Strategy
Private Banks Put Capital to Work in UHNW Businesses

There are increasing moves by private banks and wealth managers to buy equity stakes in single and multi-family offices in order to gain a foothold in the sought after ultra high net worth space.
There are increasing moves by private banks and wealth managers
to buy equity stakes in single and multi-family offices in order
to gain a foothold in the sought after ultra high net worth
space.
SG Private Banking’s purchase of a minority equity stake in
Rockefeller Financial Services is one recent example. The deal
formed part of a global alliance between the wealth management
arm of France’s Société Générale, and US-based Rockefeller & Co,
which will see the companies working together to share areas of
expertise and jointly serve the financial needs of ultra high net
worth individuals and families around the world, whilst
continuing to act as independent entities.
Whilst press reports at the time of the deal in June implied that
the move was about Société Générale buying a book of business,
wealth management consultant Scorpio Partnership contends that
these reports are wrong.
“This is less about acquiring AuM than putting capital to work as
a private equity placement in an area where SocGen knows it
should be involved, but where it lacks the core skills and where
it would be hard to acquire them,” said Scorpio’s Graham Harvey.
“Another consideration is that it may not want to confuse its own
brand. By buying a stake it gets a private equity injection.”
Rockefeller & Co counts US family offices Guggenheim, Bessemer
and bank Northern Trust amongst its peers, but whilst all of the
others have gained stakes outside of the US - Northern Trust has
been in Europe since 1969 and recently opened in the Middle East
and Guggenheim has offices in London, Geneva, Hong Kong and the
Middle East - until the tie up with SocGen, Rockefeller has been
stoically US and onshore.
Scorpio pinpoints a growing trend with acquisitions in the UHNW
space occurring with increasing frequency over the last four to
five years. What it views as particularly interesting in this
instance is the size of the investment involved. As part of the
deal, SocGen has acquired a 37 per cent equity stake in
Rockefeller for an undisclosed sum.
Other similar examples in recent history include one of the
largest privately-owned wealth management firms in the US,
Bessemer, seeding a 20 per cent stake in UK-based family office
Stanhope Capital.
London-based multi-family office Fleming Family & Partners
acquired Sagitta Asset Management for a reported £773 million
($1.3 billion) in 2005. Standard Chartered also bought an equity
stake in Fleming Family & Partners in 2005 in a move which was
similar to that of SocGen with Rockefeller. UBS bought Saurborn
Trust in 2004, which is widely acknowledged as kick-starting its
German business.
South African wealth and asset manager, Peregrine, acquired a
controlling stake in Stenham, an UHNW Trust group in a $700
million deal earlier this year.
In the case of Rockefeller and SocGen, James McDonald, president
and chief executive officer of Rockefeller & Co, and Daniel
Truchi, chief executive officer of SG Private Banking and Marc
Stern, Chairman of Société Générale Global Investment Management
and Services for North America, are taking places on the board of
their counterpart’s businesses, providing them with an inside
view on how the respective businesses operate.
Often when firms look at buying equity stakes in a multi family
office or single family office, it is about creating or buying
access to a research and development unit in the UHNW space as
what happens here often filters through to lower level wealth
segments soon afterwards. The ability to provide a tailored
proposition to UHNW clients and family offices worldwide, an
important part of SocGen’s growth strategy, was undoubtedly a key
consideration in its deal with Rockefeller.
However, Scorpio believes that another way of looking at this and
similar deals is that private banks have appreciated that UHNW
advisory can be a successful business model and an area of
potential growth, but often do not have the capability to deal
with UHNW clients themselves, due to the operational complexities
of running significant numbers of bespoke portfolios and the
additional services that UHNW clients often expect.
The challenge in serving the UHNW space is that the level of
customisation and service that clients’ demand is hard to scale.
Many firms serving clients with between $1 million to $5 million
do what they do very well; achieving mass-customisation so that
the service feels individual and bespoke and creates a business
model that is very much scaleable.
“For the banks that can nail it and get their teeth into it, the
HNW space can be hugely profitable,” said Mr Harvey.
However, the UHNW segment is not scaleable to a level that most
private banking chief executives deem acceptable. Banks are
therefore buying equity stakes, as although margins in the UHNW
space are lower, as clients gain more wealth, they are falling
out of this space, into boutique firms and family offices.
“Private banks would rather take a stake in these firms and get
37 per cent or 20 per cent of the revenues, than none at all,”
said Mr Harvey.
Ray Soudah of MillenniumAssociates does not see a proliferation
of firms making UHNW purchases, pointing out that the majority of
purchases are still not for UHNW firms or offices.
His view is that the motive for these sorts of deals tends to be
based more around image and co branding reflecting the need to
show prestige.
“There is a long standing trend to enter this space by private
banks as they tend to feel isolated and as if it is detrimental
to their image if they don’t deal with large families. However,
the segment is highly fragmented and likely to remain so despite
the SocGen Rockefeller case.”
Independent management consultant Bruce Weatherill believes that
these types of deals are about building long term relationships
and quasi partnerships by acquiring equity stakes in
complementary businesses as the investment demonstrates a long
term commitment rather than just a cold pitch for assets, which
UHNW individuals do not like.
“Whilst often falling short of a full JV, the linkage of 'most
favoured company status' to the banks and the brand linkage and
coverage for the UHNW family are mutually important,” he
said.
Mr Soudah says that the jury is out on these sorts of deals as
there are very few examples to reference to date. “The
Rockefeller SocGen deal is not a takeover, but a partnership
therefore it is difficult to see how it could fail. Not much will
change other than a few clients being cross-referred using the
firms’ existing infrastructure,” said Mr Soudah.
Mr Weatherill agrees that such deals are likely to continue and
that whilst it is far too soon to judge success, intrinsically it
seems likely that they will, providing the culture of both
organisations fits.
“Funds rarely flow immediately but as knowledge of each party
grows so this is likely to follow, particularly in areas of clear
expertise, such as Société Générale with structured
products.”
Mr Weatherill notes that it will be interesting to see if JV's
emerge from these alliances and also whether the banks operate as
quasi family offices or whether there is a narrower
relationship.
“It will also be interesting to see how well this initiative fits
with 'open architecture'. It is important that there is no double
counting or charging otherwise the initiative will fail,” he
said.
Scorpio believes that careful strategic due diligence on the part
of the firm looking to buy is key to the future success of
similar deals, however this is a challenge as many MFOs do not
release data.
“It is hard for firms to find a match as many family offices are
below the radar. However, it is a sector of the market we
actively engage with from both a research and consulting
perspective,” said Mr Harvey. However, as Scorpio has seen
European-based MFOs grow AuM at some 75 per cent in the last 24
months it believes that it is a potentially explosive market for
firms that can get the formula right.