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Sara French

Private banking is being transformed from a reclusive bastion of old money into a financial crossroads where private bankers work with investment bankers to design solutions for the new entrepreneurial class.

   The innovation is being driven by the changing profile of high net-worth individuals and by intensifying competition.

 The wave of self-made millionaires emerging from the technological revolution is a target attractive enough to turn a stuffy industry on its head.

 Take secretiveness, for example. This traditional hallmark of the private-banking industry is not a strong selling point with today's new rich.

 For one thing, many of them are unaccustomed to privacy, at least when it comes to money.

 'We're dealing with new entrepreneurial wealth which is typically very public,' says Declan Sheehan, JP Morgan's Geneva-based head of private banking for Europe, the Middle East and Asia.

 'Somebody who makes their money in an Internet initial public offering (IPO) is well publicised. In other words, the world knows exactly how much was made on a particular transaction,' he said.

 Figuring out how much the Kwok brothers of Sun Hung Kai Properties made on Friday when the company's Sunevision unit debuted is easy enough.

  As owners of a cool 52 per cent of the IPO, Raymond Kwok Ping-luen, Thomas Kwok Ping-kwong and Walter Kwok Ping-sheung enjoyed a single-day paper gain of HK$4.9 billion on that portion of their portfolio.

  Transparency on this order renders useless much of the discretion traditionally maintained in the private-banking industry - a discretion so strict it prevented a private banker from hinting at a client's identity even to a colleague on the investment-banking side of his own financial institution.

  As communication barriers come down, private bankers are freer to consult financial professionals in a bid to respond to their clients' needs. The result has been a flowering of innovative products and a sharper competition, which reflects the higher financial stakes.

 Global assets of high net-worth individuals are projected to grow by 9 per cent annually over the next three years, reaching US$32.7 trillion by the end of 2003, according to a Merrill Lynch and Gemini Consulting study. Of this, US$7.2 trillion, or 22 per cent, will be from Asia.

 Large financial institutions are trying to capitalise on the breadth of their organisations to boost the number of high net-worth clients served by their private-banking arms.

 Retail-banking customers are routinely shifted to the private-banking unit once they have achieved a certain level of wealth, and private-banking clients are gaining greater access to - and being recruited from - service areas previously reserved for institutional clients.

 For example, a private-banking client might find himself eased into a conversation with an investment banker once his business appears mature enough for a public listing. Similarly, an investment banker handling an IPO might urge the young company's founder to prepare for changes in his financial circumstances by having a chat with the private-banking division.

  'You need to be part of the listing process,' Daniel Truchi, Societe Generale Private Banking's managing director for Asia, said of the new competitive imperative in private banking.

 Many of the most productive intrabank collaborations and most interesting product offerings emerge from serving the entrepreneurial segment of the high net-worth market.

  Take the founder of the soon-to-be-listed company above.

 Although he will be wealthy on paper, his shares will probably be subject to a lock-up period during which he cannot sell any of them. The lock-up period is two years on the Growth Enterprise Market (GEM), although a proposal is now circulating to reduce it to six months.

  If, like many entrepreneurs, he has been living on practically nothing during the start-up phase of his business, ploughing all of his resources into the company, he is probably looking forward to splashing out a bit.

  But the lock-up period stands between him and such simple pleasures as a better apartment, a new car or a well-deserved holiday.

 Even after the lock-up ends, there is no guarantee shares in his corporate baby will be liquid, and their price will almost surely be volatile at the outset, rendering any early sale a dicey proposition at best.

 This is where the private-banking industry's new flexibility and cross-disciplinary collaboration comes in.

 Private bankers can now ask their investment-banking colleagues to employ complex hedging techniques on behalf of non-institutional clients.

  Forward equity sales or swaps, or options could be marshalled on the entrepreneur's behalf, making it possible for him to lock in a price for at least some of his shares during the lock-up.

 Once the price has been settled, he can take out a loan using the stock as collateral.

  JP Morgan's Mr Sheehan said entrepreneurs, particularly founders of companies listed on the United State's Nasdaq Stock Market, had been hedging in this way for at least a decade.

 But the practice is still relatively rare in Asia and is limited to the deepest markets, primarily Tokyo and Hong Kong.

  Private bankers would be wise to make other institutional services available to their entrepreneurial clients.

 For example, someone who owns 60 per cent of a young company would probably be much more interested in talking with his bank's block trader, and gaining some insight into the trading flows causing his share price to gyrate, than he would be in getting a broker's investment tips about other companies' shares.

 He might also like to talk to professionals in the equities and mergers-and-acquisitions departments to get recommendations for a possible tie-up or buyer for his company.

  'So we've made a big jump from older money, with more discretion, to newer money, which is more public but has much more complex needs,' Mr Sheehan said.



Innovation lures tech high-fliers