Wealth industry adjusts to meet family clients' growing appetite for alternatives
As families move from traditional balanced equity-bond portfolios to much larger alternative allocations weighted towards private equity, experts in illiquid assets are becoming increasingly sought-after.
“There is a long-term trend of increasing allocations to alternatives,” reports James Holder, head of global family clients at Citi Private Bank.
“Within that, there is a multi-cycle trend, where allocation to private equity continues to grow through Covid.”
This includes single asset transactions in different parts of the capital structure, with families increasingly stepping in to individual corporate deals.
A prolonged period of low interest rates, the adoption of disruptive technologies and a fast-changing commercial environment, allowing investors access to a larger number of growing companies, has changed the mentality of many private banking clients believes Mr Holder.
They have become much more open to new structures, such as the emerging US special purpose acquisition company (Spac) market, now also coming to Europe. “There is $100bn sat in Spac vehicles, looking for target opportunities to bring to the market,” says Mr Holder. “If you are the owner of a family enterprise with a consumer growth bias to that business, you are a really attractive target for some of that capital.”
Given that fast-growing companies are increasingly remaining private or raising growth capital outside the public markets, it should be no surprise that three quarters of investors prefer private over public investments as return generators, according to Matthias Lehmann, head of the global family office for Western Europe at UBS Global Wealth Management.
Going it alone
Among family offices and ultra-high net worth clients, a “definite shift” into private equity has led to disintermediation of banks, notes Gerard Aquilina, partner at family law firm Cone Marshall.
“These parties are now talking to one another – rather than to their banks – in terms of sourcing deals, and co-investing. Private equity is really the flavour of preference for ultra-highs and family offices.”
Such deals require a specific set of skills, currently in huge demand. “This needs somebody with a corporate background, coming from the institutional investment side of the bank,” says Mr Aquilina. But moving to a family can lead to its own set of problems.
“If you have an institution like Goldman Sachs or Morgan Stanley behind you and move to a family, with sectoral bias around pharmaceuticals or healthtech, you may find yourself with a more narrow focus,” he suggests. “In a family structure, chances of disagreement are much higher than in an institution, as you are dealing with personalities, which is a greater challenge.”
Compensation can also be problematic, with employees requiring cheap loans or participation in investment opportunities. “Finding good talent is currently the biggest hurdle which private banks and family offices face,” says Mr Aquilina.
Competition for staff is fast intensifying, according to Lee Woon Shiu, regional head of wealth planning, family office and insurance solutions at DBS Private Bank.
“In the last couple of years, we have seen senior bankers with years’ of experience from “established players, crossing the line to join single family offices as either chief investment officer or CEO,” says Mr Lee, with talent from both banking and private equity backgrounds being lured to Singapore from “established financial centres” such as Hong Kong and London. “This really showcases the intense competition for top talent.”
Direct investment and private equity experience are now the key dimensions for many leading family office structures globally, says Matthias Schulthess, managing partner at Schulthess Zimmermann & Jauch recruitment consultancy in London, pointing to the appointment of the co-head of investment banking from Goldman Sachs at Michael Dell’s family office. “The transition for top industry professionals into a family office environment is complex but can be highly rewarding as structures may allow attractive and exclusive co-investments of private capital,” he suggests.
But there is also a change in the type of adviser being sought right across the industry, reflecting the social revolution sweeping many countries, at the same time as the public health emergency and covid-induced financial crisis. “At individual level, candidates’ ability to foster and build an inclusive culture and true meritocratic work cultures, where collective intelligence is encouraged and group thinking is challenged, has been re-emphasised during recent years,” says Mr Schulthess. “The ability to lead with purpose has never been more important.”
