JP Morgan investment bank takes seat at family table

The growing importance of family offices as a source of capital in direct investments, their greater globalisation and higher level of professionalisation were the key factors driving JP Morgan’s decision, two years ago, to set up a practice within its investment bank to cover this lucrative client segment.

The new team targets ‘family investment firms’ with €2bn ($2.5bn) or more in assets, looking to advise them on acquiring and selling businesses, assist them with equity or debt capital raising, as well as risk management solutions. 

“The number and wealth of family offices is growing and so is the number and volume of transactions they successfully invest in; that’s what attracted us to cover this segment more in depth,” says Milena Grayde, head of JP Morgan’s Family Offices Investment Banking practice in Emea. 

She is keen to dispel the “stigma” that family offices tend to move slower. “This is a view I do not share. These institutions are used to transactions and very attuned to the market.” 

Led by serial entrepreneurs, they are often staffed by experienced investment professionals, generally former private equity or investment bankers.

She also dismisses the preconceived idea that family offices only focus on small deals. “Families could come with quite sizeable cheques into a transaction and target a majority control. I don’t think size is an issue.”

JP Morgan’s analysis indicates that in Emea, the number of transactions worth more than $500m, where family investment firms have gained the majority control, has more than tripled over the past three years, from eight in 2014, to 30 in 2017. 

The investment bank’s family office practice, which is comprised of 15 people globally, claims to offer “worldwide coverage” to these institutions which increasingly look beyond their local markets.

JP Morgan’s investment bank has had “strong relationships” with family offices around the globe for many years, but today it can “bring additional content to the table”. This, she says, is because it sits within the bank’s broader Strategic Investors Group, formed in 2016, which also caters to financial sponsors, including private equity firms, sovereign wealth funds and infrastructure funds. This position allows it to be “in the midst of the transaction flow”. 

It also favours co-investment opportunities between the different investor groups. “It allows us to think laterally, of possible consortium formations on large, more complex opportunities,” says Ms Grayde, a down-to-earth Bulgarian, who speaks five languages and also heads the investment banking business in south-east Europe and Ukraine. 

Her team works “in symbiosis” with JP Morgan private bankers, who focus on the management of liquidity, wealth planning and other private banking services of these institutions. 

But what are the challenges of this approach, which involves a close collaboration between two banking divisions with very different business models, and traditionally separated by regulatory “Chinese walls”?

Critics say cross-division referrals often fail because of disagreements over fee sharing. Some banks have no fee sharing arrangements for referrals, believing internal cooperation is a requirement that does not need monetary reward.

While JP Morgan declines to comment on the existence of referral fees, or their size, what is clear is that the new practice adds value to the client relationship, claims Ms Grayde, as the pool of investment opportunities available to investment bankers is different from that accessible to private bankers. “Ultimately, the dialogue with the client becomes richer, referrals happen from both parties and it is a mutually beneficial relationship.” 

The sale by the investment bank of a family office’s business may translate into higher assets for the private bank to manage, and a private banking client looking for investment ideas will benefit from the investment bank’s advice. 

In the industry, the collaborative approach between investment and private banking also often fails because private bankers pride themselves in being relationship-oriented, while they see investment bankers as transaction-oriented. “It is very important that both parties respect each other’s relationships; this is the only way this model can work,” says Ms Grayde. 

She rejects the cliché around investment bankers’ short-term and hard sale mentality. “We aim at establishing long-term relationships with clients. You need to work with family investment offices really patiently and consistently throughout the years, gain their trust and continue to invest in the relationship, so that when an opportunity arises, we will be their partner of choice.” And repeat business will ensure profitability over the long term.  

Asked about areas for improvement, Ms Grayde points to the importance of acquiring a “holistic understanding of the client portfolio”, partly hampered by non-disclosure agreements that the private bank has with the client. 

While there is an overlap of family offices between the private and investment bank, the latter focuses mainly on institutions interested in direct investments, to which they typically allocate 40 per cent or more of their overall wealth.

JP Morgan’s Corporate & Investment Bank has more than 130 family investment firm clients in Emea. Most tend to focus on “cash generative solid businesses, which ultimately produce solid cashflows and generate healthy dividends over time, and are patient capital”. 

Long-term horizons do not necessarily clash with target driven investment bankers. “Family investment firms’ businesses generate dividends which need to be reinvested every year. Also, they have investment banking needs for their other existing businesses, they need to raise capital or refinance existing debt. That presents opportunities,” argues Ms Grayde. 

Moreover, they invest across the capital structure, including preferred equity solutions, mezzanine debt and other alternative investments, which fall under the remit of the investment bank. “From that perspective, family investment firms are fantastic partners to private equity players and they also co-invest with sovereign wealth funds,” she says.

“We are in the infancy of building this business, but we believe we are one of the first banks to pioneer this initiative within the investment bank, and by focusing on these clients in the very beginning, we hope to gain a higher market share.”