Investment Banks Take a Hit as Family Offices Go Solo
WHY YOU SHOULD CARE
Investment bankers could be losing key clients.
The ultrarich are taking back control. Family offices are becoming more sophisticated, employing former bankers and private equity dealmakers, and they are forming a rapidly growing global network. This, in turn, means they are increasingly doing deals directly with each other.
Meanwhile, the role of investment banks, which traditionally have been key advisers on family office transactions, is diminishing. Indeed, they have not featured at all in some of the most recent headline-grabbing deals among family offices.
In January, for example, Jacobs Holding, the family office of the late Swiss coffee and chocolate billionaire Klaus Jacobs, acquired U.K. schools group Cognita for $2.5 billion from U.S. buyout company KKR. In a subsequent transaction, it sold stakes to Sofina, a family-owned investment company controlled by the descendants of Belgian industrialist Gustave Boël, and to BDT Capital Partners, a U.S. investment house. Pointedly, the names of big financial advisers hardly featured in the official announcement.
First … [family offices] call their friends, then venture capital, and the third call is to an investment bank.
Joe Stadler, head of wealthy clients at UBS
Family offices are also striking deals that go beyond buying and selling assets to each other. In 2018, Italian family-owned coffee company Illycaffè struck a partnership with JAB Holdings, the investment vehicle of the wealthy German Reimann family, to produce and distribute Illy coffee capsules.
Other family investment offices, including Omidyar Network (the family office of eBay founder Pierre Omidyar) and Bezos Expeditions (the vehicle of Amazon founder Jeff Bezos), are making direct investments in startups. They often rely on their own network to source transactions.
According to the latest report on global family office wealth from Swiss bank UBS and Campden Wealth, an advisory group, only 18 percent of wealthy individuals now identify their direct investment opportunities through financial advisers; the majority rely on personal contacts. The same report said wealthy individuals are concentrating more of their resources on direct deals as they seek to increase their control over their investments, cut costs and partner with their peers.
“There has been a shift in the way family offices operate,” says Joe Stadler, head of wealthy clients at Swiss bank UBS. “They used to call a bank and ask for opportunities. Now they are sourcing more deals privately through their network. First, they call their friends, then venture capital, and the third call is to an investment bank.”
Milena Grayde, head of family investment firm coverage for Europe, Middle East and Africa at JPMorgan (the U.S. bank), explains the growing sophistication of family offices. “They are more sophisticated now because they hire ex-bankers and ex-private equity people who help run their operations more professionally,” she says. “[Family offices] now have a fully fledged professional team that can compete in auctions and deploy due diligence.
“The difference is that they are willing to hold assets for longer with lower returns than those required by private equity investors.
“Family investment firms are increasingly resembling private equity groups when they buy and sell from each other, but still, these transactions are not happening every day.”
Others attribute the growing prominence of direct deals between family offices to the general movement of capital away from public markets into private dealmaking. A report by consultancy Bain & Company reveals private equity groups are buying public companies at their highest ever rate. Separately, fewer companies are opting to list on public markets.
“Less private money is going into the public markets, which is a reflection that those who make money in the private space remain there,” says Matthew Norman, chief investment officer at Kenjiro private office, a Japanese single-family office. “This dynamic is partly fuelling an increase in dealmaking among family offices, which increasingly have the ability to invest across borders and sectors.”
Norman, who was head of investments for a London-based Brazilian family for almost a decade, adds that dealmaking between family offices is being propelled by the people running these firms. “The setup of the family office has grown, and chief executives and chief investment officers are taking a more active role and doing deals directly,” he says. “This is no longer a world where you employ your old friend to privately run your business. It is fitted with talented individuals.”
He adds that the growing size of the market is boosting dealmaking. “Families will do business with other families as their members and their pool of liquidity grows,” he says.
As family offices come up with their own deals, UBS’s Stadler is among those who are concerned with the diminishing attractiveness of banks’ services. “Some family offices make the case that they are not properly informed about the risks of potential investments or argue that banks add to the bureaucracy of pursuing a deal,” he says.
To maintain and increase their relevance, banks are tweaking and expanding the services they traditionally have provided to high net worth clients, from bringing them more exclusive deals to boosting their network of contacts. In 2018, for example, UBS secured about $400 million from its ultrarich clients to invest in the construction of 1568 Broadway, a 46-story skyscraper in New York and the largest direct property transaction the bank has pursued.
The Swiss bank is also providing more than just advice on deals, including insights into philanthropic ventures and how to handle inheriting wealth. “We are hoping to be no longer in the middle of the food chain but at the beginning of it,” says Stadler, referring to his company’s increased focus on sourcing exclusive deals for wealthy individuals.
Still, perhaps banks should not be too worried. “There will always be the need for financial advisers or brokers of some kind when it comes to family offices transacting with each other,” says Stadler.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.