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Sunday, May 22, 2022

Billionaires Bloom in Big Year

It was a good year to be a billionaire in Los Angeles.

There are 58 of them on the Business Journal’s 2017 Wealthiest Angelenos list, led once again by Patrick Soon-Shiong, and they control a combined $203.4 billion. That’s more than twice the value of Walt Disney Co.’s 2016 assets. The average net worth of the people on the list is $3.51 billion, compared with $3.44 billion last year.

Overall, L.A.’s super elite increased their aggregate holdings by 18.2 percent during the past 12 months. That’s a huge premium on the aggregate wealth increase seen in all U.S. households, which climbed to $92.8 trillion from $87.3 trillion last year – just a 6.3 percent gain – according to Federal Reserve Bank data.

While this is good news for the bottom line of the billionaire class, at least one member of the list said the decades-long trend toward greater wealth inequality is a problem, albeit one without an easy solution.

“Inequality comes from somewhere; it’s not as simple as someone made a lot of money and someone did not,” said Nicolas Berggruen, whose $1.9 billion put him No. 36 on the list. “It stems from access to opportunity. So how do you change that? Is it taxes? Is it education? Is it wages?”

The question of wealth distribution is part of a larger debate for Berggruen about the evolving challenges faced by democratic society – a debate he’s put $500 million on the line to address through an endowment for his Berggruen Institute. The think tank, which is planned for a $45 million property in the Santa Monica Mountains, is part of the Paris-born investor’s plan to encourage deep thinking about complex problems – and he gives out a yearly $1 million philosophy prize to reward it.

But some economists, concerned the issue is reaching an inflection point, are encouraging swifter action. Christopher Thornberg, a founding partner of Beacon Economics, said the growing wealth gap could soon destabilize the market.

“A massive imbalance in assets like we have right now can create huge political upheaval and impact the economy’s ability to function properly,” he said. “It would behoove the federal government to mitigate this trend, but, contrary to that, President Donald Trump seems intent on expanding the wealth gap.”

From a practical perspective, the outsized performance of the uber wealthy’s holdings is fairly simple to explain, according to Merrill Lynch Private Wealth Management’s Richard Jones.

“Almost by definition, very wealthy people have opportunities to become even wealthier because they have access to investment opportunities that others don’t,” Jones said. “The kinds of investments the Wealthiest Angelenos can afford to make, someone with $20,000 in savings can’t.”

Jones, who manages $16 billion in assets for 90 families out of his Century City office, said ultrahigh-net-worth individuals benefit from an array of advantages that boost their returns, including more money invested in a booming stock market, access to low-interest capital, and exclusive deals through private equity and family office arrangements. Access to financial advisers, tax specialists, and sophisticated legal guidance can also help secure billionaires’ fortunes.

“There are a lot of creative strategies out there that wealthy individuals can take advantage of to help preserve their money,” Jones said. “If they do it properly, with the right overall strategic planning, they can save tens of millions of dollars a year.”

Thornberg said scrapping some of these creative strategies would be a good place to begin in terms of closing the wealth gap.

“The first thing to do would be to get rid of the carried interest deduction and start implementing a wealth tax,” he said. “People should be paying some percentage of their wealth on an annual basis instead of income tax.”

Entrepreneurial drive

But these principles only apply once a fortune is made. While the 2017 Wealthiest Angelenos list features a healthy number of people whose wealth is the product of a large inheritance, the vast majority are entrepreneurs who built their fortunes.

In fact, the biggest gains were made by the youngest and greenest members of the list: Snap Inc. co-founders Evan Spiegel, the company’s chief executive, and Bobby Murphy, its chief technology officer. While last week’s lackluster first-quarter earnings report knocked some wind out of Snap’s sails, Spiegel and Murphy easily paced the list’s gainers. The pair rode their company’s March public offering to a huge payday, each adding more than $2.5 billion to their total net worth, placing them at No. 17 on the Wealthiest list with $4.16 billion apiece.

There are also more established entrepreneurs, including Soon-Shiong, who tops the list for the ninth straight year with a net worth that has hit $18 billion. A native of South Africa, he began his career as a surgeon and has continued to make waves, revealing to the Business Journal that he would consolidate several of his privately held pharmaceutical companies under the umbrella of an as-yet unformed entity to be called NantBio, whose pieces are valued collectively at more than $8 billion. Soon-Shiong said he intended to take NantBio public next year.

The biotech maven also leads another interesting subset of L.A. billionaires: immigrant entrepreneurs. There are 15 of them on the list this year, including fellow South African Elon Musk, No. 2 on the list with $14.2 billion, and China-born John Tu, who clocked in at No. 4 with $8.95 billion.

The connection between entrepreneurial success and immigrant roots is not coincidental, Soon-Shiong said, describing it as a uniquely American experience.

“This is a country of dreamers, and it really supports entrepreneurs and facilitates those dreams,” he said. “South Africa sadly has no resources, and Canada and England and Europe – the risk-taking there is significantly less. Here people actually take risks on you … (and) we took risks on ourselves.”

Risk, reward

This risk-taking is an attribute that defines the billionaire class broadly, a luxury their wealth affords them, according to Merrill Lynch’s Jones.

“The ultrawealthy can take more risks, especially more concentrated risks than those with less money,” he said.

But even when industries suffer downturns, wealthy individuals typically manage to maintain a relatively stable net worth by hedging against market corrections. With the tech market booming right now, Jones said ultrahigh-net-worth individuals who made their money in that space, or who have seen recent gains in their investment portfolio due to tech stocks, might want to assess where they put their money going forward.

“We do spend quite a bit of time talking with our clients about stepping back and looking at the macro picture,” Jones said. “Sure, tech stocks are going crazy right now, but do you want to keep putting money there?”

Charitable giving is another conversation that nearly all of these types of clients want to have, Jones added. Longtime philanthropists, including Eli Broad, who ranks No. 5 on the list with $8.24 billion, continue to be at the forefront of this type of giving in Los Angeles. But relative newcomers, such as Berggruen, are stepping up to the plate and bringing not just their money but new perspectives.

“We all have something to give,” Berggruen said. “It may very well be economic assets, but it also can be other things. We are going to invest a lot in Los Angeles physically, but it’s also really a dedication of time, energy, and ideas.”

Following the Money

Putting number on L.A.’s Wealthiest

The Los Angeles Business Journal has been tracking the wealthiest of the wealthy for the last 23 years. This year, for the first time, we expanded the list beyond 50 people and broke out our annual package into a standalone magazine, one that is sent to paid subscribers as part of their subscription.

The change came as a result of a change in the nature – and volume – of wealth in Los Angeles.

A broad economic recovery has certainly helped those who were already wildly wealthy, and the rise of the technology sector has created some vast fortunes in Los Angeles and is primed to create even more. To be sure, standbys such as entertainment and real estate continue to prove lucrative endeavors for those positioned – and talented enough – to take advantage of the opportunities here.

As a result, since 2015 every member of the list has been a billionaire. Why, then, with more than 50 billionaires in Los Angeles County, should we adhere to a 23-year-old limit?

Provided with an opportunity to expand the list, we took the occasion to rethink the way we have been presenting our signature Wealthiest Angelenos issue altogether.

The result was a special magazine format that afforded us the opportunity to give the stories that accompany the list room to go a little deeper, to use art in a more interesting and creative way, and to provide readers with something that commands value and interest long after its publication date.

For those who read the list here, a note of explanation:

The Business Journal calculates the net worth of L.A.’s wealthiest residents using several methods. It asks each candidate for details on their portfolio, including holdings in stocks, real estate, private equity investments, and debt. Some decline to participate, and others offer relatively detailed information. Some will confirm numbers our reporters have calculated, while others might suggest general adjustments, either up or down. Our reporters check the valuations provided to them by the same method they calculate valuations for those who do not participate: Publicly available data are researched, industry experts and money managers are consulted, and comparisons based on valuations for public companies in similar industries are established.

The final numbers, then, are as accurate as possible given the constraints associated with obtaining more than a rough estimate for wealth held in private hands. Other than wealth, the primary criteria for joining the list is holding residency in the county.

Calculations of holdings in public companies were based on values as of the markets’ close on April 21.

– Jonathan Diamond

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