Billionaires became more numerous last year but their total wealth was dented as economic headwinds picked up. Analysis of data from UBS and PwC shows these super-UHNW entrepreneurs make a big positive difference as generators of income.

The world’s population of billionaires rose by 38.9 per cent last year reaching a total of 2,101 people, although total wealth actually fell by 4.3 per cent to $8.5 trillion. Asia suffered a setback, such as in China, amid some pullback in markets, according to the sixth annual report on the sector from UBS and PricewaterhouseCoopers. 

The report has come out at a sensitive time politically for the world’s super-wealthy, with politicians such as US Senator Elizabeth Warren (Democrat) - a potential US presidential candidate - and UK Labour Party leader Jeremy Corbyn vowing to tax the rich more heavily with measures such as wealth taxes. (France and Spain operated wealth taxes in recent years, although in both cases they were later repealed for creating more economic and financial cost than was actually raised in taxes.)

In a section of the UBS/PwC report that defends the role of billionaires as business creators and leaders, the authors said that publicly listed firms controlled by billionaires returned 17.8 per cent during the 15 years to the end of 2018, handily beating the 9.1 per cent return from the MSCI ACWI [All Country World Index] measure. Their companies are almost more profitable, earning an average return on equity of 16.6 per cent over the past 10 years, compared with the 11.3 per cent of the MSCI ACWI. Even as they cross from private to public market ownership, billionaire businesses are still more profitable than non-billionaire-controlled ones, the report said. An analysis of 102 firms showed that in the three years leading up to a share float, these firms had an average return on equity of 35.4 per cent. After the company floated, ROE fell as newly-created equity diluted profitability and average ROE fell to 17.3 per cent, but then recovered. When the broader market is examined, average ROE fell to 14.8 per cent after the IPO, and continued to fall thereafter.

Such figures show that willingness to take big risks for large rewards, relentless focus and leadership skills create billionaires and are the kind of qualities that drive outstanding results, Josef Stadler, head of ultra-high net worth at UBS Global Wealth Management told this news service in a briefing about the study. 

The findings also suggest that as billionaires will typically hold large, and often controlling, equity stakes in their firms; they obviously want firms to succeed, he said. 

Looking at the trend of rising billionaire numbers and angst about a stagnant middle class – issues that arguably have driven political pushback in different countries – Stadler said that central bank money printing [aka quantitative easing] had inflated certain assets and hit savings, causing part of the shift.

Even so, the report noted that billionaires in the technology sector – one marked by dynamism and change – saw their wealth rise by 3.4 per cent last year, and their net wealth has risen by 91.4 per cent over the past five years. In approximate terms, tech billionaires account for about 15 per cent of all billionaire wealth. The number of billionaire-controlled tech firms has almost doubled from 76 to 148 over that period. By contrast, industrials fared relatively badly, falling by 15.1 per cent to $608 billion, against a background of flat or falling commodity prices.

The report noted that billionaires’ actual wealth rose more slowly in 2018 than was reflected in equity market indices, demonstrating that the rise in earnings was relatively modest and that a large portion of that wealth is held in unlisted businesses. (In recent years, coincidentally, there has been a shift in asset allocation by UHNW individuals towards private equity, debt, infrastructure and real estate sectors, partly as a result of low equity yields and low, or even negative, interest rates.)

Americas shine
The report noted that while overall wealth levels dipped last year, the Americas bucked the trend, nudging up by 0.1 per cent. The net number of billionaires in the US rose by 4.8 per cent (taking into account falls in wealth as well as increases), reaching 749 by the end of last year. Growth was propelled by technology sectors. In Europe, the Middle East and Africa, wealth fell by 6.8 per cent to $2.4 trillion and Europe’s billionaire population fell by 4.9 per cent to 598. 

In Asia, which in recent years has been a hotspot for billionaire growth, the trend hit a bump. Billionaire numbers fell by 7.4 per cent to 754 in 2018. The figures, the report authors said, masked “considerable churn”, as 169 people fell off the billionaire list and 110 new entrants emerged. China produced 56 billionaires last year, or more than one a week.

Giving it away 
With so much wealth, the report inevitably touched on philanthropy and impact investing. The report note that the wealthy are becoming more strategic in how they transfer wealth to causes, capturing the efficiencies of giving via organizations such as the Bill & Melinda Gates Foundation and other groups. This cuts out duplication. Billionaires are increasingly collaborating, sharing ideas and pooling resources – with firms such as UBS acting to bring them together, the study said.

UBS was asked by journalists whether billionaires should be vocal about their positive contributions to the wider economy and society. Stadler said that he and his colleagues urge their clients to do so. However, in some regions and countries, such as China, clients are reluctant to do so, although in North America they tend to be more voluble. 

“Billionaires are a different breed of people…they have a vision in how to reach a vision…they are masters of risk and reward. They are not afraid of failure,” Stadler said, arguing that billionaires had the ability to buy when assets/markets are low and hold them to realise a gain. He said they also tend to be almost obsessively focused.

Women gaining ground, but more to do
The number of female billionaires has grown by almost half (46 per cent) in five years, outpacing the rate of male billionaires in the same period (39 per cent). There are now 233 female billionaires, or about 10 per cent of the total. While rising from a relatively modest base, the growth rate performance is significant, the report’s authors said. In Asia. More than half of female billionaires are self-made.

Green queries
During the media Q&A, UBS and PwC were asked about concerns over global warming and whether billionaires had any special responsibility for either causing the problem in the first place or in tackling it. Simon Smiles, chief investment officer for UHNW for UBS Global Wealth Management, pointed out that technology was an increasingly important driver of billionaire wealth – typically leading away from a heavy use of carbon.

(Editor’s note: This report contains much food for thought. Some takeaways: Asia is still growing as a centre for UHNW wealth, but isn’t immune to wider economic trends; philanthropists need to collaborate, which is where banks such as UBS come in.   it is not surprising that UBS and similar firms are building UHNW capabilities; family office growth is sure to continue, and the super-rich need to be more assertive about defending and explaining why and how they made their money. An academic and entrepreneur, Dr Rainer Zitelmann, has argued this point here.

On the last point, philanthropy and impact investing can certainly play a role in “justifying” wealth, but arguably if UHNW people focus only on this it makes them sound apologetic for their original sources of money. That allows opponents of great wealth to frame the debate, leading to calls for wealth taxes and other measures, no matter how much they contribute to philanthropic causes. This is a mistake - billionaires should not be so coy. Their firms provide billions of people with something they value, since why else buy it? Yes, some markets are politically manipulated or protected via tariffs, and QE has inflated wealth holdings, but the underlying story is that getting rich today, as Stadler of UBS said, is about focusing obsessively on the consumer, on taking big risks, and being a decisive leader. We also tend to forget that most start-ups fail, and yet millions heroically try again and keep the wheels of innovation turning. It is high time that wealth creation was given as much credit as is giving it away.)

This publication has written before about the topic of "wealth justification".  We also discuss the topic hear on our WEALTH TALK slot.