Entertaining clients in the business world usually follows a simple path: champers + venue + people + repeat same every year. Clients are suitably grateful for an invite and hosts are delighted with a few red faces and slaps on the back. Business entertaining keeps the world spinning round. In the wealth management market though, you have a more challenging ultra high net worth individual to contend with. A super rich client, who has not only seen it all before but probably been there done it and got the limited edition, hand made Donatella t-shirt.
As a famous model once said “I don’t get out of bed for less than £10,000” Wealth managers are dealing with high net worth clients who don’t get out of bed for less than £10 million. Global private banking institutions have had to pull out all the stops to retain and attract clients. Events have included Credit Suisse, Singapore hiring private islands and Bollywood troupes for rich Indian high net worths. Then Credit Suisse, Switzerland holding a wide ranging programme of events that include opera, polo, Formula 1 and White Turf.
White Turf, for the uninformed is horseracing on snow. But an event like White Turf is considered to be ‘off the peg’ and more suitable for the ‘band one’ client with around 30 million + euros. When you rise to more than 100 million + euros, banks start to really concentrate. A bead of sweat might momentarily be seen on an otherwise smooth Etonian brow. One private banker commented “at this level ultra high net worths don’t really need us to provide entertainment. We have to look at ideas like a one to one meeting with an actor, sportsman or luminary of their choice. Or we might try to give them something they cannot buy, like an experience they will appreciate.”
One example of such an experience can be had with Mirabaud & Cie, a traditional family office in Geneva who regularly hold musical recital for clients. A recent evening in Gstaad included guests being chair lifted to a mountain top restaurant for dinner. Other unique events aimed at high net worths in London include one being held at London Zoo by citywealthmag.com on the 10th May. Nicknamed billionaires and bongos, the evening has a £500 ticket price which includes a Las Vegas, Bollywood show and Maybach cars chaffeuring rich-list guests to the venue. The benefit of events such as these is the chance to spend several hours with intermediaries to the super rich who are often as elusive as the high net worths themselves.
As to whether all this entertaining works, most are resolute: it does. Andrew Young a private client lawyer at Lawrence Graham in London said “after a £10,000 per person day out shooting with a super rich client he piped up ‘I like you fellows’ and promptly gave us work worth £250,000 in annual fee’s.” Claudia Rossler, head of marketing for UBS Wealth Management in the UK said: " These days it’s important to offer more than 'just entertainment.’ One of the trends we’ve seen is an interest in 'knowledge events'. Our clients want information on topics such as private equity or hedge funds. That said, UBS has a long history of partnerships and sponsorships with the London Symphony Orchestra, Tate Modern and the Sage Gateshead art centre.” Claudia says these events reflect client choices and compliment the UBS brand. As to measurements Claudia agrees “Event marketing, like all investments, needs to have clear objectives with defined success criteria” UBS assess success from client feedback and ‘commercial measures’.
But whatever banks do sometimes they cannot please a high net worth for all the tea in emerging high net worth China. One fund manager paid substantial sums for a Formula 1 racing in Monaco with five clients dropping out at short notice. A lawyer regularly has Asian clients enthusiastically agree to events but they never turn up and a Swiss banker who shops at Hermes for a presents for an elderly high net worth client on her birthday gets them sent back. He comments “One year, rather pleased with myself, I decided to buy a couture hat instead of the usual Hermes scarf. She sent it back with an uncompromising scribbled note “no thanks, wrong choice, you should have asked me.” http://www.whiteturf.ch/
Monday, 10 December 2007
Private client entertaining
Helping families in business expand using private equity
Cobblestone is a specialist, family business, private equity consultancy based in Boston, USA. They work with wealthy families in business to help with preservation of the structure and expansion. Ninety percent of their work is international which has been the case for the last eight years. Eugene O’Malley is managing partner and says he also works with a few USA families on domestic transactions. A recent deal involved two private families merging their businesses together and reviewing the financial and strategic issues involved.
Eugene previously ran the international consulting practice at Arthur D Little based in Cambridge, Massachusettes but in 1989 he set up on his own and was fortunate to be able to take clients with him. He has historically handled all incoming instructions for families wanting to buy businesses and says this has been mainly for Dutch and UK families.
Cobblestone Advisers have wealthy clients all over the globe spanning such far flung places as Brazil and Egypt. I express surprise at this wide spread, but Eugene is pragmatic saying “I understand how to get a transaction done and have a large network of collaborators who’ve worked with me for a long time. This business needs particular skills: families demand honesty and directness and don’t like political people. You can’t play a political game. They value independence and input without any agenda.”
Eugene says his most recent transaction was for a family in Germany where he brought in an Irish private equity investor to create a subsidiary and separate off part of the family business. For family businesses looking at private equity he guesses there is a universe of around a thousand businesses who may each want $50million.
Of the typical type of work he does, Eugene say there is no one circumstance, commenting “I could be working with families wanting to expand from Holland into India, or Holland into Germany. I tend to be called in because families in business want to move outside of their existing client base, particularly in the UK where there are lots of families in business looking to grow.”
The usual investment profile is cross border with Cobblestone working in Brazil, Thailand and he has also helped one Singaporean family invest in Brazil. He says half of his work has some capital requirement, then explains “a family may have great know how but no capital so we’ll put them together with another family with money but without connections.”
Of the trends he sees Eugene says Germany has for many years and will continue to be an important market mainly because there is a strong, capable family owned business sector without liquidity. He comments “I think Germany has the most families in business of any country. It’s the most important market out there now. They don’t have cash because they’re always reinvesting in their business so there is an easy opportunity to help them expand using private equity.” Eugene adds “Germans have excellent skills in technology and have a strong exporting market which other economies are interested in. They also understand global trends. I have a collaborative of families who want to work with other families so I look for opportunities to bring different families together.”
As to why Eugene ended up in the niche world of families in business he says it started as an offshoot of his corporate career. His life before Cobblestone was with Fortune 500 companies in a 3000 strong entity and occasionally families would cross his path. Of this past time he says “seventeen years ago an average engagement was valued at $150,000 which seems paltry now.”
The families that Eugene deals with come to him because they are looking for a one on one project manager. I ask what sort of deals he is doing for them. He comments “as an example, one of the families I’ve worked with, I advised should incorporate a private equity strategy. We built a suitable profile with a view to introducing private equity firms and people into the family so that they could proactively look at it.” Eugene adds “in deals with families there has to be more than just money brought to the table. The majority of the families want someone who understands their business and can add value beyond money. They also want to deal with the decision maker.”
Eugene says he has a long term pool of investors who are successful individuals looking for opportunities and he also introduces these into the families he works with. He comments “one currency trader I work with put $25million into a private equity family office deal. These people are not generally visible but have a lot of money. I also work with funds who see this as an opportunity to diversify their own investments. The families I deal with are more interested in results than a name brand and they want those working with them to be objective and not conflicted out.”
I ask for an estimate of how many family businesses Eugene thinks there are as a universe. He puts a finger in the wind and says “a rough estimate would be around ten thousand families in each country.” He adds “some are going through transitions and many don’t have succession plans. I think private equity can really help them plan for the future. It can take minority or majority positions perhaps with another family member.”
Eugene says all his work comes from referrals and they generally tend to be from families he’s worked with in the past. He says “it may take five years to get another instruction. It’s that type of the business; families don’t need ongoing help of this nature.”
Cobblestone Advisers started working with families in business exclusively around twelve years ago, dropping their corporate client base. Eugene comments “family businesses always have a need for capital because there are always opportunities out there for them to capitalise on. Opportunities arise because they have substantial wealth and assets and so others approach them. Also in many cases it’s not part of the main family business that needs finance, it maybe that they want to expand or fund someone from the next generation into a new hybrid business. Eugene says families may want to expand into new business areas and says there is increasing interest in bio farms and fuel. He comments “there is a big trend to invest in bio pharma and bio fuel worldwide. You have countries like Brazil who are into sugar cane ethanol, lots of interest in the UK and Asians are also in that market place.” He adds “Bio fuel is normally corn based but corn is becoming expensive so investors are looking at other options.”
Of his role in the private equity deals Eugene says he acts as a facilitator but also sits down with the family and maps out a plan so that they are clear about what they want to achieve before they start. He says “there is usually a lack of trust from the family who worry they may end up with a raw deal. They are honest, hardworking and very wary. As there is a certain amount of lockup and disclosure I have to educate the incoming person about the family business. Chemistry is crucial and a positive approach from the private equity house to promote benefits whilst they work out if the partnership can work. It’s a long process with deals usually ranging from $20-50 million.”
Eugene continues saying “in this business, it’s reliant on the families participating. They have to fully disclose their finances and there is nothing you can do to help them if they won’t. Usually there is a defining moment when we are at the table that gets the talk going.” He gives us an example of a recent project, saying “I got a call from a family in Mexico who wanted to grow their business harnessing the internet. They wanted an adviser in a particular area relating to the internet and needed connections. This is the type of thing I will help with to see how they can partner or find finance to expand with appropriate private equity houses.”
Eugene says there have been many changes in the industry and one downside is that private equity firms have become less flexible as they’ve got bigger. He says now they all work on a formula and if the family business doesn’t fit they won’t consider it. He says this creates problems and means the work has become quite specialist navigating private equity houses into this market.
I ask what size of market he thinks he is working in. He comments “there are thousands of families looking to access private equity. There is a tradition in most cultures to pass the business on which is why it can be useful to review private equity and partnership loans. Although in the Americas it’s the reverse and they generally sell off the business and take the capital.”
One of the more complicated deals he has worked on involved a family business that was quite substantial. It was a European family who were offered the acquisition of another family business. Unfortunately there was a situation where one part of the family business had done a major lay off of staff so they felt it was un-politically correct to have an announcement of new deal and that their board may refuse to co-operate. Eugene helped set up a special purpose vehicle that acquired the family business being sold via a private equity deal. The SPV held on to the business for thirteen months, then later the family purchased it from the private equity house with board approval, paying a premium to do so. Eugene says “it meant they went from a number six position to a number one in their industry. An opportunity they would have missed out on.”
Eugene says the pitfalls of a family business/private equity partnership if not properly run, are that the family might end up with a poorly structured deal. He comments “you have to deal with operational and financial issues. It’s like going through a business plan of sales and having a dialogue about expectations on both sides. It’s very important that there is mutual agreement in how to execute the business or things will unravel.” He says often the family may spend more time focusing on the money rather than on the results they will have to deliver after the fact. Eugene says if everything works well these deals have a real impact on profitability. If not and things go wrong then there will be exit provisions for the family, or as Eugene puts it: a planned divorce. He comments “These deals are always about more than just money and families do have expectations with regard to nurturing their business. On the side of the private equity houses, they need good deal flow which is available in this sector.” He says one family business has done business with five different private equity groups in five different regions of the world.
As private equity houses have a habit of loading businesses and staff with debt, I ask how Eugene handles the macho corporate mix into honest, hardworking families. He says “you can’t allow private equity houses to come in without some guidelines. Families can’t be loaded up with debt nor have money taken out of the business so provisions will be made to prevent this. A plan is mutually developed, agreed and executed. Also families don’t take the money and walk away. The private equity house will be in a strong, supportive role to help the family.” Although Eugene adds “clients have become more aggressive with their money making ideas. With one family he was working with he said they were set to make about $4million but the owner said “I want to make $40m not $4m.” Eugene says in this case, they then advised him differently.”
As to what type of deals work in this scenario, Eugene says one of the best uses he has seen is with a first generation family transferring into the second generation with several siblings entering the business. Eugene explains “usually you may get rivalry but here we raised finance to allow each to hive off into a different business to use their skills without conflict. With one family we did this with a five year plan and the father stayed at the head running the main business whilst children worked in separate extensions. It works well in some cultures like the Middle East. It allows each one of the siblings the potential to grow their own business with their own skill sets.” Eugene says in Europe the founder always wants to bring the children in, but because they recognise how difficult it is to succeed in business, this is a good way to provide for their families and motivate their children. He says it can play a role with one child but it works best with multiple family members with net worth of more that a $100million.
As hedge fund people are springing up everywhere, I ask Eugene if he has a view. He says “Most family offices have been involved with hedge funds for ten years or more although it seems as though it’s only been about five years. I think they are generally moving away from them and dropping asset allocation from 20% to 10%. They feel there is so much money in the liquid markets that the returns are better elsewhere.” He also adds a side comment saying “hedge funds are converging with private equity because of the pressures they are under. Their challenge is the deal flow.”
Eugene thinks there are around five thousand family offices around the globe and mentions the well known Sand Aire with Alex Scot in London. He says “I think the average family office has around $25million and there are probably around fifteen hundred in the USA of this size. I would say there are five hundred that are meaningful around the globe which would mean a couple of hundred million dollars.
Advice that Eugene would give to families in business now is to keep a sharp eye on the global economy. He says “there are many opportunities to work with partners in China or India that businesses need not be fearful of.” He also says that private equity transactions can be executed very quickly so there is little downtime before inflows of money.
As much of Cobblestones business is with leading families in their respective countries he is contractually restricted in making any mention of names by telephone or on his website. □
www.cobbleadvisers.com/
Asia under the wealth magnifying glass
Asia has been under the wealth magnifying glass for a number of years with India and China attracting the majority of press attention. Singapore and Hong Kong have also been in the spotlight, now maturing as ‘hubs’ for outer lying areas of Asia. But according to a recent survey highlighted by John Elder, Director London and International Mellon Family office Services in London, Korea has become the ‘one to watch’. Their stock market has jumped into the limelight with their best performing month in February 2007, delivering just over 5%. In contrast India’s stock market saw a decline of more than 7% over the same month.
Although most economists think Asia is cooling, reports from the Asia Pacific Merrill Lynch wealth report published last year in partnership with Cap Gemini, identified a wealth universe of US$7.6 trillion to tap. This is growing at roughly 7% a year against 6% for the rest of the world. China and Japan accounted for more than sixty five percent of this market share with their individual wealth pegged at between US$1 million-US$5 million per individual. Other Asian based operations like Equity Trust, disagree with the Merrill Lynch Cap Gemini size of client and reveal ‘big ticket’ ultra high net worth Asian clients worth tens of millions walking through their door.
Whatever the figures, Asia continues to deliver numbers on the bottom line. Dirk Chanmueller, Vice President of Consulting Group, Capgemini based in Shanghai said the Chinese economy is soaring suggesting the market rose by as much as 130% at some points recently. However high profile government attention to stop the economy overheating has had a negative affect on growth and caused market volatility. Many global commentators are also warning about knock on effects from the USA following sub prime and high risk loan defaults impacting on emerging economies and stunting growth.
These concerns come into sharp focus with a report Mellon Private Bank share with us. It shows the Shanghai stock market losing 11% of it’s value in early February ‘07 in domestically traded stocks over a period of only five days, after recovery it crashed again by around 9% on February 27th. This sharp movement has sent investors running for the airport with every major global market subsequently declining. The Hong Kong market suffered a similar dip. Chanmueller adds a steadying comment “I don’t think the US sub prime market dipping will have much long term effect nor the recent erratic markets. Stocks have shown they can recover quickly from unexpected falls.”
As to why China should see such magnificent rises in stock markets Chanmueller says there has always been a lot of money to invest in the region. He thinks that confidence levels were previously low so high net worth investors stuck to real estate. This has now changed and alternative investments like stock markets are seeing an increase in local speculative money. Chanmueller comments “in my experience the local Chinese investor wants quick returns; they aren’t like US high net worths putting money into long term pension funds.”
I ask Chanmueller about newer areas like private equity but he says foreign companies have no access to Chinese stock markets which would limit private equity progress locally. A Hong Kong view from Philip Millward of law firm, Walkers differs. Millward tells us why “I’m seeing a sharp increase in private equity work and the size of the funds are getting bigger. A recent comment in HedgeWeek from the Brazilian Association of VC and PE, said that Fund raising for emerging market private equity has more than tripled in 2005 to US$22.1 billion from US$5.8 billion the previous year, and the bulk, about US$15.5 billion, went to Asia.” Millward continues “there are burgeoning opportunities in Asia but I think the US sub prime and ‘Yen Carry trade’ problems have the potential to affect assets flowing into the region.”
Philip Millward, a partner, at Walkers Hong Kong arrived in the island in 1993 and has spent the last decade working with fund managers in the region. Although the hedge fund industry in Asia is in its infancy, Millward says when he started out he worked on single country funds like The Bombay Fund. The focus was on single country, long only strategies but now products layer multiple strategies over multiple countries and sectors. Millward also sees a continuing trend for hedge fund players to move operations to Asia and expects more start up funds. Millward says “managers want to be on the ground in important Gateways to China (Hong Kong) and India (Singapore).”
Millward hopes the competition between Hong Kong and Singapore as financial centres will attract new service providers to open. He says like many jurisdictions there is an undersupply of administrators. This means some funds are experiencing difficulties in setting up in a timely fashion or are rejected as being ‘too small’ in favour of the bigger deals. A report last week in Citywealthmag.com newsletter underlined this problem. It revealed forty administrators now operating in Guernsey, who are all at maximum capacity, having to work around the clock to cope with the influx of private equity fund admin’ demand from the USA.
Another partner at Walkers in Hong Kong, Carol Hall reveals there is another trend toward hybrid funds which mix both private equity and hedge. Hall comments “as well as this development we also expect an increase in hedge funds picking up distressed funds in liquidation.” Hall continues “Other trends will include more opportunities in the Asian private debt and structured finance markets as well as in special equity situations, which should trigger innovation by hedge fund managers. They will need to find ways for investors to access these opportunities.”
One problem Hall sees with the explosion of hedge funds is increased disclosure, especially if there are some high profile collapses. Hall explains why “it will be an attempt to avoid claims from high net worth or institutional investors in times of distress.” Hall also offers some pertinent advice “Potential investors, particularly with private fortunes, need to improve their awareness of a manager's experience and techniques prior to making an investment. In my view a savvy investor should perform greater due diligence before committing capital to a hedge fund, particularly in Asia. They would do well to establish how such hedge funds performed during the Asian market downturn in June 2006 and March 2007. Successful hedge fund managers should have managed their positions in such a way as to minimise any loses.”
Recruitment has always been difficult for wealth managers in the region and with hedge fund managers also wanting expert wealth business developers, the pressure will intensify. The London market is already seeing experienced ‘heads’ poached from wealth management operations into hedge funds, keen on reaching the intermediary market and high net worth investor. Asia has wealth heavyweights like Barclays, Merrill Lynch and Credit Suisse in perma-hire mode but Barclays stole a lead with the star hire of renowned, Didier von Daeniken. The former co-head of Asia Pacific private banking at Credit Suisse joined Barclays as Managing Director and Head of Barclays Wealth, Asia Pacific, in June 1st 2007. Barclays Wealth has a hundred staff in Hong Kong and Singapore.
The Cap Gemini Merrill Lynch Asia Pacific wealth report estimates there are 320,000 dollar millionaires in the region which means if you want a wealth manager to client ratio of one to 60, you would need 5,000 wealth managers on the ground, from the word go. This highlights the pressing need for staff to maintain quality private banking operations. Chanmueller offers an insight “lots of people are coming over from Hong Kong which is important. If we get the skills into the market, it will help confidence in wealth management as a concept.
Chanmueller of Cap Gemini who has lived in Shanghai for three years, agrees with the sentiment of Carol Hall at Walkers and says the outlook is optimistic: Asia is one of the fastest growing markets for fund managers and banks. Mentioning China particularly, he does warn private banks, that competition from domestic operations is growing locally as they get interested in the wealth management space and they are doing well in gathering market share. Chanmueller adds an aside “any operation investing in China would need to include hnw education in their strategy; there is limited knowledge about wealth management offerings in China.”
Chanmueller says of the different countries in the Asia group that, Japan is the acknowledged major market. It has US$3.5 trillion of Asia-Pacific’s US$7.6 trillion pool of wealth, approximately 45.8%, contained within its shores. Shanghai has successfully challenged Hong Kong to become the gateway to China and Korea, Taiwan and Indonesia are countries that hold easy expansion opportunities for wealth managers with well informed markets. Although Korea is the star for 2007 it has a relatively low take up of alternative investments like hedge funds which is put down to limited availability in a relatively new wealth market.
Of use of alternative investments in the region Chanmueller comments “Taiwan is increasingly been seen as a mature market with one third of assets in alternative investments. They are seen as the most well diversified investors in the region. China is the least mature market although they do have a high allocation into alternative investments because of poor domestic returns. A trend in Japan has seen REITs take a hold since their debut in 2005. The first hotel REIT was launched in February 2006. A popular investment choice, they have generated double the returns of government bonds.”
The Asia Pacific Cap Gemini report says that to reach out to clients in this region, banks or funds must work with busy entrepreneurs in ways that are useful, then sell services later. They suggest helping prospective clients with cash management or encouraging them set aside capital for emergencies. The report warns “The need for wealth management is often not obvious to Asian entrepreneurs, steady marketing will allow them to gradually increase their investment competence.”
