The colour of money

‘There’s been – and will con­tinue to be – an ex­plo­sion of wealth in SA’

Finweek English Edition - - Private banking -

THE EX­TRA­OR­DI­NARY GROWTH in the black mid­dle class, helped by a ro­bust econ­omy and Gov­ern­ment’s push for black eco­nomic em­pow­er­ment, has trans­formed the eco­nomic land­scape in a few short years. The gap be­tween rich and poor may be wider than ever, as Cosatu in­sists, but that’s some­thing South Africa holds in com­mon with other de­vel­op­ing economies, such as In­dia and Brazil.

Re­search by the Univer­sity of SA (Unisa) shows the ex­tent to which black South Africans are nar­row­ing the gap on their white col­leagues in the race to ac­cu­mu­late wealth. Blacks, coloureds and Asians ac­count for slightly more than a third of SA’s 25 000 “su­per-rich” – de­fined as those earn­ing in ex­cess of R4m/year – but the fig­ure is ex­pected to grow to 42% by 2011.

That’s not to say whites are be­ing edged out in the sprint to ac­cu­mu­late wealth. Em­pow­er­ment has had the per­verse ef­fect of driv­ing many whites into self­em­ploy­ment, which is fu­elling the wealth fur­nace. “There’s been – and will con­tinue to be – an ex­plo­sion of wealth in SA,” says Paul Hanley, head of In­vestec Private Bank. “We’re bet­ting on that for the next three to four years.”

The re­align­ment in the de­mo­graph­ics of wealth is re­flected in the way SA’s banks tai­lor their ser­vices to the vary­ing needs of the wealthy. In times past the “rich” were treated as a largely

ho­mo­ge­neous group and pre­sum­ably white. The rich are cur­rently seg­mented into high-in­come earn­ers, high net worth and ul­tra high net worth and – as the Unisa study shows – a grow­ing per­cent­age of those clients are likely to be non-white.

A decade ago private bank­ing was bi­ased to­wards wealth preser­va­tion rather than wealth cre­ation. Clients re­ceived in­vest­ment and fi­nan­cial ad­vice and all the usual private bank­ing ser­vices with a high de­gree of per­sonal in­ter­ac­tion. That’s fine for the al­ready wealthy, but what about the en­tre­pre­neur and high-in­come earner still mak­ing their way up the wealth lad­der? They want to use bank lend­ing to help them achieve their wealth as­pi­ra­tions and they un­der­stand in­vest­ment-bank­ing terms such as struc­tured lend­ing.

In other words, rather than take out a stan­dard “vanilla” loan with reg­u­lar in­ter­est re­pay­ments they want a struc­tured loan wrapped with in­ter­est rate caps and col­lars, in­ter­est rate hol­i­days and the like. And they want all their per­sonal debt con­sol­i­dated into one low-in­ter­est bear­ing ac­count.

They want all the con­ve­nience of In­ter­net bank­ing and a hot line to a re­la­tion­ship man­ager for less stan­dard re­quests. Those clients are more fi­nan­cially savvy than their pre­de­ces­sors and want to be ac­tively in­volved in cre­at­ing their wealth.

For that they need gear­ing, us­ing a com­bi­na­tion of ju­nior debt, mez­za­nine debt (of­ten used to fi­nance ac­qui­si­tions of as­sets, where it can be used to pri­ori­tise new own­ers ahead of ex­ist­ing own­ers in the event of bank­ruptcy) and per­haps private eq­uity.

Hanley says In­vestec Private Bank caters to the full spec­trum of wealthy clients: from those earn­ing R1m/year or more through to those with in­vestable as­sets of R25m or more – and ev­ery­thing in be­tween. “Where do we dif­fer­en­ti­ate our­selves? We want to deal with the se­ri­ously wealthy in­di­vid­ual with dis­cre­tionary money, not just com­pul­sory sav­ings.

“At that level we can get very creative with the fi­nan­cial so­lu­tions we of­fer by bring­ing our in­vest­ment bank­ing skills to bear by way of swaps, de­riv­a­tives, private eq­uity and the like. We be­lieve we’re the only bank fo­cus­ing on the R25m space, where there’s less com­pe­ti­tion. Where a client has around R10m in as­sets we fo­cus on help­ing him grow that to R25m or more by of­fer­ing prop­erty fi­nance and ac­qui­si­tion fi­nance along­side the more tra­di­tional private bank­ing ser­vices.”

RMB, like In­vestec, has a strong in­vest­ment bank­ing back­ground ser­vic­ing the needs of cor­po­rate clients but flanks that with a private bank­ing approach to the in­di­vid­ual wealth cre­ation needs of its clients.

One area where it seeks to stay one step ahead of the com­pe­ti­tion is by adopt­ing creative debt so­lu­tions for clients. RMB Private Bank is a mar­riage of Ori­gin, which was first to of­fer debt con­sol­i­da­tion to the SA mar­ket, and Ans­bacher, the off­shore wealth man­age­ment com­pany ac­quired sev­eral years ago by RMB.

“High net worth in­di­vid­u­als tend to be ac­tive in the mar­ket and want to use the bank’s bal­ance sheet as a cost-ef­fec­tive way of fund­ing their busi­ness ven­tures. We’re par­tic­u­larly strong in struc­tur­ing debt so that it is cost-ef­fec­tive and ef­fi­cient from a tax point of view,” says Mar­ius Kilian, of RMB Private Bank

“The chal­lenge for banks go­ing for­ward is to man­age the mas­sive in­crease in com­plex­ity in­volved in deal­ing with clients with a global pres­ence,” says Kilian. RMB set up a private ad­vi­sory di­vi­sion to cater to that global com­plex­ity, where clients need ad­vice on how best to struc­ture their af­fairs across mul­ti­ple ju­ris­dic­tions, each with dif­fer­ing tax and le­gal set-ups.

BoE Private Clients grew as­sets un­der man­age­ment – ex­clud­ing the ef­fect of mar­ket ap­pre­ci­a­tion – by roughly 20% over the past year and ex­panded the client base by more than 10%. “With growth like that there’s un­der­stand­ably a lot of com­pe­ti­tion in this space.

But the key dif­fer­en­tia­tor is the qual­ity of ad­vice,” says Vince Boulle, head of BoE Private Clients.

Brand value counts for a lot in the private bank­ing arena and those with an es­tab­lished track record and a rep­u­ta­tion of high qual­ity ad­vice and ser­vice are reap­ing the ben­e­fits.

BoE Private Clients’ en­try thresh­old is R1m in an­nual earn­ings or R5m in in­vestable as­sets.

Boulle says more tra­di­tional clients are happy to have their money man­aged for them on a dis­cre­tionary ba­sis, but newer ones are more likely to want to part­ner the bank in man­ag­ing their as­sets and are on the lookout for wealth cre­ation op­por­tu­ni­ties – such as private eq­uity.

The needs of the em­pow­er­ment mar­ket dif­fer from the old money in that their cash tends to be ploughed back into their busi­nesses, so there’s less de­mand for in­vest­ment ad­vice than for le­gal and tax-based struc­tur­ing.

“I don’t be­lieve there’s a stan­dard way of ap­proach­ing that mar­ket,” says Boulle. “If the client is an en­tre­pre­neur with as­sets of R100m and is still ac­tively in­volved in wealth cre­ation his needs will be vastly dif­fer­ent to some­one

ap­proach­ing re­tire­ment and who wants to pre­serve what they have al­ready made. The trick is to as­sess the be­hav­iour and needs of the client and approach each one in­di­vid­u­ally.”

Ed­win Sch­midt, GM at Absa Private Bank, says the holy grail of private bank­ing is cap­tur­ing a larger share of clients’ wal­lets. “Get­ting a client to open an ac­count with you is easy. In­creas­ing your share of that client’s busi­ness is more dif­fi­cult.

“For that you have to build up a re­la­tion­ship as a trusted ad­viser and that’s not some­thing that can be done overnight.

“You’ll typ­i­cally find the av­er­age so­phis­ti­cated client has 12 or 15 re­la­tion­ships with dif­fer- ent ad­vis­ers, from trans­ac­tional bankers through to in­sur­ance bro­kers and in­vest­ment ad­vis­ers. You need some­one to sit on top of those re­la­tion­ships to man­age them pro-ac­tively and re­move any po­ten­tial con­flicts.”

Private eq­uity is one area where the private banks are be­com­ing ac­tive. Tra­di­tional private eq­uity in­volves rais­ing funds from in­sti­tu­tional in­vestors to in­vest in fast grow­ing com­pa­nies or busi­ness ven­tures.

Now high net worth in­di­vid­u­als are be­ing show­ered with private eq­uity op­por­tu­ni­ties by their banks, where the re­turns can ex­ceed those typ­i­cally avail­able on the stock ex­change.

Caters to full spec­trum of wealth. Paul Hanley

Key dif­fer­en­tia­tor

is the qual­ity of ad­vice.

Vince Boulle

Strong in struc­tur­ing debt. Mar­ius

Kilian

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