Though the growth of the citizenship by investment industry has continued unabated over the past five years, it has only come to mainstream attention relatively recently – and often for controversial reasons. However as James McKay highlights, the current global health, economic, and mobility crises brought on by Covid-19 have underscored how second citizenship, conferred by this US$25 billion a year industry, has never been more critical.
While these issues have correctly been identified as fundamental market drivers of the citizenship by investment (‘CBI’) industry, they are rarely contextualised with the trends in the broader investment space that were already in place before the advent of the global pandemic.
Here, we look at how signals in HNWI investment behaviours and developments in other asset classes reveal a high degree of overlap with citizenship by investment drivers. This points to the need for collaborative partnerships to bridge the gap between wealth management and citizenship by investment industry professionals.
Citizenship by Investment and Covid19
The recent surge in demand seen in the CBI industry is indicative of how Covid-fuelled travel restrictions, health concerns, government surveillance, and economic weakness have catalysed the very fundamentals that sustained the industry’s long-term growth.
Indeed, Montenegro, a country that only issued its first passport as recently as February 2020, reported a 142% spike in applications during the first quarter of 2020 compared to Q4 2020. Turkey, another relative newcomer to the CBI industry, reportedly processed 4,000 applications in three months, according to IMI – the equivalent of US $17 million a day.
The significant increase in CBI activity during the pandemic underlines that attaining a second citizenship is not only seen as a means of achieving greater flexibility for the allocation of assets to geographically diversified investments but, also as an asset of strategic insurance value. This means it is seen as an asset that can provide access to safer environments and better healthcare during pandemics or other black swan events.
HNWIs’ dwindling appetite for risk
Despite what appears to be a rush to de-risk on the part of investors, the data indicates that these trends had already gained considerable momentum long before the accelerating effect of Covid-19.
For example, according to the Capgemini Wealth Report 2019, cash replaced equities as the largest portion of HNWIs’ portfolios during 2018-19 (Figure 2), suggesting a recognition that gains from the historic bull that started in the wake of the 2009 financial crisis are very long in the tooth.
Further, the growing appetite towards alternative assets and newly emergent investment classes provide yet more context of HNWIs’ declining appetite for risk.
Gold as a Monetary Equivalent to CBI
As an increasingly popular alternative investment, gold is conventionally seen as a hedge against inflation due to its utility as a store of value. However, other factors can often be clearer drivers of both demand and price and, as such, gold’s strongest suite actually lies in insulating the holder against systemic risk such as banking sector failure, sovereign defaults, or hyperinflationary events as recently witnessed in Venezuela.
The heightened risk to the global political economy due to Covid-19 saw gold outperform virtually every major asset class in the first half of 2020 (Figure 2). Indeed, according to the World Gold Council, the global response to the pandemic by central banks and governments, in the form of rate cuts and substantial liquidity injections, fueled H1 inflows into gold-backed ETFs to a record-breaking 734 tonnes, surpassing the 2009 annual record of 646 tonnes and lifting global holdings to 3,621t. These trends are supported by developments in the UK, where the royal mint reported a 400%+ surge in demand for gold bullion in the initial weeks of the pandemic.
Additionally, BullionVault, a company that allows investors to store their assets in vaults around the world, saw a record 113.9% increase in investor purchases between February and March.
This activity in the gold market underscores its utility as financial insurance and a hedge against systemic risk, and the uptick in global vaulting solutions indicates that HNWIs are also looking for additional protections by geographically diversifying these safety-net assets. In many respects, therefore, gold can be seen as the monetary equivalent to the safeguards offered by a second citizenship through CBI.
Read more: Dominica’s Citizenship by Investment takes the Gold – The CBI Index
Private Equity: Shirking Regulation and Chasing Returns
The growth of private equity is another signpost illustrating the challenges of reducing risk while generating returns in the current climate of excess central bank liquidity and negative interest rates.
McKinsey’s global private markets review 2020 showed that private market assets under management (AUM) rose 10% in 2019, and have increased 170% over the past decade to $4 trillion, during which time the number of active private equity firms has more than doubled. This compares to global public market AUM growth of approximately 100% over the same period, while the number of US publicly traded companies has stayed flat.
It is important to note that while the private market is an increasingly favourable option to generate returns in downturns over publicly traded companies and venture capital, many business owners’ motivations for going private are tied in with second citizenship seekers: namely, the avoidance of burdensome regulatory requirements and less government and public oversight.
Bitcoin: Unburdening Global Value Exchange
Despite emerging only relatively recently, it has become difficult to ignore the rising impact that bitcoin and digital assets are having in the investment space.
The fact that many wealth managers remain unsure of whether bitcoin is a currency, commodity, or security, has not stopped the growing perception that it has merit as an asset class, particularly as it continued its ascent in the wake of the US elections.
Beyond its attractiveness as a fledgling, high-growth asset class, many of bitcoin’s fundamental drivers of citizenship by investment have much in common with cryptocurrencies. Their global mobility and ability to allow for a borderless, peer-to-peer transfer of value without financial intermediaries and reduced government oversight, is attracting more interest from HNWIs.
In a survey from May 2019, over two-thirds of HNWIs reported they would gain bitcoin exposure over the next three years. Bitcoin’s qualities also make it well-suited to the newly emergent class of young, globally mobile, and digitally savvy HNWIs, and it is therefore unsurprising that several bitcoin luminaries have advocated securing a second citizenship.
A Symbiotic Duo: Investment Migration and Private Wealth
The above are but a few examples of how many of the current de-risking strategies involving shifting asset allocations and geographical diversification seen across other asset classes have much in common with the fundamental drivers of the citizenship by investment space.
Not only does this show how these trends are increasingly interlocked because of ever more uncertainty, but it also points to how these symbiotic developments are creating potential avenues for value co-creation between citizenship by investment specialists and wealth managers and/or tax planners.
Both must leverage their respective advisory expertise as well as gain a better understanding of the other side of the investment equation in order to collaboratively guide the rising numbers of investors with convergent goals whom they both may serve.
For more information on the above insightful analysis on how CBI trends reflect global HNWI investment priorities please email james@mckayresearch.com or visit www.mckayresearch.com
Read more: https://www.capgemini.com/gb-en/news/world-wealth-report-2019/
