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Ultra-wealthy boost cash holdings as uncertainty grows around election, future of economy

Tiger 21 chairman Michael Sonnenfeldt joins Yahoo Finance to discuss how the ultra-wealthy are investing.

Video transcript

ALEXIS CHRISTOFOROUS: All right, when it comes to the economy, the ultra-wealthy are just as worried as the rest of us, and they're flocking to cash. In fact, members of the Tiger 21 investing group have been boosting their cash holdings all summer long. The Chairman of TIGER 21 Michael Sonnenfeldt joining us now.

Michael, good to see you again. So for folks who don't know, the average Tiger 21 member has $100 million in assets, and members are now at 19% cash. Why is that?

MICHAEL SONNENFELDT: So obviously, each person has a different answer. But our members are entrepreneurs, and they don't have large exposure to the public equity market, but a lot more to private equity and real estate. And our members are concerned about the uncertainties coming. It's not just the election. It's how we going to get back to a normal economy.

The stock market is surging, but that only represents 15% to 20% of the labor force. Our best estimates are 80% of the labor force where all the pain is is not in the public companies. And we know on Main Street, there's a lot of issues going on. So it's low interest rates. It's the concern about all the money flooding in, and how much of that money is actually distorting the markets, and how long will that last.

BRIAN SOZZI: Michael, when I hear those levels of cash holdings, it sends a signal to me that investors are liquidating somewhere, liquidating holdings of assets somewhere. Where are-- where are the wealthy liquidating positions?

MICHAEL SONNENFELDT: Sure. So members' exposure to public markets is only about 22% or 23%, but it's the most liquid part of their portfolio. So when they brought up cash levels, they were getting out of cash. They were-- excuse me-- they were getting out of their public equity, and they were getting out of miscellaneous things like collectibles that they didn't need or second homes that they didn't need, and less so out of the private equity and real estate. Perhaps as they sold assets selectively or when they had distributions, they didn't reinvest them in those categories.

ALEXIS CHRISTOFOROUS: So Michael, when-- when the uber-wealthy are looking for opportunities right now, want to put some cash to work or move things around in the portfolio, what opportunities are they seizing upon right now?

MICHAEL SONNENFELDT: Sure. So it's very important when we meet in our monthly meetings we kind of look at that question. And the-- the theme that keeps coming up is business is open, the window is open, but it has a much higher bar. So members want much bigger discounts.

And when you have 800 of the world's top entrepreneurs who have all this liquidity, each has a separate area. If you're in the real estate area, you're going to look for a deal of a lifetime. If you've made your money trading stocks, you're going to look for-- look away, perhaps, from the technology stocks where there might be beaten down areas.

In the collectible areas, it's interesting. If you look in the art market, the best names are going on fire, but just below it, the bottom has fallen out. So if you're able to look in the distressed area, there's lots of opportunities. There's still a deal of a lifetime crossing your desk every week if you can look for it and have the fortitude to make the deal.

BRIAN SOZZI: Is there any indication, Michael, on where the wealthy may allocate their cash if Joe Biden-- Joe Biden becomes president?

MICHAEL SONNENFELDT: One-- one of the things that's quite interesting is we were debating, actually earlier this week in one of our monthly groups, is the stock market predicting a Trump success or a Biden success? And it was pretty evenly split. Obviously with Biden winning, you're going to have a complete change in the tax law, but perhaps a much more robust infrastructure spending.

So some pluses and minuses. You may have the top 1% having a heavier tax burden. But to the extent that they own any of the companies that are going to benefit from that infrastructure, you have that possibility as well.

ALEXIS CHRISTOFOROUS: I'd love to know, Michael, what your members are doing with real estate, because it's got to be king in a lot of their portfolios. And real estate from hotels and commercial real estate coming under a lot of pressure during this pandemic. What are they doing with those physical holdings? And are they looking at REITs as an opportunity right now?

MICHAEL SONNENFELDT: You know, Alexis, it's almost as if you're in one of our meetings. About a week or two ago, we were talking about real estate as if it's a monolith. But when you're sitting around the table with some of the top real estate entrepreneurs, they start separating how well industrial real estate is doing, particularly with last-mile deliveries of all of these online sales as compared, obviously, to retail and office.

And then you get into the issue of the inner cities. For 20 years, the gateway cities, such as New York, San Francisco, Boston, and LA, they've been on a tear because of the 24/7 economy. Now, particularly in New York, you see the trend going exactly the opposite way. All of the suburbs around New York are on fire where they've been languishing because people are moving out of the city at this moment.

And that's gets into the next question of the relationship between real estate and municipal bonds, how strong are the cities going to be able to withstand this dramatic change that's going on? It's an inflection point, and the story isn't told. Obviously, the degree to which the Fed buys municipal bonds, as apparently they have from time to time, and the federal government supports cities will have a dramatic impact on the life of Americans in the next generation.

BRIAN SOZZI: Michael, a last quick question from me. What-- what's the level of fear in the room on a scale of 1 to 10 that Joe Biden comes in here, raises taxes on these wealthy-- on these wealthy folks, and as a result, they earn less return on their investments?

MICHAEL SONNENFELDT: Look, I would say that our members are split. Some of our members are concerned about paying taxes, depending on how they think the money is being wisely spent. Others believe that you can't have a functioning society without having roads and a military, and you have to pay your fair share. So people have a different view.

But the historic-- history has not showed that under Democrats we've had very good economies. Under Bill Clinton, we-- we balanced the budget. That was the first time that that actually happened. So it's-- the devil is in the details, but I don't think people can make a broad brush that the economy is going to go down if there's a Biden win.

Even today, Biden is slightly favored in the election, and the market is strong. I'm not saying the market is predicting a Biden win, but there is a lot of uncertainty. And that's why we've had this historic rise in cash. By the way, our members are up almost 10% year-to-date, which means that even with these high cash resources they've been making great investments and doing well, many of them in the private area, both in the real estate, where they're finding deals to pounce on, and in the private equity area, where they're finding small companies that are sort of the basic building blocks of our economy.

ALEXIS CHRISTOFOROUS: Well, great insights, as always. And don't you know, I'm that fly on the wall in your meetings, Michael. I'm there.

MICHAEL SONNENFELDT: Yeah. Well, come any time. Both of you are invited.

ALEXIS CHRISTOFOROUS: Would love to take you up on that. Michael Sonnenfeldt, Chairman of Tiger 21, thanks so much, and be well.