Poor investment returns and the transfer of wealth to a globally-minded, investment-savvy generation means that direct investment in private equity via investment clubs or like-minded family offices is on the rise. Private banks can still provide that elusive book of contacts and introductions, but need to ensure that this value-added service is not taken for granted by the next generation of do-it-yourselfers.
Mohammad Syed, managing director, head of strategic solutions at Coutts, comments: "Broadly speaking, we are talking about private equity. The traditional route to market always used to be via funds but post crisis, investors are finding them too opaque and all but the biggest and best funds are struggling outside of the institutional investment arena. The general direction of travel is to invest directly because of the need of the next generation who want to control, add value and be able to actually touch and feel their investments."
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But investment returns, although a significant factor, are not the sole reason for this trend. Indeed the combination of a truly global economy which is much more accessible than even 10 years ago has dovetailed with the transfer of wealth down to the next generation. Money that would have been invested in a fund can now go direct. Even previously hard to reach markets, like China, are becoming accessible to those with the appetite, the right contacts, knowledge and appropriate help with the legal and corporate finance aspects of a deal.
And appetite seems to be high. The next generation are also much more mobile themselves and certainly more international in outlook, both personally and professionally.
Catherine Weir, global head of family office for Citi Private Bank, comments: "The big trend is the transfer of wealth from the current to next generation of investors – the next generation tends to live in multiple jurisdictions, has experience in several different business locations and brings a very different dimension with their life and business outlook into play."
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The transfer of wealth and business interest down through generations also means distillation. Not everyone can, or indeed wants to be the patriarch of the family firm. Therefore a more outward looking perspective is required so that family members can pursue their own interests. In turn, wealth transfer can also mean that inward investment can be required for the family firm.
Syed says the business succession and the transfer of wealth is one of the significant drivers no matter where one is in the world.
"The patriarch needs to have a conversation with the next generation and decide what is to be done with the business and the family wealth. It is important to remember that investment can be both outward to satisfy the needs of the next generation of entrepreneurs, as well as inward if the family business wishes to take on additional investors, or is looking for specialist input or expansion into different areas or geographies," he says.
Keeping it in the family
As a consequence of the three elements of investment returns, need for new business outlets and geographic awareness and diversity, the creation of family offices to manage structure and process is becoming more and more favoured. The role of the family office can differ hugely depending on the wealth involved, the complexity and diversity of the family involved and indeed theoriginal purpose for the office’s creation.
In a co-investment context though, the family office is serving as a useful listening post for potential investments. It is able to communicate with both other potential investors as well as those promoting an investment opportunity.
Caroline Garnham, managing director at the Family Bhive, comments: "Managing your own investments means that you can cut out the middle man and have much more knowledge and control. It is becoming more and more the acceptable mindset to have. However, what is missing is the lack of contacts and knowledge."
And Weir adds: "UHNW families want the choice of like-minded parties and people and they are seeing lots of clubs where one family office finds something interesting but prefers not to fully fund themselves and so clubs together with another. The different family offices all bring something new to the table."
In this respect, the family offices a re doing the heavy lifting and bridging the gap between the individual investor and the deal itself and other interested parties who might be able to form a co-investment deal. In past times this sort of investment club or co-investment deal might have been facilitated by the old merchant banks but they have since become the large institutional banks with deal sizes to match their largesse. Investment clubs for UHNW families thus make sense in terms of critical mass, contacts and expertise.
The size of the club is typically driven by the investment deal in question, however like-minded families will tend to invest with each other again and again and according to Wier, deal size can be anything between $5m to $100m with a typical number of investments per family standing at around $10m.
Real estate seems to be one of the most popular types of co-investment deals. It fits the desire to hold onto an actual investment, as opposed to investing via a fund and having allocations spread between a larger number of properties.
Weir thinks that interest in Africa is a significant trend in the UK at the moment as families seek to extend their global reach. Again this is a classic example of co-investing now becoming possible as the world becomes a smaller place and contacts and deals become more readily accessible. Clearly there exists good scope for partnerships between those that have the experience and those that have the capital.
The marriage of capital and experience is also the case with first generation family businesses that might have no natural their or wish to expand into new markets or geographies as the business is passed down a generation.
A third trend is for families from Asia and Asia-Pacific to buy into a luxury brand. Syed comments: "With brands the investor seeks to have a heritage brand because it is prestigious in itself and also offers a new market with its own distribution channels to the investor/s. The brand can also be sold back into the country or region of origin where there will also often be an existing distribution base derived from the investor’s home business."
He cites the examples of Land Rover and Jaguar Cars which were sold to Indian company Tata Motors in 2008 and have since been successfully launched in India. In 2006, Tommy Hilfiger sold his company to Apax Partners, a private investment consortium based in Asia. The company was then listed.
Syed comments: "In Asia and Asia Pacific there is a strong cultural preference for direct investing coupled with the fact that a lot of the wealth is first generation. The investors there are very much about being in control and consequently club deals and direct investing has always been the way to do things."
There also exists a further model – an interesting amalgam of family wealth and banking, which takes the benefits of family club deals with the asset base of a bank. Family-owned private bank, Banque Havilland, has just this model. It looks to build co-investment club deal opportunities with UHNW investors with a minimum of £50m who are interested in co-investing with the Rowland family.
Speaking to PBI last year, COO Venetia Lean referred to a high-end commercial property offering in Luxembourg, which the family has already invested in and was looking for co-investors.
Private banks not out in the cold
But where do the private banks come into play? A s ever, the value of the t rusted advisor and the reach of the private bank as a facilitator seems to be the key valueadded elements.
Syed comments: "Investment clubs have been around for a very long time, initially via merchant banks. But they have now become investment banks and they are looking for an institutional-sized product to sell via their distribution channels. The private banks meanwhile do not have a product to sell but are adding value through connections and facilitations and being the trusted advisor."
In practice this means the provision of contacts and introductions that could otherwise be hard to come by, as well as the referral to professional service providers who know the market, industry or geography in question intimately. Typically Syed says, the bank would find between three and four investors or investments. "We add value because of our global reach and knowing where to look in all jurisdictions and our ability to decipher regional and cultural aspects."
But Seb Dovey, managing partner at the Scorpio partnership thinks that the banks may not actually be fully adding value. "Sometimes if the deal is sufficiently large they may be able to add value through accessing the investment banking community for the client," he acknowledges.
Garnham meanwhile is seeking to bypass the introduction and facilitation services of the private banks entirely with the launch of a new website that will match investors/ family offices and promoters.
"The difficulty for many is that the promoters have difficulty getting deals direct to the investor without some form of referral system, which is not what these investors ultimately want, but the FCA make it difficult for investors to find investments, and promoters to find investors without a referral chain," she says.
Garnham hopes the site will open up the market. "The issue is that when investing direct there are a lot of middle men, but that pool of contacts eventually exhausts itself. With the website, the potential pool of contacts is unlimited, as long as the membership criteria are met for both promoters and investors," she adds.
The success of such a site clearly depends on its ability to attract critical mass and the ease of completing a deal. Here Dovey thinks that private banks have the edge.
"In the end all investors at this level value a structured deal flow. The reality is that the structured process of review is more likely to lead to results rather than just relying on serendipity," he says.
Lending is the other area where banks may have the edge of family offices too. They have the capital base to fund large financing deals, however if the risk is spread, between multiple groups, this lessens the needs for banks. All this illustrates, that just as changing client demands are causing fragmentation in business models amongst wealth managers and private banks, and the UHNW/family office space is experiencing similar change. Whether it will be a revolution, or simply evolution, remains to be seen.
