In the world of wealth management, there are investment strategies that millionaires use to grow their wealth, but which often remain unknown to the general public. These powerful levers, once reserved for an elite, are becoming increasingly accessible today. Understanding and mastering these investments can radically transform your approach to investing and allow you to optimize your assets significantly.
In this article, we will explore three investments favored by the wealthy, explained by an expert in wealth management . These strategies are not just financial tools, but real levers for wealth growth and tax optimization. Whether you are an entrepreneur, a seasoned investor, or simply curious to learn more, discover how these investments can help your wealth take off.
Table of Contents
- Introduction to the financial levers of millionaires
- 1. Lombard loan: a powerful and flexible financial lever
- 2. Private equity: the high-yield asset class of the wealthy
- 3. Investing through a company: a major tax and strategic lever
- Conclusion: Take inspiration from millionaires to optimize your wealth
Introduction to the financial levers of millionaires
Before getting to the heart of the matter, it is important to understand what is meant by "great fortune" in the context of wealth management. We generally speak of a minimum financial net worth of 5 million dollars, excluding real estate or businesses. Beyond that, we distinguish very large fortunes from 25 to 30 million dollars. These investors have varied profiles: business leaders, entrepreneurs, professional athletes, artists, or even public figures.
These wealthy individuals use sophisticated strategies to manage and grow their capital. Among these strategies, three investments stand out for their effectiveness and their ability to generate high returns while optimizing taxation. These three levers are:
- Lombard loan
- Private equity
- Investment through a company
1. Lombard loan: a powerful and flexible financial lever
The lombard loan is a financing technique that consists of borrowing using one's financial assets as collateral. These assets can be stocks held in a securities account, ETFs, or even Luxembourg life insurance contracts, particularly favored by wealthy investors.
How does a Lombard loan work?
Imagine you own $100,000 in stocks in a brokerage account. The bank can lend you an amount equivalent to a portion of this value, often around 60%, or $60,000, using the stocks as collateral. This loan allows you to have cash available without having to sell your assets.
The key advantages of Lombard credit
- Unsecured loan: You are free to use the borrowed funds as you see fit — whether to invest further, purchase real estate, or finance a personal project.
- Assets continue to grow: Unlike selling assets, those used as collateral remain invested, allowing you to benefit from their growth potential.
- Bullet loan: You only repay the interest during the loan term, generally five years, and the principal is repaid at the end of the term. This reduces monthly payments and improves your cash flow.
- Renewal possible: A Lombard loan can be renewed indefinitely, as long as the value of the collateral assets is sufficient, thus offering significant flexibility.
- Tax optimization: Using a Lombard loan to finance one's lifestyle avoids selling assets and thus realizing taxable capital gains. Loan interest is deductible in certain cases, which can reduce the tax burden.
Why do millionaires use Lombard loans?
This lever is particularly appreciated for its ability to preserve assets while offering immediate liquidity. For example, selling assets held in a life insurance policy to finance personal expenses often results in capital gains taxes. In contrast, borrowing via a Lombard loan does not generate any taxation. Thus, assets continue to grow while the borrowed funds finance current needs.
Furthermore, Lombard loan interest rates are generally low, close to the short-term interbank rate plus a margin of about 1%. For example, an overall rate of around 4% is often more advantageous than suffering a tax of 30% or more on a realized capital gain.
Precautions to take
It is essential to remember that Lombard loans remain loans, with risks. If the value of the collateral assets falls significantly, the bank may request a collateral top-up or partial repayment of the loan, which can lead to a margin call. Furthermore, it is not advisable to use this leverage to finance non-productive expenses or very risky investments. Prudent management and professional support are essential to take full advantage of Lombard loans.
2. Private equity: the high-yield asset class of the wealthy
The private equity , or private equity, is the best performing asset class historically, with an average annualized return of around 14%. Yet, it remains little accessible and unknown to the general public, who are often more familiar with listed stocks.
What is private equity?
Private equity consists of investing in shares of unlisted companies. These companies can be start-ups in the development phase, growing companies, or mature companies seeking expansion. Unlike public equity (listed shares), these investments are not liquid and are generally locked in for a long period of about ten years.
Private equity segments
- Venture capital: Investment in start-ups or young innovative companies, with higher risk but significant return potential.
- Growth capital: Investment in established companies, in a growth phase, with a certain stability.
- LBO (Leverage Buy-Out): Acquisition of mature leveraged companies, often to accelerate their development or restructure their business.
- Turnaround capital: Investment in struggling companies, with the aim of recovery.
Accessibility and entry ticket
Historically, private equity required very high entry tickets, often several hundred thousand or millions of dollars. Today, it is possible to access this asset class through life insurance contracts or specialized funds with much more accessible entry tickets, sometimes from $1,000. For quality institutional investments, commitments can be around $100,000, spread over several years.
The advantages of private equity
- High return: With a performance history superior to listed markets, private equity offers remarkable growth potential.
- Diversification: By investing in unlisted companies, one gains access to a universe less correlated with public markets.
- Participation in real growth: These investments directly finance innovative or developing companies, contributing to the real economy.
Limits and risks
The main disadvantage of private equity is its lack of liquidity. The funds committed are locked in for several years, with no possibility of early withdrawal. Furthermore, like any high-yield investment, it carries a higher risk, particularly in venture capital where companies can fail.
It is therefore crucial to understand the return-security-liquidity triangle: one cannot have a very liquid, very secure, and very profitable investment at the same time. Private equity sacrifices liquidity and a certain security to offer a higher return.
Concrete examples of unlisted companies
To better understand, think of companies like OpenAI (creator of ChatGPT), Blablacar, Doctolib, or Back Market. These companies, although well-known, are not listed on the stock exchange and represent typical private equity opportunities. They often generate significant revenue and are mature, but choose to remain private to avoid the constraints associated with listing.
Why do millionaires favor private equity?
High-net-worth individuals allocate an average of 23% of their financial assets to private equity. This asset class is also heavily used by institutional investors such as insurance companies, pension funds, and prestigious universities, who see it as an essential lever for performance and diversification.
3. Investing through a company: a major tax and strategic lever
Investing through a company is a strategy often underestimated by individuals, but which offers considerable tax, financial, and asset advantages. This leverage allows for tax management, access to investments reserved for companies, and optimization of wealth transfer.
Why invest through a company?
Here are five major reasons why millionaires use this leverage:
- Tax optimization: Profits generated within a company are taxed at a reduced rate (15% up to a certain threshold, then around 25%), well below personal tax rates which can reach 45%. By investing directly through a company, one avoids the double taxation linked to the personal flat tax on dividends and capital gains.
- Access to specific investments: Certain investment opportunities, such as Luxembourg life insurance policies or certain Lombard loans, are more accessible or advantageous through a corporate structure.
- Easier financing: Companies can have simpler access to debt, allowing them to raise funds to invest in or develop projects.
- Structuring and managing assets: With several companies, particularly through a holding company, it is possible to effectively manage financial flows between entities, optimize taxation through mechanisms such as the parent-subsidiary regime or fiscal integration, and secure assets.
- Facilitated transfer: Legal and tax arrangements dedicated to companies, such as the Dutreil pact, allow for the transfer of a company with a tax reduction of up to 75%, considerably reducing inheritance tax.
Key mechanisms for optimization via a company
Beyond taxation, the company offers flexibility in wealth management and transfer:
- Usufruct and splitting of ownership: In splitting ownership, one can separate the bare ownership and the usufruct of company shares, which reduces the taxable base during transmission while retaining control and income.
- Share division: As the company is composed of shares, it is simpler to distribute assets among heirs, especially when there are several children, by avoiding the physical division of property.
- Legal structures: The implementation of holding companies, shareholder agreements, and other legal mechanisms allows for dynamic and secure asset management.
Best practices
Investing through a company requires a good knowledge of tax and legal rules. It is important to be supported by competent professionals to effectively structure one's assets and avoid costly mistakes. This strategy is particularly suitable for entrepreneurs and investors with significant capital.
Conclusion: Take inspiration from millionaires to optimize your wealth
The three levers presented — Lombard credit, private equity, and investment via a company — are pillars of millionaires' wealth strategy. They not only allow for wealth growth but also intelligent tax management and transmission optimization.
Although these tools may seem complex or reserved for an elite, they are becoming accessible to a wider audience today thanks to the evolution of financial markets and available offerings. Nevertheless, their use requires a good knowledge of the mechanisms and rigorous risk management.
For those who wish to take their assets to the next level, it is essential to inform themselves, train themselves, and be accompanied by wealth management experts. Understanding these levers and knowing how to use them intelligently can make all the difference between stagnant asset growth and a true explosion of your wealth.
Finally, always keep in mind that every investment involves risks and that past performance does not guarantee future results. The key to success lies in the combination of a suitable strategy, prudent management, and professional support.