How the super rich will be making money in 2008

The super rich didn’t get that way by getting skittish every time the economy trips – they adapt, and make new killings from a resurfaced playing field. JAMES THOMSON uncovers their cunning plans.

By James Thomson

The super rich didn’t get that way by getting skittish every time the economy trips – they adapt, and make new killings from a resurfaced playing field. What are their plans in 2008?

On the surface, it may appear that Australia’s super rich face a difficult year.

The looming US recession will rock the global economy; interest rates are rising; consumer spending appears certain to come under pressure from higher oil and food prices; sharemarket returns are shrinking; and the market’s appetite for deals has waned.

Some super wealthy entrepreneurs – like former furniture magnate John Van Lieshout , who flogged his Super A-Mart chain to private equity in 2006 – have been waiting eagerly for the market to turn down.

The super rich are used to adjusting to economic cycles and the prolonged strength of the Australian economy has confused many. A good downturn will help flush out competitors and create the things the rich like best – bargains.

Here are six strategies the super rich will be using this year to make money:

Selling out

In the past few years, dozens of wealthy entrepreneurs have sold all or part of their empires, including James Packer and Kerry Stokes, John Van Lieshout, Lang Walker and the late John Ilhan .

While some, like Packer, Stokes and Ilhan, sold out to raise capital to fund growth, others wanted to enter semi-retirement. This will continue in 2008, with the first big sell-off likely to be conducted by the billionaire Salteri  family, which is in the process of selling its Tenix defence business.

Going green

The growing focus on climate change is creating business opportunities that the super rich are seizing on. A slew of BRW Rich 200 members, including the Liberman family, the Roberts family, Philip Wolanski and Brian Sherman, are involved in ethanol companies. Surfwear giant Gordon Merchant holds shares in biodegradable plastics company Plantic, as does Richard Pratt. Bruce Neil of Select Funds Management (who is worth more than $350 million) has invested in a tyre recycling company.

Some of these investments may take some time to pay off, but with the new Labor government seemingly prepared to pump money into climate change solutions , opportunities will continue to emerge.

Targeting Asia

The US is a no-go zone, Britain looks shaky and European markets are still growing slowly, but Asia is still hot. The Myer and Liberman families have shown interest in Vietnam and Peter Scanlon is leading the charge into China. He has spent many years carefully developing relationships with local companies and has also made investments in Australian companies looking to crack that market, such as credit and cash-card company OnCard.

Scanlon also has a big stake in the listed FCBP Investments, which has been set up to specifically chase investments across Asia in the financial services, transport and logistics sectors. And his tip for spotting a good emerging market? As he told Eureka Report late last year, look for countries with high birth rates, such as some Eastern European nations.

Buying resources stocks

The resources boom is far from over and rich investors are still piling into the sector. Take Ken Talbot from Macarthur Coal. He’s set up a specialist investment group dedicated to the resources industry called Talbot Group, which has recently bought shares in Goldminex (up 30% since floating last October), Karoon Gas (up almost 60% last year) and Sundance Resources, Cloncurry Metals, Southern Gold (all of which have been volatile).

Even master investor Richard Pratt has come into the sector via Neptune Marine Services and Mermaid Marine, which provide services to the offshore oil and gas sectors. Wealthy investors tend to look for junior mining stocks to invest in, so following them into this sector is not for the faint hearted. But pick the right stocks and the rewards can be substantial.  

Investing in the retail sector

Many of Australia’s greatest fortunes were founded on the retail sector, and it’s still a favourite. Richard Pratt’s investment vehicle Thorney has been spending up big on shares in Retail Food Group recently, despite the fact that its share price has been volatile in recent times (it was up a bit more 20% last year).

Pratt has also been buying into shopping centre and property group Centrepoint Alliance and car parts wholesaler Allomak. The Thorney team clearly have faith in the retail sector, which will cheer many SME entrepreneurs no end. Other wealthy investors share Pratt’s confidence: Solomon Lew is bringing in the Spanish chain Zara to Australia this year and the wealthy Perlstein family is expanding its Speciality Fashion group.

Buying property

Another sign of the confidence of wealthy entrepreneurs in the retail sector is their continued investment in retail property. Sam Tarascio sold his transport business last year to concentrate on his property development business, Salta, which is extending the Victoria Gardens shopping centre in Melbourne. Lindsay Fox is pushing ahead with a retail development at the old Essendon airport site and Frank Lowy’s Westfield has built a $3 billion war chest to hunt for assets.

There are a few reasons property will be a key investment theme for wealthy entrepreneurs. First, it’s a good defensive sector in a downturn, provided you don’t borrow too much. Second, there will be plenty of property bargains as rising interest rates catch out those who have borrowed too heavily. Third, it’s the preferred asset class of retiring entrepreneurs, because property is easier to manage than an operating business yet still provides strong returns. And if sharemarket returns fall, property will only become hotter.

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