Deep pocketed banks can make the most of multi-family affairs
The recent pre-Christmas deal making activity of Fleming Family & Partners (FF&P) and Guggenheim Partners throws into the spotlight the considered value of the investment in multi-family offices. Based on these deals and other MFO activity in the past 12-18 months, it is now reasonable to suggest to large international families that there is a viable private equity play in developing an MFO.
Indeed, if built well, it is possible to assume the option of finding a suitable buyer in five to eight years. Moreover, the families are likely to receive a premium payout by larger banking institutions anxious to buy market share at the top of the wealth pyramid. The question may be whether the banks, as investors, will be able to take the business model to the next logical stage and reap their own rewards.
Looking first at the FF&P case, its purchase of Sagitta Asset Management for an undisclosed sum could have initially been perceived as a defensive step for two small-time asset managers saddled with high cost-income ratios and growing an average account asset base well below their stated objectives of the US$20m+ (e16.5m) segment. Their only special characteristic appeared to be their surviving family legacies – the Said’s and the Fleming’s.
Opinion of this kind was thrown upside down, in classic Fleming family tradition, with the disposal of 20 per cent of FF&P equity to Standard Chartered for $78m. The masterstroke deal, advised by Hawkpoint, caught virtually everyone by surprise. The validation was put that Standard Chartered could use FF&P as a platform to rebuild a private banking business that it left more than a decade earlier. Moreover, FF&P could exploit StanChart’s Asia-Pacific presence to boost assets under management, and may reduce its cost base over the longer term.
Setting this aside, what is more intriguing is the line in the sand drawn by the valuation of FF&P at $390m. For a business that was started in 2000, and only opened for external clients in 2003, this is a stellar RoI for the family founders. From their perspective, the private equity investment in the MFO concept has been a very good option to date. The question is whether the same will apply to an institutional investor – such as StanChart – buying in this sector.
In this context, it is noteworthy that Guggenheim Partners – another multi-family office concept, operating in the United States and Switzerland – also sold off a portion of its separate alternative investment outfit Guggenheim Alternative Asset Management (GAAM), to Bank of Ireland. It is worth noting again the strong RoI for the initial family investors. GAAM was created as a separate hedge fund of funds entity in 2002. In three years, from an effective standing start, it accumulated $2.8bn in assets under management. The Irish bank paid $184m for 71.5 per cent of the business. The total valuation of the company was, therefore, $257m.
Bank of Ireland has stated the deal will broaden its product line and it aims to offer its distribution channels to GAAM. Nevertheless, the deal has parallels to FF&P and StanChart in that there is little truly in common between the two parties. This appears to be the logic of the fit. Of note, in the GAAM deal, 11 per cent of the equity will be retained by management while a further 17.5 per cent will be retained by Guggenheim Partners. These positions are expected to be transferred to Bank of Ireland within seven years, subject to performance targets being met.
Perhaps one could argue these two deals are exceptions to the rule. However, it is the view at Scorpio Partnership that the MFO concept is a viable business initiative with scope for acquisition by banks with deeper pockets. The trick is building a business that ultimately is inheritable by the acquirer. FF&P and GAAM are the beneficiaries of this approach. Others may do well to follow.
Sebastian Dovey is managing partner at wealth management think tank, Scorpio Partnership
