Coutts hunts for risk-hungry clients
MOVE A DEPARTURE FOR BANKER TO THE QUEEN THAT PRIDES ITSELF ON PRESERVING CAPITAL FOR ITS RICH CLIENTS
When British entrepreneur James Dean decided to raise money for his tech start-up this year, he did what company founders usually do — he talked to venture capitalists. Yet Dean disliked what he heard, so he sought an alternative. He didn’t choose equity crowdfunding or peer-to-peer loans. Instead, Dean turned to Coutts & Co.
As a 326-year-old private bank that caters to Britain’s ultra-rich and counts Queen Elizabeth II as a client, Coutts may not be the first name that jumps to mind as a tech disrupter. The firm, after all, still requires its male employees to wear neckties when meeting with clients.
Yet in what’s believed to be the first programme of its kind in European private banking, Coutts runs an invitation-only investment club that connects clients with hand-picked UK companies seeking early-stage funding. The price of admission: an initial investment of £250,000 (Dh1.2 million, $329,000).
The move is a departure for a private bank that prides itself on preserving capital for its wellheeled clients, not helping them wager on enterprises that may take years to pay off, if ever. Venture capitalists typically declare victory if just one out of 10 plays deliver mammoth returns. That’s why Coutts opens the club solely to professional investors with the capital, the expertise — and the stomachs — to handle the risk. (It helps that investors are eligible for tax breaks, such as not paying capital-gains levies, thanks to a UK government programme that supports small businesses.)
Not everyone wants to go down this road, said Alan Higgins, Coutts’ chief investment officer, over afternoon tea in the bank’s marble-clad headquarters near London’s Trafalgar Square. It is likely that there will be cases where individuals make huge gains, but equally, there will be cases where people lose lots of money.
The investing tastes of the super-rich are shifting in an era where low interest rates and the rise of blockbuster tech unicorns are spurring broad interest in early-stage companies. While private equity and venture capital have been staples in portfolios for two decades, many high-networth investors may want to do more than plough their cash into vast funds that charge steep 2 and 20 per cent management and performance fees, but offer little in the way of direct engagement with entrepreneurs.
Hands-on experience
About 250 of Coutts’ privatebanking clients, many of whom are worth tens if not hundreds of millions of pounds, have joined the club to get that hands-on experience. They deal directly with company founders, join their boards, and introduce them to members of their own business networks, which could lead to other deals.
With the state of global markets, people are looking for yield, and active collaboration between investors and entrepreneurs is a natural step, said Richard Jones, the co-founder of Cambridge Sustainable Investment Partners, a consulting project for the asset-management industry at the elite British university. A lot of these investors have made money in tech, and so they understand the opportunity and the risks.
Coutts, which is indirectly an arm of the state thanks to the crisis-era rescue of parent company Royal Bank of Scotland Group Plc, is taking some risks of its own. While Coutts doesn’t take stakes in the firms, it is putting its reputation on the line by showcasing them as investments to its clients.
By contrast, VC firms such as Accel Partners and Hoxton Ventures are steeped in the idiosyncrasies of early-stage enterprises in the UK and can draw on long track records as they size up new business models. And both buyout and VC funds spread their risk across dozens of names in their portfolios, while Coutts club members commit to just a handful.
People may like the sound of an early-stage firm, but chances are it’s going to be a goose egg, said Chris Adelsbach, managing director at Techstars in London, an accelerator programme for start-ups. To have a diversified portfolio, you have to have at least 20 positions.
For Coutts, the club offers a way to deepen its relationships with select customers at a time when competition is jolting London’s sleepy private-banking industry. Tech savvy robo-adviser upstarts are circling at the same time giants such as UBS Group AG and Credit Suisse Group AG are expanding their market share. Switzerland’s Union Bancaire Privee is poised to buy London-based wealth manager ACPI Investment Managers, according to people knowledgeable with the transaction.
Those customer relationships won’t be enhanced if Coutts can’t unearth promising prospects. To that end, Coutts managing director Mohammad Kamal Syed leads a team of five who criss-cross the UK, hearing pitches from hundreds of companies in sectors ranging from retail to light manufacturing to tech. Some are start-ups, and some are more established firms that need growth capital.
Sometimes, the small-business bankers at RBS and its NatWest retail lender refer names to Syed. Those that make the grade are then featured on a membersonly portal on Coutts’ website. Coutts charges clients a small percentage of the capital they invest.
“We have entrepreneurial ly minded clients who want to invest in private companies, but they don’t have a lot of time to source deals,” said Syed. “We filter deals for them.”
Construction industry
Those transactions can take time to ripen. In mid-2017, for instance, Dean, the entrepreneur, pitched Coutts on his company, which is called SenSat. Aimed at helping the construction industry improve its planning processes, it uses drones and proprietary software to create 3D topographical maps that are so precise they show details as small as a soda can. At that time, Coutts passed because SenSat wasn’t generating enough revenue.
Over the next few quarters, the start-up signed on more than two dozen customers, including Highways England, the government-owned company that manages the national highway system. Eager to raise capital, Dean made the rounds with VCs. But he found their terms too onerous, or disliked their ideas about growing his business. So Dean got back in touch with Coutts, which saw enough momentum to introduce the company to its club members.
These high-net-worth investors had either built and sold multibillion-pound businesses from near scratch, or managed some of the largest private equity funds in Europe. By June SenSat had raised £2 million from the Coutts club members.
One of them, a private-equity veteran, used to make decisions based on reams of financial analysis developed over months of due diligence. Now, Coutts does ample vetting for him, and he subsequently spends a couple hours talking with management of the companies he’s sizing up.
The investing tastes of the super-rich are shifting in an era where low interest rates and the rise of blockbuster tech unicorns are spurring broad interest in early-stage companies.