Private banks are struggling to meet the demands of one of the most lucrative wealth segments: entrepreneurial ultra-high-net-worth clients who, having built up their own businesses and cashed out, now wish to invest their wealth.
Private banks have recast themselves as essentially asset managers with a bit of tailored service for such individuals and their families. But these clients don’t want to redeploy their wealth in conventional financial assets. As an increasing number of such families look to invest in companies, they are turning to each other as co-investors because private banks simply cannot provide the deal flow at the right size or cannot add value to the largest of clients.
“Business owners love building things. When they cash out, the investment process is very boring in comparison, so they are drawn back into investing and taking a role in business through private equity,” says Sara Hamilton, founder and CEO of the Family Office Exchange.
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| Sara Hamilton, founder |
Hamilton says this is one reason that there has been an increase in demand for private equity deals. A second reason is that entrepreneurs discover that, after several years out, US taxes eat away at investments much faster than they do at company holdings.
Chip Packard, co-head of wealth management Americas at Deutsche Asset & Wealth Management, says he is seeing a trend emerge of “entrepreneurs who have built wealth and monetized it, and are now looking to deploy part of it back into an operating business or real estate.”
The Family Office Exchange has recently announced the establishment of a platform for families to come together and pool ideas called FDX Capital Marketplace.
Hamilton says: “Twenty years ago families insisted on controlling the deal, but today there is much more willingness to share in the ideas, the due-diligence process, the funding and the board oversight with like-minded families.” Research conducted by FOX shows most of their family offices members prefer deal sizes between $5 million and $25 million. Real estate, energy, health and finance were the preferred sectors.
Hamilton says that from a supply perspective, there are plenty of family-owned businesses up for sale that would welcome a takeover from a group that understood their demographic.
“Many private companies are run by people over 65 who haven’t found their successor and whose children do not want to take over,” says Hamilton. “The owners have yet to find a solution as to what to do with their business and do not want a forced distressed sale. These owners are holding out as they don’t want private equity funds to buy them because they know they will likely sell the business in five years’ time and they have a strong dislike for Wall Street. But they are very interested in teaming up with other long-term families with a buy-and-hold attitude.”
It is not just wealthy American families looking to buy. Hamilton says US businesses are viewed as safe investments for Asian families because of the strength of the US economy.
It is a difficult challenge for the private banks. Families looking to deploy $5 million to $20 million are too small for the banks to warrant using their investment banking arms, yet families with $500 million and above in assets looking for larger purchases are able to approach private equity firms or even the businesses themselves directly.
“The challenge for private banks with these very wealthy families is: what can you offer them in terms of access?” says a US private banker. “They are not interested in your open architecture platform because, at that size, they have access to the best private equity firms in the world and do not need introductions and can approach businesses directly too. They want to know what you are investing in and they want to co-invest with you as they would with a private equity team.”
The gap
As a result private banks are building teams that provide these top-tier families with ideas and co-investment opportunities. But a large slice of the potential business from these wealthy investors doesn’t fit well with an investment-banking-style approach. In real estate, for example, one US private banker says there is a gap between what the private banks would want to see as deal size versus the family offices.
“There is a large appetite and the industry hasn’t worked out what to do yet,” says the private banker. “If you have $100 million, then you don’t want to invest in funds, but it’s hard to find a solution because no one will take your money unless you’re putting in 75% of that, which would concentrate your portfolio and be unwise.”
