There’s a theory that investors prefer corporate businesses over private client firms, but is that perception remotely accurate or is the thinking flawed?
Whether they’re the man on the street choosing which retail funds to invest in, or institutional types looking to buy into a business, investors are always looking for the biggest bang for their buck. They have another thing in common, too – the pot of cash isn’t bottomless, so that means hard decisions have to be made.
When it comes to the institutional end, there’s a school of thought that says city slicker investment types prefer flinging their hard-earned cash into fiduciary firms that favour corporate funds rather than those handling private client wealth.
Indeed, it’s been suggested that potential investors often won’t back M&A activity or IPOs for firms heavily into private clients. And if they will invest, they do so at a lower price or insist on a massive expansion of their investment’s corporate client base as part of its business plan.
Jonathan Smith is a Partner at Wyvern Partners who advises private equity firms, banks and other investors, and has witnessed this negative impact on firms with strong private client business. He says one firm has even been told that it’s “too private client to IPO”. He believes there’s an unfair preference among investors for firms with strong corporate client bases.
This poses an interesting challenge for the Channel Islands, which host firms from across the spectrum. There are fiduciary experts with a strong corporate bias, such as Ipes and Augentius. There are mixed firms with a corporate bias but a considerable private client base alongside, such as Sanne, which had a £232 million IPO in 2015. And there are firms with a strong private client base, such as Equiom, which is private equity-backed and has been on the acquisition trail for the past year or so. Many other firms are heavily private client, or equally mixed.
When you look at the balance of such firms, it makes you wonder if there really is any merit in the argument that one is better than the other.
Clean vs dirty money
Smith thinks the concerns are that corporate money is safe, whereas private money is potentially ‘dirty’. He believes there’s been a legacy of misconception among European investors that offshore centres are part of an unregulated, secretive Wild West of investing, where private clients hightail it to hide their saddlebags of ill-gotten cash.
Investors with that view are wrong, he says. “For an outsider to the sector, corporate business is seen as safer, with less reputational risk and higher growth rates. Maybe the growth rates can be better in the corporate sector, but in the Channel Islands the private client money is clean and has been for years.”
It’s a perception that frustrates Bart Deconinck, co-Founder of mixed business Zedra. “In the private client sector, you find now, worldwide, a very compliant, clean and above-board industry,” he says.
“Sometimes you can get angry because, for instance, you have leaks such as the Panama Papers that give a view on how it used to be 10 years ago, not how it is today. Public opinion mixes this up, and some journalists get it wrong, and it gathers speed. I wouldn’t know how to get a structure up and running and a bank account open for money that wasn’t fully compliant anymore. I just wouldn’t know how to do it.”
Smith says the impact of this prejudice is widespread. “It’s impacting a bit on pricing, but some firms with lots of private clients have been told they can’t list. Where private equity firms do buy into mixed businesses, they’re trying to make them more focused on corporate business,” Smith claims. “The whole concept is flawed.”
Growth rates
Not everyone agrees, however. One market maker, who didn’t want to be named, says it’s not misunderstanding how good the quality of private client business is, but a focus on the potential growth rates that are higher in the corporate sector.
“The view that corporate business is better isn’t unfair. Investors see corporates as stickier and likely to grow more quickly. It’s not at all about getting out of private clients to tilt the balance in favour of corporates – most of this money [behind private equity and IPOs] is funded by private clients,” the source told BL.
Deconinck says it’s a problem, but the dynamics are shifting. “I would say, yes, up to very recently, investors looked at corporate businesses above private, but I think it’s changing now,” he says. Three years ago he admits there would have been zero interest in a business with a strong private client portfolio. Part of the negative view of private clients were concerns about tax conformity.
Deconinck insists that this all changed with the introduction of the Common Reporting Standard (CRS). States such as Jersey have been sharing information with countries around the world for 15 years or more. The same couldn’t be said of all offshore tax jurisdictions. But pressure from the Organisation for Economic Co-Operation and Development (OECD) has meant that even the more recalcitrant governments have started sharing tax information.
“The Channel Islands have always been frontrunners in this, but the jurisdictions that are a little more laissez-aller have also cleaned up their act more recently because there’s no hiding anymore,” Deconinck says. “Since January, private clients are de facto compliant. There’s no right or wrong anymore – only compliance. The appetite is changing because investors know that if you step into the private client business, it’s a totally different ball game to 10 years ago.”
No wonder, then, that the Channel Islands remain attractive to wealthy private individuals. Indeed, targeting growth in this area is part of the islands’ plans for the future. Jersey Finance, for example, had a tour of Asia last year and sees the growing number of high-net-worth and ultra-high-net-worth individuals in the likes of China as a huge potential market. Guernsey Finance was in Shanghai for the same reason in December last year.
Turning the tables
The spotlight now, Deconinck insists, is on the less regulated and potentially less complaint corporate sector. “At the same time as the private wealth sector has become compliant, you see all kinds of things happening in corporate business that create uncertainty.”
He cites OECD guidelines on base erosion and profit shifting (BEPS) as a powerful concern. Reporting guidelines now demand companies report profits in the countries in which those profits originated, casting doubt on the structures used to move profits to lower-tax locations. “It calls into question all sorts of corporate structures,” says Deconinck.
He specifically points to what he calls the “attacks” in the EU on Apple and Starbucks for their location decisions that result in little tax being paid in key trading countries. Apple was told to pay back €13bn in avoided tax to the Irish government after the EU stamped out the ‘sweetheart deal’ to attract the tech giant.
Starbucks was similarly forced to pay €25.5 million to the Dutch government, with the knock-on effect that it’s started paying greater proportions of tax in individual EU countries too.
Trump impact
And US tax avoiders are about to be played a Trump card. “The new President in the United States has a comprehensive tax reform where he wants to bring back the trillions that are in overseas structures,” Deconinck says.
“All these things create uncertainty in the corporate sector. So today, if you look at the private client business, you know exactly what’s going to happen, while the uncertainty in terms of ‘are these structures for corporate clients valid for the medium or long term?’ is becoming a problem.”
Deconinck also challenges the long-held assumption that growth is more certain in the corporate sector. He says growth in this sector is predicated on three factors: continuing GDP growth; M&A transactions; and cross-border trade.
“As to economic growth, yes, I see that continuing, but M&A transactions are still subdued compared with what we saw prior to 2008. And with cross-border trade you only have to look at what’s happening in the world to see free-trade agreements being stopped. We’re going into a protectionist world.”
There are changes in circumstances and new nuances, but the argument over whether it’s better to have corporate or private clients or to have a mix of both has been going on for years and will probably go on for many more. Even the most pro-corporate source says: “Private client business is still very attractive. There’s a lot of value in private client business.”
While Wyvern’s Smith says investors need educating to see the value of firms focused on private clients, Deconinck argues that all firms should be balanced – ideally about 50 per cent in each but not more than 60:40 in either direction. Sometimes defining your client can be a case of semantics.
“Look at Asia. Even the biggest companies there are often owned by families. If those families are your clients, are they private clients or corporate? Often it’s unclear,” Deconinck says. “Having expertise in both is the way forward. If you have knowledge of both corporate and private clients, it puts you in the perfect position.”