, they are better prepared to respond without creating disruption. More important, assets and their ability to grow are better able to continue undisturbed.

Rather than wait for significant upheaval, there are actionable next steps to take for recession preparedness:

Evaluate Cash Flows

First and foremost, evaluate the sources of cash flow and associated risk balanced against documented risk tolerance. Once risk and risk levels are determined, an inventory of investment inter-dependencies and risk impact is called for. As an example, if a business, organization or family is heavily invested in commercial real estate, rents may decline; a concentration on a specific type of commercial property that thrives in a recovery may be refocused to more “recession-friendly” properties. New construction investments may be redirected.

Asset Prices

Business leadership, organizational or family leadership must watch for recession indicators such as when market prices in some sectors trade higher than fundamentals or logic would suggest. Market psychology and emotions may then provide fuel for an asset bubble.

In an asset bubble preceding a recession, owned and private assets may become devalued. That has both a financial and psychological impact: if assets are suddenly worth less, what impact does that have on the psychology of the investment strategy? Secondarily, have the fundamentals of the assets changed?

Prices are driven by earnings, earnings are driven by operations, and operations are driven by products being manufactured.

In a recession, we evaluate asset prices because a company could continue to make the same amount of money, but investor psychology devalues the price; the stock market goes down and the price of assets drops.

Loan and Investment Covenants

Asset prices ultimately impact loan and investment covenants because asset prices drop, loan values change, capital calls become more prevalent than equity investments, all of which have an impact on existing investments.

Once evaluation has been conducted, develop an action plan around the findings. This may mean changes in the asset portfolio, covenant renegotiation, and an investment and wealth preservation education strategy for family members, boards or shareholders.


Executed properly, investments in a recession can continue to generate cash flow, hedge against inflation, offer security against a down market, and generate significant upside. Preparedness and planning for such an event are key.

It is wise to direct efforts focused on identifying and acquiring assets that meet the current and long-term needs, establishing a healthy balance for risk/reward appetite, and meeting the goals of an investment timeline during a recession period and beyond.

There are two critical concepts: achieving a risk/reward balance commensurate with  requirements, and simultaneously satisfying the immediate and future asset management needs.

About Kevin Heaton, Founder i3 Family CFO and Private Asset Management

Mr. Heaton is the founder and principal of i3, LLC, a Family CFO consulting and Private Asset Management firm, and has grown the organization into a team of highly-regarded associates providing clients with access to information, infrastructure, and investment opportunities. He is a dynamic speaker and presenter, and has contributed to Business News Daily, MSN Money, US News and World Report and other outlets related to asset management and CFO leadership.

The i3 team works closely with family members and decision-makers to manage the 1031 Exchange process including the identification and selection of like-kind assets, the management of a significant real estate portfolios, the provision of services to support day-to-day private asset portfolio management, private asset risk assessment and management, and the design of acquisition and asset management strategies.

Prior to founding i3, LLC, Mr. Heaton was CFO of a home services investment company, and grew revenues from $2 million dollars to $30 million dollars in only two years. Kevin was also responsible for developing the US presence of Bucephale Asset Management, a Swiss-based, $250 million-dollar hedge fund. Mr. Heaton began his career as an investment advisor at Merrill Lynch. Contact us to learn more.

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