MAY 2012                                                                       Download PDF Version

How are the Mighty Fallen!                                                                            


Seven Nizams ruled Hyderabad State from 1724 to 1948. The state was roughly the size of the United Kingdom and stretched from southern India’s east to west coast. In 1937 Time magazine had the Nizam on the front cover naming him as the richest man in the world.














The details of his then wealth were:

  1. A daily income of $5,000;

  2. Gold bars worth $250m (with gold at $35 an ounce);

  3. Jewels worth $150m; and

  4. Other capital worth $1.4bn

He was an eccentric man who used the Jacob Diamond, much bigger than the Kohinoor diamond and now valued at $100m in its own right, as a paperweight on his desk; it was later found by his grandson hidden in a sock. It is rumoured that he had enough pearls to fill an olympic sized swimming pool and that he only ever wore a set of clothes once before discarding it.

In 2007 Forbes magazine ran an historical net-worth calculation and found that, with inflation taken into account, this Nizam would be worth $211bn.

In 1948 the new government in India invaded Hyderabad and expropriated all the property of the Nizam. He lived on until 1967, still remaining a relatively wealthy man. However, if we fast forward to 2012, his grandson now lives in a small 2-bedroom flat in Istanbul with no diamonds, gold bars or pearls in evidence. This story is contained in an excellent book by John Zubrzycki called The Last Nizam which, appropriately enough, I finished reading in the Punjab Club, on a recent business trip to the subcontinent and the Middle East.

An interesting comparison to the Nizam’s plight would be the invasion and annexation of Kuwait by Saddam Hussein in 1990. In this example Saddam Hussein may have been able to seize the fixed assets of Kuwait and its royal family, however, the global assets of the kuwaiti sovereign wealth fund (SWF) remained intact and untouchable.

I recently met with the deputy director who runs a Kuwaiti SWF and he explained the degree of multi-generational planning that had been done to protect the assets from exactly such an eventuality. He also described how the fund directly receives 20% of all the Kuwait oil income and therefore, while they had been able to leave Kuwait with a substantial asset base (a considerably better position than the Nizam) they were potentially walking away from a massive flow of oil income. During the months in exile he had calculated what the position would be if they never got back to Kuwait and the government had to sell down their asset base and use it to fund itself. The answer shocked him; within 25-30 years, they would have run out of money.

A SIMPLE EQUATION

The combination of the Nizam and the sovereign wealth fund led to an epiphany in the Punjab Club; perhaps there exists a very simple equation for sustaining real wealth for multi-generations.


Although this is a deceptively basic equation it should not be disregarded due to its simplicity.

Upon my return to London I discussed this with one of my advisors and he totally agreed. Having sold out of a successful business he not only bought a wide range of real assets but also set about building a new operating business; intuitively he knew this formula and what needed to be done.

For any family to thrive through generations they have to address both income generation and asset growth. Of the two, income is disregarded, but it is essential in order to give the asset base the air to breath and to grow.

THE FAMILY OFFICE CONUNDRUM

In the UK there has been a steady rise in the number of single family offices (SFOs). As businesses are sold and family members coalesce they often decide to employ dedicated professionals to look after their wealth rather than farming it out to private banks. So far so good. However, in terms of sustaining wealth they are missing one leg of the equation; they are addressing the asset base and not the income generation. Therefore a number of SFOs are wondering why their business model has not been as effective as they had hoped. 

The rise of the multi-family office (MFO) is a second attempt by some groups to address this income puzzle. The MFO hopes to address the income generation through the fees that they will be charging the joining families.

There is no criticism implied in the above statement, in fact it is a very sensible thing to try to generate income. However, we would suggest that the income generated in an MFO will be paltry and moreover the innate fragility is that core family’s assets are tied to the MFO.

WHO HAS SUCCEEDED?

So who has got it right? Can we point to any family or institution that has followed the wealth equation and survived intact?

Perhaps God has the answer? The Catholic Church....

One can widen the answer to cover a larger group of religious institutions from Judaism, to Islam, to Buddhism. Wealth has been sustained for multiple centuries by these institutions. They have understood and implemented the wealth equation very well by generating income from their congregations and allowing their assets to gain real returns.

CONCLUSIONS

  1. If a family wants their wealth to survive through generations it needs to be allocated to two distinct pots - one addressing asset growth and one addressing income.

  2. This formula holds true for all families, however, the balance will certainly differ on a case-by-case basis.

  3. An advisory business rather than a family office may be better placed to assist with both sides of this equation.

  4. Going to the Punjab Club can reap unexpected insights!


 

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