Diversification across investment classes and geographies is key to wealth preservation. FILE PHOTO | NMG
Summary
- Although it is clear that many HNWIs in Africa are still on their journey towards creating sustained long term, intergenerational wealth, there is an increasing realisation of the importance of leaving a legacy for future generations.
- Protecting this hard-earned wealth for generations to come has to be a priority.
- If entrepreneurs empower themselves now and set in motion intergenerational wealth planning, backed by a genuine commitment, they can protect their legacy.
A now renowned report by the Williams Group wealth consultancy highlighted a frightening statistic – 70 percent of high-net-worth families lose all their wealth in the second generation.
It also says 90 percent lose it all by the third generation meaning great-grandchild of the initial wealth creator get nothing in nine out of 10 cases.
Many reasons explaining this wealth loss have been highlighted, key among them there being no perceived serious need to invest in and equip the next generation, and two, many wealthy families lacking dispute resolution mechanisms.
Thirdly, there is the lack of development of entrepreneurial talent among the next generation. Today’s article is a mesh between reason three and reflections on the Standard Bank’s report; Africa Wealth Report 2020.
To give context, here’s the link between the two. Findings of the bank’s report show that no less than 148 of the 265 respondents from five surveyed markets of South Africa, Kenya, Mauritius, Nigeria and Ghana cited entrepreneurship as their chosen path towards accumulating their first Sh100 million.
Even when asked how they continued creating wealth beyond their first Sh100 million, entrepreneurship stood head and shoulders above alternatives such as an executive career (47) or family-owned business (41).
Furthr highlighting the theme of self-reliance, less than 10 percent of respondents indicated that they had inherited their wealth. To tie up the two with the “wealth destruction” story is a question: is entrepreneursip enough to secure generational wealth? The straight answer is no.
Three key inputs will be needed. One, education is key. Given that the bank survey revealed that African HNWIs place a strong emphasis on family, it is clear that any sustainable wealth preservation strategy on the continent must take into account education of the next generation.
It’s obvious that when entrepreneurial talent is not developed, the family forgoes an important wealth creation opportunity and restricts the potential for the next generation to outperform their predecessors.
The fact is there is no automatic inheritance of entrepreneurial talent. Like any skill worth having, it needs to be developed over time. Generationally successful families understand this.
Two, diversification is paramount. It is pretty obvious that Africa’s HNWI primary vehicle chosen for consolidating and preserving wealth is property. Across all five countries surveyed, only in South Africa was property not the primary vehicle for wealth preservation.
This is partly as a result of Africa’s less developed financial markets. Nonetheless, Africa HNWIs still have an opportunity to diversify into equity through regional and global listed equity boards and private equity funds, amongst other emerging quasi-equity-type opportunities.
Diversification across investment classes and geographies is key to wealth preservation.
Three, succession planning is vital. Keeping abreast of tax changes ensures peace of mind so that when the inevitable happens everything is in place for a smooth transition. Lack of proper succession planning is like shooting oneself in the foot: it shows a lack of care.
Although it is clear that many HNWIs in Africa are still on their journey towards creating sustained long term, intergenerational wealth, there is an increasing realisation of the importance of leaving a legacy for future generations.
Protecting this hard-earned wealth for generations to come has to be a priority. If entrepreneurs empower themselves now and set in motion intergenerational wealth planning, backed by a genuine commitment, they can protect their legacy.
Mr Mwanyasi is the managing director of Canaan Capital
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