The global diversification of wealth continues to drive the efforts of law firms’ private client teams as the world’s population of affluent individuals continues to climb. LB tracks the latest developments.
The international private client teams at major law firms are thriving. The practice area, for decades regarded as the black sheep of the family, has now been warmly accepted into the fold. In some cases private client has become more than a much-loved practice area.
Wealth management and private client practices of many firms are unequivocally at the top of the agenda, particularly at an international level. In our wealth management report last year (see Follow the Money – Wealth Management – April 2010) we reported that Singapore had become strategically important to wealth management firms. Channel Islands firm Collas Crill told LB that international expansion was on the agenda and Singapore was the logical starting point. By 1 August last year, the firm’s office was open for business.
‘We are breaking the mould by choosing to open in Singapore with a Channels Islands offering rather than, say, Hong Kong or mainland China,’ says Jason Romer, managing partner of the firm’s Guernsey office. ‘Singapore provides an excellent hub from which to service the region and its established and emerging economies. Before we opened the office we had considerable interest from institutions keen to take advantage of our presence in Singapore. That, and the fact that so many other businesses are looking to establish a base in Singapore, confirmed that we made the right choice of jurisdiction.’
‘Singapore provides an excellent hub from which to service the region and its established and emerging economies’
The most recent evidence of international expansion on the back of private client and wealth management work comes from Lawrence Graham (LG). The firm, which is currently in merger talks with mid-market City rival Field Fisher Waterhouse, announced in April that it would be opening in Singapore by forming an alliance with local firm PK Wong & Associates.
Financially, firms with a strong private client focus are doing particularly well. West End firm Forsters is a good example. Despite its practice being focused largely on two areas – real estate and private client – the firm has performed strongly in the last two years.
One of the first to announce its 2011/12 financials, the firm posted a 13% rise in fee income to £28m from the £25m the firm recorded in 2010/11. Managing partner Paul Roberts said this means the firm achieved double digit growth for the second year in succession and during a two-year period, revenue has increased by 25%, while PEP is up by over 30%. The firm’s trust practice contributed 8% of revenues and has grown by 100% in the last five years.
Beyond home boundaries
Evidence suggests that the movement of international wealth management law firms into Asia – Singapore in particular – is a prudent strategy. Singapore’s status as an Asian financial and disputes hub has been made easier by the Singaporean government, which has been making a concerted effort to attract the growing wealth in Asia, principally with regulatory changes to ease investment. For example, it has brought in a tax exemption scheme for family-owned investment holding companies registered in the jurisdiction. Likewise, the highest rate of personal income tax is 20% and corporate tax has been cut from 25.5% to a flat 17% and income and capital gains for non-Singapore investments held by non-residents are exempt from tax.
The fuel for this fire is the unprecedented growth of Asian wealth. According to the World Wealth Report (WWR) 2011, published by Capgemini and Merrill Lynch Global Wealth Management, the population of high-net-worth individuals (HNWIs) – those with investable assets of over $1m – in Asia-Pacific is 3.3 million individuals, now the second-largest in the world behind the US, and ahead of Europe for the first time. The combined wealth of Asia-Pacific HNWIs had already topped Europe’s in 2009, and that gap widened in 2010 with Asia-Pacific HNWI wealth reaching $10.8trn. Overall, HNWIs’ wealth in Asia-Pacific is now up 14.1% since the end of 2007.
‘I’ve certainly seen a lot more of the London firms taking an interest in Singapore because at the moment you don’t have so many local private client specialists’
LG’s move comes as a natural progression of the firm’s business in South-East Asia where it has operated for 20 years, principally advising private capital and corporate clients. Former senior partner Penny Francis will move to Singapore to oversee the development of the practice, while private capital partner Nick Jacob and corporate partner Geoff Gouriet will continue to split their time between London and Singapore.
‘Singapore is an important centre for wealth management and we have a large number of long standing private capital clients across South-East Asia,’ said Jacob at the time of the announcement. ‘This alliance with a local firm will enable us to provide local law advice and enhance our ability to look after clients and offer more services.’
And Singapore isn’t the only major international development for LG on the wealth management side recently. In 2011 the firm also set up a joint venture with The Family Business Advisory Group (FBG) in Dubai. FBG advises ultra-high-net-worth clients in the Middle East on family and corporate governance issues. The firm also announced in June that it would be forming a ‘non-exclusive association’ with Brazilian firm Motta, Fernandes Rocha – Advogados.
While the recent surge into Singapore by major firms began when Berwin Leighton Paisner (BLP) launched its own private client practice through the hire of Simon Michaels from Baker & McKenzie in late 2010, Withers continued the trend in July last year when it first announced that it planned to open in Singapore in 2012. In February this year it confirmed its plans to open an office in Raffles Place run by US partner Jay Krause and UK and Hong Kong partner Philip Munro. This complements the firm’s Hong Kong office, which opened in 2008.
‘Even when we opened in Hong Kong we knew it would only be a question of time before we set up in Singapore,’ says the firm’s managing director Margaret Robertson. ‘Having a presence in both locations along with our offices in Europe and the US enables us to deliver integrated advice both quickly and directly to clients across Asia. I forecast that our Singapore office will grow as quickly as our Hong Kong office.’
Alan Binnington, private client director at RBC Wealth Management, says there are very few specialist private client lawyers in Hong Kong and Singapore. He says the local firms do a lot of work for the corporates but many of those corporates happen to be family owned, so local lawyers are either developing expertise in using trust structures or inviting London private client lawyers to work in partnership with them to assist the families with their structuring.
‘I’ve certainly seen a lot more of the London firms taking an interest in Singapore because at the moment you don’t have so many local private client specialists,’ he says. ‘Obviously the local firms will start developing their own expertise and you’ll have more experts coming forward.’
He has recently returned from a trip to RBC’s Hong Kong operation and doesn’t see an over saturated market. ‘I don’t see there being a finite amount of space for international wealth management teams operating in Singapore or Hong Kong, as that part of the world is where the wealth is being created,’ he says.
Globally the picture remains very healthy too, albeit the growth in personal wealth is not as dramatic as it was in 2009. In 2010, the world’s population of HNWIs grew 8.3% to 10.9 million, a more sustainable pace than the 17.1% increase seen in 2009. The growth in HNWIs’ financial wealth also slowed to 9.7% in 2010. This was still a healthy rate, but was less than the 18.9% jump in 2009 when there was a sharp rebound from the hefty crisis-related losses of 2008. The 2010 increase was still enough to push global HNWI financial wealth up to $42.7trn, beyond the pre-crisis high of $40.7trn in 2007.
Although Asia has dominated the thoughts of partners heading up private client and wealth management practices in the last two years, the importance of effectively servicing the privately wealthy in Europe remains undiminished. This has been made particularly clear by the amount of movement around Switzerland last year. Switzerland has become a strategically important location for private client practices looking to service clients from Russia and Eastern Europe, as well as the Middle East.
Speechly Bircham in particular was active during 2011, opening in Zürich and Luxembourg. The Swiss opening followed four years of monthly visits to the country by a core group of partners looking to build relationships with private banks, trust companies, law firms and family offices. As the volume of work grew exponentially, the firm opened its Zürich office in June 2011, headed by partner Mark Summers who moved there permanently.
The firm’s Luxembourg office opened that same month. Operating as Speechly Bircham Pfeiffer, the firm practises Luxembourg law, and is led by local Françoise Pfeiffer, who was head of banking and finance at Oostvogels, and before that at Loyens & Loeff before setting up her own practice.
Likewise, Farrer & Co and Withers also launched Swiss outposts in 2011. Farrer, which opened its doors in June 2011, only has a serviced office in Zürich. However the move does represent the firm’s first foray outside of London, recognising the need to develop its international business.
Withers’ presence in Switzerland is rather more established and the opening of its Zürich office in April last year was largely to complement and build on the success of its Geneva office, which has been running since 2005.
And the fact that the US remains the number one country in the world for finding and servicing HNWIs should not be overlooked. According to the WWR, the population of HNWIs in North America rose 8.6% in 2010 to 3.4 million, after rising 16.6% in 2009. Total wealth rose 9.1% to $11.6trn. The US is still home to the single largest HNWI segment in the world, with its 3.1 million HNWIs accounting for 28.6% of the global HNWI population.
All of this has not been lost on Mishcon de Reya, which launched a family practice in its New York office after hiring family partner Michael Stutman from US firm Mayerson Stutman Abramowitz in December 2011. The firm launched a New York base in January 2010, which was primarily focused on litigation.
Mishcons’ managing partner Kevin Gold said at the time of Stutman’s hire: ‘For some time now we have witnessed the increasingly international nature of our clients’ needs, and recognise the growing value of multi-jurisdictional expertise in wealth management.’
Succession fears
Regardless of geographic location, the number one issue occupying the minds of private client teams worldwide is succession planning for the privately wealthy. According to the WWR, the majority of HNWIs (82%) also say succession-planning capabilities are important to them. The issues of family conflict, divorce and governance loom large and the international nature of family wealth means that the work is complex and multi-jurisdictional for private client lawyers.
According to Wolf Theiss’ Niklas Schmidt, succession is an enormously important aspect for any family business owner, since most entrepreneurs want to see their work continued after their death, either by the next generation or by new owners (ie exit through sale). The legal restraints (including tax issues) on the transfer of a family business are in practice the most important hurdles to be managed.
‘While his lawyer will have seen many cases of succession, for the business owner himself this will be the first and possibly last time he has to deal with the topic. The owner’s personal lawyer will also have all the necessary information regarding the family,’ says Schmidt.
Camilla Wallace, partner at Wedlake Bell, says law firms can help through carefully structured ownership, which may or may not include family trusts, and ensuring that the governance documents for the family business set out a clear path as regards succession. In other words, lawyers can make sure there is a detailed succession plan, encouraging cross-generational interaction at an early stage, advising the family to be proactive during the good times so that overreacting in a crisis (such as when the patriarch/founder has unexpectedly died) can be avoided.
‘The goals of the next generation vastly differ from the outgoing generation. The former may be larger in number and bring with it different dynamics not least because individuals may have had to work less hard to get to where they are,’ says Wallace.
According to the WWR, advisers to HNWIs currently lose an estimated 49% of assets under management during generational wealth transfer. The financial crisis may have made it even tougher to retain those assets – and to attract new money – because the younger demographic is more likely to focus on the difficulties of the crisis years and may be unsure that partnering with an established family adviser is in their best interests.
‘The goals of the next generation vastly differ from the outgoing generation’
As a result, the report says that next-generation HNWI clients may need a more global and holistic approach from their advisers – one that includes a broad array of advice on overall finances (including taxes), investment opportunities in faster-growing international markets, and partnerships with wealth-transfer lawyers and accountants. Younger HNWIs may also be more demanding of their advisers in terms of transparency, efficiency, technology and convenience in everyday interactions, as many favour real-time digital media for communications and transactions. In short, the demands on wealth management lawyers are just as tough as those put on law firms by corporate and banking clients – clients want more bang for their buck and want it all packaged in an easy-to-digest, global manner.
But at the heart of managing wealth transfer the same issues apply. Douglas Connell at Turcan Connell in Scotland says planning for future ownership of an asset such as a family company or business, landed estate or farm, is not always straightforward. When an asset should be transferred, there needs to be some protection built in following the transfer against third-party claims and tax liabilities.
‘Every family’s circumstances differ, and each will have particular complexity from inheritance tax to financial planning,’ says Connell. ‘Finding the most appropriate solution is key and advice should be given on an individual basis – developing a family succession plan, and then implementing that plan, which would include preparation of wills, establishing appropriate structures with trusts and family partnerships and also minimising tax exposure along the way.’
Connell adds that the firm’s approach to succession planning is risk-based and one particular area of expertise is the risk of matrimonial claims that can seriously disrupt the smooth course of succession planning. Turcan Connell, formed in 1997 as a spin-off from Dundas & Wilson, has always been focused on private client and wealth management services, so its business law focus is on family-owned businesses rather than businesses with broader classes of shareholders. But finding a place in the cross over between wealth management advice and mainstream corporate advice is the Holy Grail many private client law firms are chasing.
Buying out of trouble
One clear and high-profile example of a firm benefiting from offering first class legal services to very wealthy entrepreneurs came last summer when Formula One magnate Bernie Ecclestone and one of Italy’s richest businessmen Flavio Briatore came to sell their 33% stake in Queens Park Rangers. The pair sold their share of the Premier League football club to Tony Fernandes’ Tune Group for £100m. Withers stepped in as one of the main advisers, demonstrating that it could do private deals just as well as private client. Corporate partner Ben Simpson and the firm’s chairman Anthony Indaimo advised Ecclestone and Briatore on the sale. The firm had originally advised Ecclestone on his divorce from former wife Slavica in 2008, before he turned to Manches’ Helen Ward to see the divorce through to its conclusion in 2009.
On its website, the firm says of the deal: ‘This deal underlines Withers’ commercial team’s reputation in acting on high profile and high-value deals and validates its focus on acting for the wealthy on merger and acquisition deals and other transactions in the wider brands sector.’
The more recent example of a high-profile trade sale by an individual entrepreneur was that of finance guru Martin Lewis, who called on Olswang’s M&A partner Mark Bercham and his team to advise on the sale of Lewis’ MoneySavingExpert.com website to MoneySupermarket for a princely £87m in June.
Mishcons is one firm that has made a concerted effort to take full advantage of the interplay between private client and corporate. As the firm revealed to LB in our feature ‘Gold standard’ in February, Mishcons has leveraged off its traditional strength in private client work, with the 2010 introduction of the client-facing Mishcon Private initiative that now acts as the gateway for HNWIs to the rest of the firm’s services. Head of Mishcon Private James Libson estimated that private clients generate somewhere between 50% and 60% of the firm’s revenue, if business corporate mandates are counted, while managing partner Kevin Gold explained that Mishcon Private is the single most important initiative for driving growth across the firm.
‘Some of our biggest corporate work has been in family corporates, the high-net-worth of the world who move in slightly different ways to capital markets,’ he said in the feature. ‘So where people have got money and cash, they are still doing deals and thinking things are cheap, and we have more than our fair share of that client base.’
The firm developed its dedication to providing a holistic service to HNWIs even further this year, with plans to launch a private client business for HNWIs and families, offering services including private bank relationship management advice, consolidated asset reporting, as well as tax and structuring advice in February. It will also offer concierge services – an extension of the 24-hour, 365-days-a-year global concierge service the firm launched in conjunction with leading luxury lifestyle group, Quintessentially, in 2010.
The new business will use all the legal services that Mishcon Private already offers, including reputation management, family, art law, residential property, immigration and contentious trusts and probate. Corporate partner Richard Tyler, who is heading up a strategic committee investigating the project, is leading the initiative and the firm intends to pilot the venture with an existing client later this year.
‘With so many high-net-worth clients that themselves constitute the equivalent of multinational companies, we can see a market to service them as such, with an offering that goes beyond their legal needs,’ said Gold at the time of the launch.
One type of deal at the heart of the interplay between mainstream corporate work and traditional private client services is the management buyout of a family business.
The sale of a business is a once in a lifetime opportunity to acquire real wealth after years of hard work and usually the priority for the entrepreneur is to secure the best deal possible from a credible buyer.
The list of potential buyers may include a competitor, a new management team or a private equity house. And while taking a business public isn’t usually considered an ‘exit’ route in the true sense, the entrepreneur may also be tempted by the cash realisation possibilities of an IPO.
‘The MBO is in many respects the best way of preserving your legacy but you have to remember there’s a trade off in price for that’
However, research by private bank Coutts in its recent report A special kind of exit shows that in roughly 15% of exits the potential acquirer will comprise the existing management team, backed by finance from a bank or private equity.
It is through this type of work that private banks and wealth management law firms alike can see a way in. It offers a unique arrangement and a more personal level of deal than a standard trade sale of the business, which is often the way an entrepreneur will choose to exit their business.
But management buyouts (MBOs) can offer a quick and clean exit for the wealthy business owner. According to Coutts, only 19% of entrepreneurs would be prepared to consider an MBO as an exit strategy but 55% of entrepreneurs who had sold a business through an MBO said that they chose the route because it offers the best deal or it was the only way they could exit their business.
‘It is increasingly popular, particularly where entrepreneurs are willing to invest time and capital alongside existing management – a hybrid solution,’ says Wedlake Bell’s Wallace. ‘A partial buyout can create liquidity for the family, solve a succession issue and regenerate the business.’
‘There are two key issues for entrepreneurs in all this,’ says Andrew Haigh, head of client propositions at Coutts and lead for the MBO research. ‘One is maximising their value; two is controlling their legacy. The legacy issue is very important. If you go ahead and do a trade sale, then gradually over time you will see your legacy dismembered. The MBO is in many respects the best way of preserving your legacy but you have to remember there’s a trade off in price for that.’
However, not everyone agrees that MBOs are the way to go right now. ‘The last three or four years have seen a decline in corporate finance activity, particularly in relation to re-financing and business exits,’ says Douglas Connell. ‘This has had an inevitable impact on the volume of new business directly resulting from these financial transactions. However, there are many deals continuing to take place which remain off the public radar but which generate significant funds for the individual shareholders. The availability of entrepreneurial relief has proved a major tax incentive. I think the level of management buyouts has significantly declined.’
‘The MBO is more back in favour than it was,’ says Haigh. ‘That’s recognising that both the classic private equity deal and the MBO are both dependent on finance which is quite difficult.’
And MBOs as exit strategies for private clients has yet to take off seriously in Europe, according to Wolf Theiss’ Schmidt. ‘Interest in exits through management buyouts (and even more so through a sale to a private equity firm) is growing in the CEE region, but the level of interest is certainly not comparable to that in Anglo-Saxon countries,’ he says. ‘This is a cultural issue, which is characteristic of Continental Europe as a whole, and in particular Eastern Europe.’
While continental Europe may not have caught up yet, it is clear the world is changing. Firms that have traditionally advised the privately wealthy can see that those clients need to pass that wealth on or turn their assets into cash and do not need traditional corporate advisers to do it. As long as the firms follow the cash into Asia in particular, the rewards can be immense. With corporates cautious and banks anxious, clients with the means and desire to do deals are king. So step up those firms who have advised on family and trusts issues – it’s time to adapt or die.