The search for new riches

Private banks and wealth managers, challenged by regulatory restrictions, rising costs and falling fees, are looking to identify new, easily accessible pools of capital. This will allow them to boost managed assets, transactions and profits.

Rather than the inherited wealth which dominates private banking in some of the established European markets such as Switzerland, Italy and Germany, the new sources being targeted are generally capital sourced from entrepreneurial activity.

French giant Société Générale is typical among global institutions. While not ignoring domestic and neighbouring markets, it is concentrating its longer-term asset-seeking efforts in three developing regions: Africa, Central and Eastern Europe and the Middle East.

“We are increasingly focusing on entrepreneurship,” says Jean-Francois Mazaud, chief executive of the private banking division at Société Générale. “We are helping entrepreneurs with the management of their business as well as their private wealth and addressing the capacity of these entrepreneurs to develop their businesses on an international scale.”

Not only do these wealthy individuals hope to develop global brands for their businesses, but they want their philanthropic deeds and their apparent efforts to make society a better place recognised outside their home countries.

Research conducted by SocGen together with Forbes Insights, surveyed 250 ultra high net worth individuals with an average first generation fortune size of $2.8bn (€2.2bn). But ultra wealthy individuals in the French bank’s three key target markets boasted a much higher average fortune than those in other jurisdictions. Russian billionaires surveyed were worth $10bn on average, Middle Eastern players $7.6bn and Africans $2.3bn.

The most favoured sectors for these fortunes to be invested in are sports, philanthropy, politics, art and real estate.

What has particularly interested the bank is how wealthy individuals, who have emerged from societies restricted economically, are coping with extreme global financial forces in their business careers.

“In emerging markets, particularly South Eastern Europe, people are for the first time facing recessions which are directly the result of a free market, not their former communist systems,” says the report’s author, Kasia Moreno of Forbes. Africa is seen by SocGen as “potentially the next Asia”, on the brink of an economic take-off like China 30 years ago and India 20 years ago, with the 40 richest Africans enjoying a combined wealth of $65bn, according to Forbes.

Targeting these pools of wealth created by successful business operators, it is not enough to just be in capital cities such as Moscow, Kyiv, Nairobi, Abuja or Cairo. Banks must create networks of capital introducers in the regions too.

“We are seeing more and more individuals becoming wealthy in the regions of Russia,” says Jean-Gabriel Arqueros, who heads SocGen’s asset gathering business in the Russian Federation and other former Soviet Republics. “There is a belt of cities we are looking at, spreading from Nizhny Novgorod, along the Volga, through Irkutsk in Siberia to Vladivostok in the Far East,” he says.

These newly-rich individuals, who have successfully made their money, particularly from natural resources production, now need help in diversifying portfolios outside their home countries, which is a very new concept to many.

A similar, even newer class of entrepreneurs is emerging across the African continent, says SocGen’s regional private banking boss, Jean-Paul Rame. “We are seeing an Africanisation of businesses and entrepreneurs, who are now quickly diversifying into neighbouring countries,” he says.

Possibly the most fragmented region favoured by the bank is the Middle East, in which SocGen targets 20 countries, where 60 per cent of the world’s oil reserves and 45 per cent of gas sources are based. 

“Our typical client in the Middle East belongs to a large family, close to power,” with seven large family groups essentially controlling the entire region’s economy, says Eddy Abramo, Dubai-based regional CEO for Société Générale Private Banking.

“They are not interested only in local markets, but also investing abroad, especially Europe. There is a patriarchal management style, with one senior decision-maker in each family. There are some issues about transmission of family holdings from the father to the second generation, which can change the constitution of wealth in a family group.”

Such families, says Mr Abramo, would normally have their own family office, whose chief investment officer or chief financial officer is the main contact point with the private bank. Typical portfolios invest in low risk, low volatility assets, such as emerging and investment grade bonds. “They are also very interested in real estate, especially in Europe, with London, the South of France and Geneva the particular hot-spots,” he says.

The bank feels it can offer major added value by helping clients both source properties and then structure their holdings.

“We have also seen direct investments such as Qatar’s purchase of Paris St Germain Football Club. These will increase in the coming years,” believes Mr Abramo.

This sense of where the new pools of wealth are to be found and tapped, clearly appreciated by the major banking groups, is neatly summed up by Martin Graham, chairman at London-based multi-family office Oracle Capital Group, who began as a graduate trainee in banking in 1986 and has since worked for both financial institutions and stock exchanges.

“When I started my career, global capital flows from North American pension funds were financing the world,” says Mr Graham. “Now that has turned around. Today the world is being financed by the emerging wealthy of Asia, Eastern Europe and the Middle East.”

But this shifting emphasis will ultimately take time to penetrate the structure of the financial system. The securities services arm of French group BNP Paribas, which services many of the world’s leading asset managers and private banks, now has 20 per cent of its 9,000 strong staff payroll based in the Asia Pacific region, and this is likely to grow to 30 per cent within five years, says the operation’s CEO Patrick Colle.

“Chinese institutions are beginning to diversify globally,” he says. “Their overseas investments are not yet very big, but the trend is starting to happen and we are in pitch mode to win these clients.”

According to Singapore-based consultancy Wealth-X, all the fastest growing major consumer economies are in Asia, including China, India and Indonesia. “Indonesia has the fastest growing rate for ultra high net worth individuals,” says Wealth-X chairman David Leppan. “But there is a major question of critical mass. Many private banks will concentrate on Russia and Eastern Europe, where they can build a profitable operation.”

Russia is one of the areas highlighted by JP Morgan Private Bank, along with the Middle East, for targeting new business. The UAE, Saudi Arabia and Qatar are particular areas of focus.

But to think such banks focus exclusively on sourcing business in developing markets would be a big mistake. JP Morgan has dedicated much investment to boosting its brand in the UK, where it is moving steadily down from its once exclusive ultra high net worth perch into the more populated mid-sky level of individuals and families with between €5m and €25m of assets to invest.

This change in strategy makes much sense, says Sebastian Dovey, founding partner of wealth management think-tank Scorpio Partnership. While a typical ultra-net worth client with maybe €100m in the bank generates 30 to 50 basis points annually for the wealth manager, the margins for the high net worth space are double this at up to 100 bp. “Banks have no choice but to attack the high net worth space,” concludes Mr Dovey.

Last year alone, JP Morgan hired 14 new bankers in London to service this highly lucrative client segment. “We are serving entrepreneurs and the international community in London,” says Pablo Garnica, CEO of JP Morgan Private Bank in the Emea Region. “We will soon be looking to roll out this initiative in other regions.”

JP Morgan watchers expect Italy and France to be among the next markets on the bank’s radar. As far as old money goes, senior management at the bank believe they may have netted almost all they can, particularly in Europe, although relationships are being deepened to slightly increase flows.

While they need to continue to service inherited wealth, the new sources in the high net worth segment in these countries are likely to be the more lucrative ones. “Our market share can grow in Italy and France, especially in the high net worth space,” believes Mr Garnica.

It is this need to correctly allocate resources to a dual approach of servicing the old wealth and bringing in new, entrepreneurial clients which typifies the developing strategy of most major wealth managers.

“We do look at old wealth too, which continues to grow due to good investments. Look at the 9 per cent market performance this year in the US and 4 to 5 per cent in Europe,” says Mr Garnica. But he makes no secret of the group’s hunger for newly-created assets. “The segments where we target new clients are those which create wealth – from entrepreneurs.”

Calculations from global banks relating to private client target markets are often rudimentary, believes Scorpio’s Mr Dovey. “The strategy can be quite crude. The major players are often saying: ‘There’s a lot of money in Asia, so let’s go for it.’ But how do you attract the wealthy individuals when the market is so congested?”

Western banks have finally been won over to the idea that in order to gain substantial new assets in Asia, you need a strong operation on the ground, says Mr Dovey, an idea which took at least five years to sink in for many.

Despite this, most banks in Asia are failing to deliver what the wealthy clients actually want, according to Scorpio’s interviews with Asia’s rich investors.

“The feedback from customers – which everyone is ignoring – is that in Asia, more than anywhere else in the world, there is a strong desire for integrated financial planning, with guided investment advice,” he says.

This flies in the face of the talk from most bank chief executives and their Asian relationship managers, who insist Apac clients have a gambling mentality and are only interested in the next big trade. “Our data shows the private bank offerings are structured in a way that they only listen if the client wants to trade and they do not have the capacity for integrated financial planning,” says Mr Dovey. “But it is coming, and will happen on a mass scale. Asia will eventually talk about managed assets, not direct market holdings.”

Screwed-up documents with false assumptions often litter the post-meeting boardroom floors of the private banks. “There is a supposition that the market closer to home in Europe has dried up, but that is not the case,” he says. “There is a very healthy onshore and offshore market in the UK, where the Indians and Chinese are buying property.”

He admits the cost of doing business has risen sharply in recent years, partly due to the regulatory swathe which has swept through Europe. “They had it too cheap in the past, with a lack of any meaningful regulation and they are now paying the price of past profits.”

Margins will be seriously dented, both in the UK, where RDR is beginning to bite into profits and in Europe, where the likes of Prips and Mifid are likely to have a deep impact on the economic model, but the wave of rules can also be exploited by wealth managers and turned to their advantage.

“To be compliant, the wider regulatory regime makes it more expensive to do business,” states Mr Dovey. “But through a clear, reconfiguration of the business model, you can also attract more assets by embracing a more transparent approach.”   

Making wealth acceptable

Macro-economic statistics certainly favour Asia and despite high costs of staff, it can be a more comfortable place than rival regions for banks to do business, believes Scorpio’s Sebastian Dovey.

“Things are taking off in Russia and Kazakhstan. But there is a sense of dealing with a toxic asset base, which you don’t have with Asia Pacific, where there is a lot more enthusiasm for wealth management.”

Doing private banking business in emerging markets such as Russia brings its own particular hazards and the importance of due diligence is further magnified, admits JP Morgan’s private banking boss Pablo Garnica.

“We are proud of our brand and take very much care around reputational risk, as much as we do about credit and product risk,” he says. “The first risk we look at is always: ‘are the people we are dealing with the right people?’ We have made sure we have the resources locally, which allows us to assess this.”

The wealthiest individuals in some developing markets also have a substantial PR job to do, convincing the broader population that being rich is acceptable, that their wealth is legitimate and that they will spend large chunks of it to make life easier for their poorer brethren.

Forbes editor Kasia Moreno shares feedback from some of the regional entrepreneurs her team has interviewed, including Ukraine’s philanthropist Victor Pinchuk, a media magnate, owner of steel company Interpipe and son-in-law of the troubled country’s second president Leonid Kuchma.

“A lot of people still feel loss after the collapse of the Soviet regime and are struggling to survive in the new economy,” says Ms Moreno. “Entrepreneurs need to co-operate better with the societies in which they operate and Mr Pinchuk is trying to improve the image of entrepreneurs.”

Looking across the border to neighbouring countries can often help provide the inspiration needed. “Amongst the most entrepreneurial people in European markets are the Poles,” she says. “Polish people tend to like their entrepreneurs. People in Poland are noticing how this new wealth being generated means new workplaces being built and taxes paid to the state.”