HOW MUCH MONEY have you got? And how quickly could you spend all of it? If the answer to the second of those questions is: "I couldn't", then JPMorgan Private Bank wants to hear from you.
"We position ourselves at the very apex of the wealth pyramid," says JPMorgan's Chris Hancock, who liaises between the investment and private banks. "Our desired client base consists of those individuals whose wealth management problems stretch beyond their own lifetime, and so give rise to succession issues, tax planning issues and the like, because they cannot spend all their money."
Best execution
The clients that JPMorgan Private Bank wants are increasingly targeted by, and using, both investment banks and private banks. The ultra wealthy have adopted the characteristics of an institution.
"The wealthiest 10 or 15 families in each European country are effectively institutions," says Jeremy Marshall, chief executive of Credit Suisse Private Banking (UK). "They want to execute their own ideas with their bank and get, for example, prime brokerage services from their bank." The banks, with their compulsive tendency to create horrific neologisms, have named these clients 'instividuals'.
"Our pitch is: 'We'll treat you exactly the same way we treat Fidelity. We'll give you the same product, the same pricing, and the same execution,'" says Marshall.
The trend for private clients to use investment banking services is marked in Europe today because private wealth is increasingly created rather than inherited. So as well as needing someone to look after their own wealth, private clients need someone to look after the business that makes them rich.
Anyone can see the advantages of, say, trying to persuade an entrepreneurial private client to use your investment bank when the time comes for a $100 million IPO. The best opportunities to cross-sell private and investment banking services surround Europe's wealthiest families.
The typical private bank divides its clients into the affluent, who are worth between SFr250,000 ($200,000) and SFr2 million; the high-net-worth (SFr2 million to SFr50 million); and the ultra-high-net-worth, with assets of SFr250 million or more. It's the ultra-high-net-worths who need, and can afford, complex and costly investment banking transactions.
"If we're doing OTC, bespoke, structured transactions, the time and cost involved mean that it really only makes sense to do that with a lot of wealth," says Liz Cacciottolo, the head of UK operations for UBS wealth management.
For their part, ultra-high-net-worth individuals want their private banks to give them access to an investment bank.
"M&A advice, disposals, research, and all sorts of things suddenly become very important to families at around $250 million net worth," says Peter Charrington, head of private banking at Citigroup Private Bank. "Between $500 million and $1 billion net worth, accessing the investment bank becomes crucial. And that means using the private bank as a door into the investment bank, rather than expecting a private client to navigate around the different parts of the investment bank themselves."
Some private clients will be looking for acquisition opportunities. Some will want to know about every debt product, from private placements, through high yield and mezzanine debt to public debt to securitization. During the bull market, a lot of entrepreneurs had wealth sitting in single stocks. Rather than sell and incur large tax bills, they used investment banks' derivatives and risk management services to hedge and monetize their positions. These are services that stockbrokers or fund managers cannot provide.
Quick decisions
If it is important for the ultra-high-net-worth individuals to get access to the investment bank, it is equally useful for the investment bank to have access to ultra-high-net-worth individuals. "The investment bank gets the ability to sell a lot of the investments and products that they would design for institutional investors or pensions funds," says Charrington.
Individuals can commit funds more quickly than institutions, which can help bridge the gap between sellers that want to sell at once and buyers that want to buy at the right time for them.
One example was Citigroup's First Aqua deal, which began in January 2002, when Vivendi Environnement wanted to increase its UK water assets by buying Southern Water from Scottish Power. When UK regulators held up Vivendi's acquisition, Scottish Power still wanted to sell.
Citigroup turned to its private bank to keep the deal alive. In six days, Citigroup Private Bank and six of its clients raised about $100 million, which provided the private-equity chunk of the capital structure of First Aqua – a vehicle that bought Southern Water and owned it until it was sold to Vivendi and RBS Private Equity a year later. The private clients in the consortium made around 25% profit.
"Where institutions may take months to get approval and act, a private individual can say yes or no there and then," says Charrington. "The investment banks have never really understood just how powerful private clients can be."
Among the investors was Tom Hunter, the Scottish serial entrepreneur and partner in West Coast Capital. The minimum commitment was £5 million ($8.9 million), with a couple of the investors providing considerably more.
First Aqua was not the first time that Citigroup had got private-bank clients to provide private equity. But at £2.1 billion it was the largest of these deals, and has set the standard for future transactions in cashflow generative sectors such as utilities. Having done similar deals in Scandinavia, Citigroup has already looked at possible transactions in Japan and elsewhere in Asia, as well as Europe.
On previous deals, Citigroup had usually been the lead debt provider to the private-client consortium. On the Southern Water deal, it invested equity alongside its clients. "That co-investment opportunity is very appealing to billionaire private clients," says Charrington.
To be a client of Citigroup Private Bank you need a minimum net worth of $5 million. The kind of client who gets involved in a deal such as First Aqua will be worth far more. "You need to be very careful, because a private-equity deal should only be a small part of a client's wallet," says Charrington. "If you're worth $50 million, an average deal commitment of $5 million is close to your upper limit. This is a club."