Strategy

Private Banks Put Capital to Work in UHNW Businesses

Emma Rees 13 August 2008

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.



 

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