There is an increasing amount being written about the great wealth transfer - the transfer of wealth from the baby boomers to their children. Estimates suggest that roughly $16 trillion is up for grabs between generations in the next 30 years - that’s equivalent to the entire output of the US economy in one year. The transfer will inevitably create changes in corporate structures, as well as how wealth is managed. Family Capital looks at six consequences linked to the transfer.
Most of the transfer will take place in the US, Germany and Japan, but also China
Approximately $10 trillion of the transfer will take place in three of the west’s biggest economies - the US, Germany and Japan. There has been unprecedented wealth creation in these economies by the baby boomer generation and many of them are on the cusp of transferring wealth to their offspring. China will also witness a big wealth transfer. As Family Capital reported last week, there are more than 16 million private enterprises in China and succession is beginning to occupy the thoughts of these business owners. But the transfer will also affect many other countries, especially ones with an ageing population, i.e., much of the western world.
Expected Wealth Transfers US$bn
The next generation will want different things...
As Family Capital has reported before, the next generation of family business leaders are poised to change the companies they will inherit, revamping strategies and governance structures. They will bring in more non-family professionals to manage the businesses they inherit and will be less involved in the operational side of the business. Indeed, many of them will manage the companies they inherit as an investment, rather than an operational business. This trend might be an unintended consequence of bringing in outsiders to run their firms, but will, nevertheless, be a growing phenomenon.
...but don’t expect an entrepreneurial renaissance
Given that many will run their business as an investment and allow non-family professionals to come up with the ideas to grow their companies, the next generation of business owners are likely to be much less entrepreneurial than their parents. OK, this is a bold prediction and there are some caveats. One big caveat is that many of them will be asset and time rich, and this should encourage some entrepreneurial efforts, particularly in the creative and tech sectors. But the business inheritors will be less driven to make money than their parents, because, unlike many of their parents, they have no necessity to make money.
Many businesses will be sold…
Expect many inherited businesses to be sold. A recent Deloitte study reckons that 40% of future leaders and owners of businesses will sell off a part of their company to finance growth. But many will also decide to sell off the business altogether. That will spark a boom in private equity deals in the family business sector.
...and more family offices will be set up
As more businesses are sold off, more family offices will be set up. But family offices will also be started by business owners, as they move to a more passive (investment) role in running their operational businesses. An expected boom in the number of family offices will lead to more demand for professional managers to run new private investment groups.
Philanthropic endeavours will also flourish
One thing is pretty much for sure is that the beneficiaries of the transfer of wealth are going to be spending a lot more on philanthropy. All evidence suggests this to be the case - the nextgen are much more partial to giving than their parents. That’s partly because they have more than they need from a materialistic point of view, but also because a philanthropic culture is more prevalent among Generation Xers and Yers.