They want you

Private banks generate huge revenue from ultra-high-net-worth clients. Devanshi Bhatnagar finds out to what lengths the banks will go to keep these accounts on their books

PUBLISHED : Monday, 23 September, 2013, 12:00am
UPDATED : Thursday, 22 May, 2014, 3:54pm

Private banks make most of their money from their richest clients. The segment called ultra-high-net-worth (UHNW) - those with investible assets of US$10 million and above - comprise about 20 per cent of a private bank's clientele but generate 80 per cent of its revenue.

As such, banks will go to great lengths to attract and retain their biggest clients. For example, they might provide access to niche investments that otherwise only hedge funds or specialist funds would see.

They provide support to execute complex trading ideas (acting like a prime broker might work for a hedge fund) and would offer all of this at discounted fees.

To get a sense of what institutions actually do we approached a number of international private banks to see what services they offered their richest customers.


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Private banks that are part of a larger entity encompassing an investment bank are able to treat rich clients as a quasi-institution. If the client wants to do heavily structured trades, involving leverage, collateral, derivatives, exotic markets and the like, they can call on the bank to treat them as if they're a mini-hedge fund, bringing in resources from the brokerage and investment banking units to execute such transactions.

This relationship is more natural if the client is a family office, a professional office dedicated to managing family wealth and investments - effectively, an institution.

UBS serves 35 such family offices globally, says Amy Lo, head of UHNW, Asia Pacific at UBS Wealth Management. The offices have bankable assets in excess of 200 million Swiss francs (HK$1.7 billion).

Lo says the bank "works like a factory", co-ordinating with the investment bank to give family offices access to specialist investments such as equity stakes in firms prior to going to IPO.

UBS' private bank works with the investment banking side to include family offices in such deal-making, splitting revenues 50-50 with the investment bank, to ensure they are fully motivated to share their best deals with the private banking side.

Goldman Sachs, which like UBS is a big IPO bank in Asia, also offers its private clients private equity stakes in firms primed for listing. For example, the bank took a US$2.58 billion stake in the mainland bank ICBC in 2006, prior to its Hong Kong float. That investment was highly profitable and some of Goldman Sach's private clients got a look into that transaction.

Likewise, the US bank invited private clients to invest alongside the bank in Facebook prior to that firm's Nasdaq listing.

Private banks also often collaborate with the investment banking arm to distribute bonds to rich clients.

Ronald Lee, head of private wealth management in Asia Pacific at Goldman Sachs, says his bank only takes UHNW clients, or those with an account size of US$10 million and above. He says this lets individual bankers focus on a core group of clients, with one banker managing no more than 30 clients, he says.

Asia has been the fastest growing part of Goldman Sachs' private wealth business with the region's share of global assets growing by 30 per cent since 2008.

Standard Chartered is a leading bookrunner in Asian local currency bonds. It uses its strong corporate lending business to get onto bond mandates, and the bank then offers a slice of their bond deals to customers of the private bank.

"Since the financial crisis, private banking clients focused on bonds … it worked like a door opener to new clients," says Desmond Liu, managing director and head of Standard Chartered Private Bank, Hong Kong and northeast Asia.

Liu says that by working with Standard Chartered's debt capital market unit, his private bankers get the latest information about new bonds, and can offer debt deals to private clients at the same price as sold to institutional investors.

In other words, there is a funding ecosystem at Standard Chartered in which private clients play a central role. Heads of small- to mid-sized private enterprises come to the bank for corporate loans and to help arrange bond issues, and then the bank converts these people into clients of the private bank, who may act as investors in such bonds. And if such a client wants to borrow using his company shares as collateral, the bank's comfort with lending to the corporation comes into play, with the bank generally willing to make such loans.


Flat earth
Private banks can also collaborate with their investment-bank sister institutions in the offer of distressed debt opportunities. This is a highly risky and specialised sphere of investing. The investment banking side can bring resources and expertise to find distressed deals, and then invite private banking clients to invest alongside institutions, or perhaps to co-invest with the investment bank.

UBS brought a package of deals targeting US real estate to its Asian private clients. The sector has been in steady recovery since its epic crash in 2008.

Enrico Mattoli, head of investment products and services, UHNW, Asia Pacific at UBS Wealth Management says average prices for US homes fell 30 per cent in 2008. Asian investors intrigued by the idea that this represented a buying opportunity, in the way the Hong Kong 2003 Sars outbreak marked a once-in-a-generation moment to buy local real estate, began exploring investments.

The problem was the US market was unfamiliar to Asians.

It was not a simple matter of jumping on a plane and buying Las Vegas condos, or something similar. UBS instead offered their Asian investors the chance to buy distressed residential loans via a tax-efficient private equity structure.

In another deal, UBS offered Asian private clients a stake in a portfolio of central London offices generating total returns of about 10-12 per cent per annum.

Private banks also put a lot of money into their trading platforms, which gives private clients research and news, and lets them execute the kind of sophisticated trades that hedge funds might run.

For example, in the second quarter of 2013, Credit Suisse rolled out in Asia an "algorithmic" trading strategy called Spear.

Spear is a dynamic trading strategy that shorts the equity market during periods of market stress and switches to a long position during normal markets to capture market uptrends.

Credit Suisse typically offers private banking clients access to Spear through a note tracking the Spear Index, which tracks the returns of this trading strategy.

The bank says it executed US$400 million orders through its ultra-high-net-worth platform - which encompasses Spear - in Asia Pacific in the past six months.

Bart Wong, who heads the UHNW investment solutions, Asia Pacific unit at Credit Suisse, says that due to a short position entered into by Spear at the end of May, it outperformed its benchmark by 5 per cent in June.

SJ Hwang, managing director, head of UHNW solutions, Asia pacific at Credit Suisse says the bank has invested in its UHNW platform over the past two years. This segment accounts for more than half the private bank's regional assets under management.

All of which goes back to the key point: banks go to great lengths to get ultra-high-net-worth clients.

If you are very wealthy, there's a wealth manager who wants to meet you.