UBS Group AG’s top banker to billionaires said the wealthiest clients are sidelining financial institutions as they close private transactions without advice from investment banks.
Family offices and some hedge funds are increasingly completing deals with each other or banding together on direct investments as eking out returns in public markets gets harder, Joe Stadler, UBS’s head of ultra-high-net-worth clients, said in an interview.
“We have been looking at this trend for years now, but it’s accelerating, and for banking that could become the digitalization event for Kodak if we are not preparing ourselves,” he said, referring to the downfall of Eastman Kodak Co., the photography giant that was pushed into bankruptcy as digital cameras upended the film market.
The growth of direct deals among the super-rich aligns with the rise of them taking control of their own fortunes through family offices. Following the lead of billionaires including Michael Dell and Bill Gates, many now act like private equity firms, buying large stakes in companies or acquiring them outright. Direct deals comprised almost a third of the firms’ portfolios last year, according to research by UBS and Campden Wealth.
Banks are struggling to win these private deals because regulators require them to carry out so-called suitability tests: in other words, vetting clients to ensure they have enough financial know-how to be aware of all the risks. Banks feel compelled to carry out the tests even if they believe the client doesn’t need them, Stadler said. The customers, meanwhile, are put off by the paperwork, he said.
“Suddenly you have no business,” he said, adding that banks need to create their own deal platforms and legal frameworks to stay relevant.
Wealth advisers and banks are adding direct investing to their white-glove services for the rich — and getting lucrative fees. For a family with $100 million to invest, upper-end advisers charge about 0.5%, or $500,000, annually.
Investment banks are already seeking to put themselves at the center of rich clients’ deals. Zurich-based UBS holds events around the world, wherever its wealthiest clients rub shoulders, and BNP Paribas SA created an online platform three years ago that allows its richest customers to search for co-investment opportunities. Earlier this year, Investec Plc’s private bank launched an initiative to connect wealthy customers by appointing a head of strategic client partnerships in London.
To carve out business, banks need to leverage their skills, and UBS is adept at matching buyers and sellers, Stadler said.
“If somebody wants to sell a plot of land in a large German city for 50 million euros, we know who is interested,” he said. “We know the buyer and we have to make sure we can match.”