UBS sees chance to add colour to family office picture

While many in the private banking world increasingly see the burgeoning number of single and multi-family offices as a new source of competition to their livelihood, bosses at the world’s largest wealth manager, UBS, are eyeing the segment as a much more strategic business opportunity.

UBS tackled this new niche with the strategic establishment of an autonomous unit, the Global Family Office (GFO), back in 2010. But this elite  squad is becoming increasingly prominent under its latest boss, Italian former investment banker, Sara Ferrari.

The Swiss bank’s marketing material says “families with private wealth in excess of $150m are ideal for establishing a single family office structure”. It also refers to asset management, direct investment, tax consolidation, estate management and communication around a family’s legacy, governance and succession planning. 

In essence, as larger private banks compete with a new breed of bionic, mechanised wealth managers, the proliferation of family offices is ideal to boost the fortunes of UBS, the bank that wants to be able to do everything for the highest echelons of the wealth pyramid.

“Once a client makes the decision to set up a family office, they don’t need traditional wealth management anymore, but our group-wide offering,” admits a smiling Ms Ferrari. “Our trading platform in the investment bank becomes a big advantage for us.”

This means a lucrative combination of wealth and succession planning, portfolio stewardship and the M&A and structuring advice offered by UBS’s investment banking operation. The family office plays right into the high stakes gamble which leading players Credit Suisse and UBS have thrown themselves into: namely that the investment bank needs to be fed regular deals from wealth management clients in order for the whole edifice to survive. 

The targeting of this segment ensures that even if family office clients have appointed their own CIO to make asset allocation decisions, they still need a strong counterpart to make and clear trades. The UBS premise is that no family office can do everything, and whatever they cannot do, the bank will fill in the substantial gaps. “Because of our set-up, we can become their execution platform on the trading side,” says Ms Ferrari. “We offer them direct access to the trading platform in our investment bank.”

This is often a minimum requirement, and the GFO team hopes to offer a much broader palate of services, including some asset allocation advice, but also tailoring more specific, niche investment opportunities.

“We can set up an investment company for them or a mini-hedge fund and we can provide them with trading ideas for this vehicle,” reveals Ms Ferrari, who has recruited high profile private bankers to her team, including Anurag Mahesh, previously global head of key clients at Deutsche Bank and a specialist in the Asia Pacific region. “They still manage their own money, but we give them institutional-style coverage from the investment bank. And once they become institutional, a lot of clients will require professional FX tools.”

This idea of combining wealth management and investment banking lies at the very heart of the Swiss bank’s business strategy. Despite a recent reorganisation bringing together global and US wealth management to run SFr2.3tn ($2.5tn) in a single division and prioritising ultra high net worth clients, the GFO team will not be affected.

“That’s why we sit between the investment bank and the wealth management division,” ventures Ms Ferrari, whose team offers a mix of two concepts: the long-term relationships, established across generations, necessary for a successful private banking business; and the fast-trading philosophy associated with investment banking. 

“Investment banks tend to be more transactional and product driven,” suggests Ms Ferrari. “But UBS is a wealth manager by nature, so we can combine the two mindsets.”

Some of these trading structures evolve into private equity funds, managing assets of more than one family. “These can become very competitive in some sectors,” she says, citing the Bertarelli family’s pharmaceutical heritage, which has led to the family office becoming one of the most reputable investors in the healthcare sector. 

“They are dealmakers, far beyond a normal family office,” she says. “They believe in the industry in the same way as a proper institutional investor.”

But not all offices have the internal investment firepower to play in this space. “We work with families employing tens or hundreds
of staff, but also those with much smaller structures, who need basic manager selection and want to outsource different asset classes
for us to manage,” she adds.

There are also strong regional differences in the needs of typical family offices. European clients often prioritise wealth preservation of older money and transfer of assets across generations. “Asia is less advanced in terms of the level of development of family offices,” with a typical “blur” obscuring any division between family and corporate assets. “China is one of the fastest growing markets in the world, so the families there are focused on developing their business. The story is all about growth,” says Ms Ferrari.

Those offices which are in investment mode – typically the more mature US and European multi-generation operations – are currently keen on private equity portfolios, accounting for 20 per cent allocations of the average portfolio. “This has been quite a consistent trend over the past four years,” says Ms Ferrari, as yields have slipped for more traditional asset classes, particularly fixed income.

But within this trend, a more intricate discussion is being played out. “Within private equity, the whole debate is focused around venture capital funds versus direct investments and co-investments,” she says. “There is a lot of interest in theory across all family offices, and we deal with increasing exposure to direct and co-investments. But in reality, finding and executing the deals is not as easy as clients hope.”

A trade-off exists between the cost of investing in funds, “which families don’t seem to like that much”, and the ability to conduct due diligence in order to align a family with co-investment partners. 

“These challenges are not easy to overcome,” she ventures, particularly co-investing, which, “despite a lot of noise,” boasts only a small number of investments. 

“It will be interesting to see how many family offices will set themselves up over time to be the new Warren Buffet,” she says sceptically. “You need infrastructure to play in this league.”

Despite the difficulty in actually executing deals, there is no shortage of requests from families to mingle with other like-minded clans to swap ideas and Ms Ferrari sees a clear role for banks to play in this sphere.

“Connecting them is a big service banks can provide for their clients,” she says, stressing geographical links in particular, with European families keen to meet counterparts in Asia and vice versa. One of the key topics of discussion at such forums is always philanthropy, including impact investing, particularly as the generational shift kicks in and millennials edge closer to the family’s investment levers.

“There is a significantly higher social consciousness and personal sensitivity to the environment and education. There is a demographic trend that will push us towards impact investing,” says Ms Ferrari, pointing to the bank’s figures showing 70 per cent of family offices expect a generational transition during the next 10 to 15 years. 

“The new generation is taking a more active role in managing wealth or defining the investment strategy and strategic asset allocation.”

The political mood of nationalism and protectionism sweeping across the US and Europe also means government subsidies being slashed, leading to increasing numbers of private funds being established to fund the deficit, with many taking an interest in impact investing. These vehicles are very often taking the place of hedge funds, still tainted with a view of black boxes and nefarious practices. Of the 260 family offices interviewed by UBS, one third are already active in impact investing. 

“This is about what used to be called philanthropy, but now it involves proper investments, through a social lens.”