Independent, Authoritative, Indispensable
august 2016 ASIAN PRIVATE BANKER September 2016 | ISSUE 103
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ASSETS L NE STAR
I nside T HIS MON TH Straight Talk: Michael Blake, CEO, Private Banking Asia, UBP, pg 12 Going techside with five private banking integrations in Asia, pg 14 When impact investing met private equity, pg 18 Anthonia’s Way, pg 21 W W W. ASI A N P R I VAT EB AN KE R . CO M
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CONTENTS ISSUE 103
September 2016
4
Letter from the Editor A silver lining
5
Editorial Crow’s Nest: The Doldrums
6
Insights APB On-the-Spot poll results
8
APB Mandate Private assets: Lone star
12 Industry Straight Talk: Michael Blake, CEO, Private Banking Asia, UBP CEO Andrew Shale Editor-in-Chief Shruti Advani Editor Sebastian Enberg Editorial Richard Otsuki Priyanka Boghani Managing Director Paris Shepherd Design Vivien Wong Production DG3
Operations Benjamin Yang Koye Sun Jessie Cheng Joanne Tse Business Development Madhuri Chatterjee Sonia Lam Sam Chan Stacey Wong Olaide Ogungbesan Digital Tristan Watkins Yiyang Zhou
14 Technology Going techside with five private banking integrations in Asia 18
APB Mandate When impact investing met private equity
21 Industry Anthonia’s Way 23
People Moves Movers & Shakers
ISSN NO. 2076-5320
Published by Key Positoning Limited 13B Greatmany Centre 111 Queen’s Road East Wanchai, Hong Kong Tel: +852 2529 5577 Fax: +852 3013 9984 Email: info@asianprivatebanker.com
asian private banker 3
le t t e r f r o m the e d ito r
A silver lining There are no two ways about it. 2016 has, thus far, proven a testing time for Asia’s private banks, with transactional revenues plumbing new lows. But amidst the gloom, private market investing has been one of the year’s few bright spots - a ‘lone star’ if you will - and Chinese high net worth investors, seemingly willing to commit to longer-term horizons, are leading the charge. Our September issue, number 103 to be precise, examines the state of private market investing in 2016, not only for incumbent offshore players but also Chinese wealth managers that rank among the region’s more prominent distributors of solutions. We sit down with Michael Blake, Union Bancaire Privée’s articulate Asia CEO, who discusses the ins and outs of the Coutts deal, and details how he intends to meet his ambitious growth targets for the region. Anthonia Hui, doyen of Singapore’s IAM scene, recollects her colourful career and gives her prognosis on the current state of independent wealth management in Asia. And, we examine the state of impact investing via private equity - a relatively new structure that seems to be finding favour amongst the region’s wealthy. Plus all the regular trimmings, including Crow’s Nest, the latest in tech happenings and Movers & Shakers. As always, I thank you for your feedback - our previous issue generated some thoughtful discussion on the state of India’s onshore industry - a topic I hold dear. Join the conversation by emailing comments to editor@asianprivatebanker.com.
Until we meet again,
Shruti Advani Editor-in-chief Asian Private Banker
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ed itori al
The Doldrums
T
hose of you with a penchant for whodunnits and an eye on the wire may have picked up on a recent report out of Switzerland, that 10 percent of Swiss private banks “disappeared” in 2015.
Yes, disappeared. Alas, sleuths! If you were expecting some Doylian mystery with a whiff of red herring, I’m afraid to say that this is a fairly open-and-shut case. The culprits? Volatile markets and muted client activity, rock bottom interest rates, regulatory complexity and evolving client needs. Ominously, a similar assemblage of factors is conspiring to make life difficult for Asia’s private banks - and the signs are telling. Much has been written by Asian Private Banker about consolidation dynamics and, I dare say, acquisitions and exits will be par for the course for the foreseeable future. But the recent retrenchment activities of a number of private banks in the region have only reinforced the fact that one can no longer run a business on the fumes of ambition alone; and those that do will soon reach an impasse - if they have not done so already. I will refer to this impasse as the Doldrums. The Doldrums, as any sailor can attest, is a zone that is antithetical to positive progress, where structure overawes agency, where trade winds are sickly (barring the odd ruinous hurricane) and frustration can boil over. Some banks are better equipped to navigate the Doldrums and to even circumvent them altogether. There is now a fairly confident consensus that scale is a deciding factor, with US$30
billion in assets under management generally accepted as the minimum amount required to run a profitable business. But is it really that simple? Not according to those that fall short of this mark. So-called boutiques (a hazy tag if ever there was one) acknowledge that they will never compete in terms of AUM size, but argue that their diminutive stature affords them a nimbleness that larger players cannot match. There is, of course, some merit to this argument, in the sense that these players may choose to focus on a particular area of strength unlike one-stop shops. At the same time, specialisation renders one vulnerable to cyclical dynamics and shocks - traits that are congenital to markets. Then there is the question of talent that, while an industry-wide issue, does not affect all banks equally. Boutiques will say that their scale removes the need to hire en masse, and that they can afford to approach the talent pool in a more judicious manner. But to attract senior bankers, boutiques typically need to pay 20-40% above the going rate at industry leaders such as UBS and Credit Suisse, with little guarantee that they will be able onboard the assets. And they must also compete with a steadily growing cabal of independent wealth managers attractive to entrepreneurially-minded senior RMs. What is notable is the growing trend amongst smaller-scale private banks to seek out onshore partnerships to ensure a pipeline of business. This is potentially an astute play given (i) the underbanked state of Asia’s onshore markets and (ii) the prohibitive costs of setting up a standalone onshore business. Lombard Odier has been especially active, inking strategic deals with institutions in South Korea, Thailand and, most recently, the Philippines. Others are
looking to follow suit, with the underpenetrated China market a prime target (in the past two months alone, I have personally introduced two offshore CEOs to their counterparts at two large-scale Chinese institutions). But the Doldrums are even less forgiving to another subset of private banks that typically languish below the US$30 billion threshold but, by virtue of their business model, require scale to survive. I’m referring to private banking arms for larger international institutions that, being publically-held, are under constant shareholder pressure to meet revenue targets. These are the banks that are unable to justify an Asia presence when margins are so tight and when dire global conditions are forcing strategic rethinks at the group level. These are the banks that have been hit hard by a lull in transactional activity and a slow uptake in discretionary mandates in the region. These are the banks that will struggle to convince clients that they bring something unique to the table and that they are in it for the long game given that Asia is not their ‘home’ market. And accordingly, these are the banks that will struggle to attract, remunerate and retain high calibre talent. Indeed, just how these banks intend to navigate their way out of the Doldrums on their own volition remains to be seen; and barring any structural shift in the market, I will make a rather safe prediction that we will see a raft of exits (whether outright or via acquisition) in the next 12-18 months. Yes, a 10% annual attrition rate in Asia may, at first blush, seem farfetched; but the omens are not at all good. — S. ENBERG
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INSI G H TS
Asian Private Banker has conducted a comprehensive survey on high net worth life insurance trends. 455 respondents - relationship managers, trust/wealth planners, family offices, and insurance product managers from across the region have had their say. Keep an eye out for the results of Asian Private Banker and Transamerica Life Bermuda’s exclusive HNW Life Insurance Landscape Report - released next month.
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NEXUS - The original and prime fund selector gathering of Asia
Hong Kong | October 4, 2016 | 8:00am 12:50pm Singapore | October 6, 2016 | 8:00am 12:50pm
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ADVISORY COUNCIL Belle Liang
Maggie Tsui
Alexander Kwan
Karen Tan
Charis Wong
Michael Christo
Hsiao Ching Tang
Paul Stefansson
Ernest Chan
Rocky Cheung
Iris Kao
Rodolphe Larqué
Jaye Chiu
Roger Bacon
John Cappetta
Johann Santer
Vincent Ng
This event qualifies for CPT/CPD accreditation. For more information on the Funds Selection Nexus, please contact Koye Sun (koye.s@asianprivatebanker.com)
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AP B M A N DATE
PRIVATE
ASSETS L NE STAR Heightened risk aversion and a commensurate lull in transactional activity hit Asia’s private banks hard. The lone star performer, this year, has been private equity and there is little evidence to suggest that the asset class will slow down any time soon. Transactional income vaporising 2016 has been a chilly year for those private banks without an alternatives shelf. Especially so, when considering the washout of 2015, when equity day traders were sidelined having earlier enjoyed a surge in the Shanghai Composite beginning in late 2014. Global transaction-based income, which includes equity and fixed income cash products, investment funds and structured products, fell 24% year-on-year in the second quarter alone, with Asia taking a heftier hit, according to a recent UBS financial report. APB Mandate’s own data shows that equity structured product volumes for wealth managers have plummeted by up to 30% over the past year - a decline felt especially by houses that do little in the way of non-flow trades. Those private banks that have not already delegated fixed income management are being forced to navigate unchartered
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territories as central banks persist with fiscal stimulus programmes and ultra-low rates. Sources indicate that some private banks have burnt their fingers betting on policy direction via constant maturity swap notes, with monetary bigwigs acting unpredictably. Although hedge funds are an intuitive solution for generating returns irrespective of market direction and volatility, sniffing out performers is no easy feat. Year-to-date, global investors have pulled out US$55.9 billion from hedge funds, including a US$25.2 billion outflow in July - the largest monthly redemption since February 2009. According to Bloomberg, hedge funds delivered 1.2% industry-wide in 2016, compared to the S&P 500’s 7.6%. Slim pickings in traditional asset classes and hedge funds have paved the way for one star performer: private market investments.
“Lower yields and returns across asset classes are a key driver of investor interest in private markets,” says Andrew Lee, deputy global head of UHNW & alternatives at UBS Wealth Management, adding that greater downward pressure on global yields emerged after the Bank of England (BoE) responded to this year’s Brexit vote outcome. “Bonds are unlikely to be able to serve as portfolio diversifiers to the same degree that they have historically… and investors who have limited near-term need for liquidity are increasingly evaluating private markets as a way to enhance expected portfolio returns with similar volatility risk, further diversifying return drivers and increasing potential to access manager alpha.”
A P B MA NDAT E
Chinese HNWIs continue to board the train to go global Unsurprisingly, Chinese HNWIs lead the pack in terms of outbound private buying, coinciding with an aggressive corporate buying spree that has involved high-profile global brands such as Volvo, Football Club Internazionale Milano and the landmark Waldorf Astoria, and a number of push factors, most notably a weakening yuan and domestic slowdown. A recent AVCJ report shows that cross-border private equity reached US$16.4 billion by mid-2016, breaking 2012’s record. In broad terms, the increase in appetite for private market deals is driven by a structural transformation in China’s economy, from export-led manufacturing to technology, industrial know-how and consumption. Corporate buyers have adjusted their priorities, accordingly, with private clients following suit. “Chinese companies are acquiring North American and European companies to enhance technological capabilities and move the nation’s industrial sector upstream, to obtain high-value brands that can be offered to the maturing consumer in China, and to build scale and distribution in strategically important markets and
geographies,” says a J.P. Morgan report. “Chinese companies are looking beyond market share in China to global markets, with their sights set on becoming market leaders globally.” For example, Beijing-based wealth manager, CreditEase (US$6 billion AUM as of 2015-end) is reportedly aiming to raise US$200 million for a global private equity fund focusing on businesses in consumer, telecom, healthcare and industrial sectors, with a minimum entry level of US$150,000. The firm is already managing a US$30 million Israeli Innovation Fund that primarily focuses on Israeli and American private technology firms operating in the tech, media, telecommunications, healthcare and smart materials spaces. At Noah Private Wealth Management, clients have bought more than US$2 billion of private equity products in the first half the year, accounting for 26% of all investment product flows. Its group president, Kenny Lam, says that private equity accounts for approximately 15-20% of its clients’ portfolio allocations. He adds that the demand also encompasses domestic opportunities in China covering a broad range of industries such as education,
technology, media and telecommunications. “The phenomenon of Chinese going global alongside drivers like renminbi depreciation and demand for diversification is not a new topic; and what you are seeing is domestic players, like Noah, capturing a part of that flow,” Lam tells Asian Private Banker, adding that the breadth and exclusivity of deals on its offshore platform are a source of competitive advantage over global private banks. “Within [clients’ PE allocation], half has been allocated to domestic private equity this is a space where we still see has a lot of room to grow.” And the pace of Chinese outbound investments is only accelerating. According to a recent Dealogic report, Chinese outbound M&A for the first four months of 2016 reached US$96 billion (it climbed an extra US$14.8 billion one month later), four times more than for the same period last year. This total also represents 9.7% of the global sum compared 1.2% in 2015. (continued on page 10)
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AP B M A N DATE Still, no walk in the park With valuations frothy, the global recovery still playing out and numerous uncertainties looming, private assets are a ‘natural’ instrument to help insulate clients from daily volatility or risky short-term plays that depend on unpredictable central bank policies and political referendums. Even so, private asset sales to Asian HNWIs are not necessarily plain sailing, despite the steady uptick in demand. Top players in Asia with a sizeable UHNWI base will typically garner between US$50-150 million when fundraising, but the number of deals per year can vary substantially, according to industry estimates. Sources share that several top five private banks in the region will successfully execute three or fewer deals per year, while other smaller players can execute as many as ten, depending on client needs and preferences. Liquidity, transparency and, of course, income are among the major hurdles private banks need to overcome to win business. Though the ability to find underliers that resonate with clients - particularly with regards to their core business - is what can make or break a deal, private banks’ ability to structurally tweak solutions to address other inhibitors can also increase the attractiveness of private asset opportunities. “[On] the issue of liquidity, we, alongside others, have cracked this nut with a monthly redemption feature for selling positions,” says Donald Rice, APAC head of alternatives at Credit Suisse’s private banking arm, who points out that current alternatives allocations from regional client portfolios reach as high as 40-50%. Rice explains how Credit Suisse has been able to resolve this issue by constructing portfolios with exchange-listed programmes alongside advanced secondary positions that blend with private debt positions. This enables a gating provision that can mitigate liquidity concerns, especially for investors who had poor lock-up experiences in 2008. “Secondly, is the demand for distributions early on, rather than wait the full seven-to-ten year lock-up period,” Rice continues. “We’ve managed to tackle this issue by
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offering a coupon in our debt solutions as well as shorter duration products. Finally, is the issue of transparency. For clients that want visibility, we have been showing secondaries rather than blind pools.”
Plenty of fuel left Yet, despite varying degrees of success in Asia, optimism amongst wealth managers remains high; and the trend of private asset investing is expected to sustain for years to come. “Whilst some private banking clients in Asia have been investing in private markets for many years, on average, the overall penetration level in the majority of client portfolios remains relatively low,” notes Leighton Mattheson, head of private markets, APAC, investment products and services at UBS Wealth Management, underlining the slow pickup of new investors in the region. “However, over recent periods, we have witnessed a significant increase in both client interest and investment activity. We believe this shift in behaviour is being driven primarily by clients seeking diversified sources of alpha, coupled with an enhanced degree of asset class familiarity and product access. Given the low yield investment environment, we expect this trend to continue.” The bank expects this trend sustain across generations, and has recently launched a Swensen-inspired ‘Endowment Style’ discretionary portfolio management (DPM) solution, as part of a larger DPM innovation roll-out. UBS WM’s ‘Endowment Style’ portfolio currently allocates 22-40% to private markets with a weighting of up to 32% in private equity, depending on risk profiles. And despite the relative nascency of private asset investing amongst HNWIs in the region, UBS’ Andrew Lee sees signs of maturation as evidenced by a growing demand for deeper parts of the market. “Historically, the majority of private market investments by HNWIs in Asia have been in the form of large-cap, brand name private equity funds,” Lee says. “Whilst we expect this to continue, we have observed a notable increase in clients seeking enhanced diversification, including access to the mid-market and more specialist investment strategies, [including
private credit, real estate and thematic investing]”. Efforts to either introduce or bolster private equity offerings are not slowing down as private banks in the region work to secure true long-term recurring income against a backdrop of difficult markets and mounting expenses - the Monetary Authority of Singapore recently announced that accredited investors would be offered retail-level protections in a move that is expected to further increase compliance costs. In December 2015, DBS Private Bank launched a new offering targeting UHNWIs dubbed ‘PE Access’ - an “introducer model” that informs clients of new deals who must then perform their own due diligence before investing. It targets clients with a minimum net worth of S$50 million (US$36.7 million) and the minimum ticket size is S$5 million (US$3.7 million). In March this year, Standard Chartered Private Bank introduced its new private equity offering, Pegasus Series, which aims to provide less accessible funds at a “substantially lower investment point”. And in May, Bank of Singapore announced that former CIO Hou Wey Fook’s role had changed to solely focus on managed investments, while also highlighting a 2015 fundraising with Blackstone that topped US$170 million. Even those private banks in the region that neither have the access nor scale to launch alternative offerings that outshine larger competitors are pursuing innovative solutions to capture private asset flows from Asia. “Although we are small in Asia, we, like many other Swiss boutiques, have a very strong European network,” says one Singapore-based head of a pure play. “Large deals may go through the usual institutional channels but we also bank many, many SME owners who are seeking new sources of funding through equity or debt. We can connect them to Asia and vice-versa.”
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The Leaders Conversations qualify for CPT/CPD accreditation. For more information, please contact Koye Sun (koye.s@asianprivatebanker.com)
Straight Talk:
Michael Blake, CEO, Private Banking Asia, Union Bancaire Privée Mike, generally a positive start to the year going by UBP’s interim earnings report. UBP’s first half results were very encouraging, net profit up 13%, revenue up 20% - a large part of this is a result of the Coutts acquisition. As Guy de Picciotto [CEO, UBP] has said, in many ways the results for the first half of 2016 have vindicated UBP’s view of the Coutts business. UBP was not the only bank to look at Coutts with a view to acquire. But others were put off by Coutts Asia’s unsustainable cost/income (CI) ratio. Why do you think UBP proceeded with the purchase? In terms of the various views on the acquisition of the business, what I would say is that UBP has a huge amount of experience in acquiring wealth management businesses, largely in Europe, with five acquisitions in the last five years; so we’ve developed a real understanding of the acquisition process. The conclusion, having looked at the Coutts business, was that this was transformational for UBP in Asia, in that it gave us a platform in the region. As a result of the purchase, we went from around US$1 billion in assets under management in Asia to about US$10 billion overnight. It also gave UBP a branch in Hong Kong alongside the original branch in Singapore. So there’s no question that, for UBP, the Hong Kong and Singapore branches and the acquisition of Coutts are transformational and give us now a foundation to further build a business. But how is it that UBP was able to rationalise taking on a business with a CI ratio well in excess of 100%? It’s difficult to directly compare the CI ratio of the Coutts business before integration and the ratio today. What is clear is that the ratio has improved dramatically over the course of the integration. The reason why it is difficult to assess is, first of all, the Coutts business pre-integration was in a holding pattern. As you will remember, there was a protracted period - about two-and-a-half years - during which the business was first under strategic review before going through the sale process and finally integration. So to assess the CI ratio and commercial performance of Coutts at that point is quite difficult, given that the business was not in growth mode. What is absolutely clear is that the CI ratio has
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greatly improved and we are now set up to grow profitably. When Guy de Picciotto was here earlier in the year, he outlined a fairly bullish vision for UBP’s business in Asia and set a number of targets - aiming to double AUM over the midterm, and to increase Asia’s share of the bank’s global AUM to 25%, also over the midterm. Yes, the primary objective at the moment is to double the size of the [Asia] business off the back of the Coutts acquisition. So the immediate priority now is to consolidate and double in size. Whether that takes us two, three or four years depends to a certain extent on the steps we take and also the market environment. Let’s assume that the next five years stretch constitutes the ‘midterm’. By our estimates, UBP has US$11 billion in private banking AUM in Asia, and that doubling AUM would take you, conservatively, to US$20 billion. To do this, UBP would have to achieve a compound annual growth rate of just under 13%, which is far in excess of what a number of your competitors are achieving. How do you intend to beat the market? It will take a combination of measures. The first approach - which Guy has also spoken about - is hiring established RMs, and we have an ambition to increase the number of RMs from around 65 at present to approximately 100 across Asia within the next couple of years. Essentially, organic growth through relationship managers. Second, we have here a very well-established client base. The business has been in a holding pattern and we are already starting to see clients do more with us. There is absolutely the potential to increase the share of wallet we have with existing clients. The third element, which is always difficult to anticipate, but remains relevant is that as we see further consolidation in the region, there may well be opportunities that arise - either in terms of teams or portfolios - that we are well-placed to take advantage of. So while a CAGR of 13% over the next five years is, I agree, higher than market, the CAGR from US$1 billion (AUM) to US$11 billion is also higher than market. Clearly there are a multitude of ways to achieve higher growth rates. De Picciotto’s aim to increase the Asian share of UBP’s global AUM to 25% will only increase the pressure to grow at a higher-than-average rate.
IND U ST RY
Like I said, the core focus for us at present is to consolidate the acquisition - it’s been a really great start over the last four months and to hit the targets in terms of doubling the size of business and to hiring RMs that share our vision for WM in Asia.
of experience in due diligence, product selection and portfolio construction; third, private ownership that, when wrapped around these other factors, gives you stability and makes us a flatter organisation.
How do you intend to meet your hiring targets? We’re not going to go out and hire anyone we can find. It’s a case of quality over quantity. I’m spending a lot of time meeting with RMs in Hong Kong and Singapore and we’ve been really encouraged by the conversations we’ve had. People are intrigued by a privately-owned private bank that is committed to and investing in the region at a time when a lot of banks are either retrenching or withdrawing altogether.
Notwithstanding the sizeable boost Coutts has given to UBP’s book in the region, 2016 has proven difficult for private banks that depend on transactional business. What are you doing to shore up recurrent sources of income given current market conditions? In terms of our current book [in Asia], 10% is in discretionary, 20% is in advisory where there is a dedicated investment advisor who has contact with the client in addition to the RM; and the remainder is “RM-led”. This [discretionary/advisory rate] is slightly higher than the industry norm. In terms of direction and travel, we do see an increased appetite amongst clients to consider discretionary as part of their portfolio. It’s a journey and we remain at a very early stage, but it’s definitely the direction we are travelling in.
But you may not be able to avoid bidding wars, especially because, like others, you are targeting “quality” talent with decent books. More so, mature, entrepreneurial talent is increasingly taking the IAM/EAM route. So why would an RM choose to work for UBP in Asia? For RMs today, there are some reasonably clear choices. They can go for large universal banks that offer clients a one-stop shop. But that also means that relationships are increasingly institutionalised. The other option is to go with boutique private banks, including UBP, where the RM continues to be the primary interface and the primary owner of the relationship. You’re right, the kind of RM that has been successful at UBP over the years - and will continue to be successful - is someone who is very experienced and has got a very strong network of relationships, whose clients respect them for the advice they provide and who’ve developed their reputation over multiple years. For these individuals, we offer a secure and stable platform and environment to service their clients into the future. At US$11 billion in AUM, UBP is still well below the consensus ‘minimum scale mark’ for Asia [US$25-30 billion and growing]. Do you agree that this is an issue? It’s interesting. At one of your recent events, there was a discussion about this and, during the conversation, the required AUM mark went from about US$15 billion to US$30 billion depending upon who was speaking. That, for me, exemplifies the issue perfectly. Big is not necessarily beautiful. To a certain extent, your break-even point depends very much on your platform, footprint, focus and appetite to invest. You will find in this industry players with very small AUM totals that are profitable and players with rather larger AUM totals that are unprofitable. For this reason I don’t believe you can take size as the only indicator. Guy has been very clear about where we are at the moment and where we want to be. In terms of the platform and niche, the three things that UBP brings to its existing client base here are: first, institutional-quality asset management with a strong fund management track record; second, a strong track record in alternatives where we have a depth
Your CEO has said that he would like for the ratio between advisory and discretionary to be reversed. How would you achieve this? In Asia, there has been an ongoing introductory process with clients, of course. But we must also consider market trend. Take China as an example. Among Chinese clients and prospects that have a base here in Hong Kong and Singapore, we’re seeing an increased willingness to consider discretionary as part of the overall offering that they receive. Are you seeking a private banking partnership with an onshore player, whether in China or elsewhere in Asia? We are very interested in the partnership model. I think it’s the model that stands the greatest chance of success. Onshore builds are extremely expensive and take a huge commitment over a number of years. There’s also limited proof that the onshore strategy works in Asia. Yes, there’s little proof that it works as a whole. It has for a handful of larger players, but overall, my sense is that competing against very large domestic players is certainly not what we want to be doing. You joined UBP as part of the Coutts deal, so I want to finish up by asking you about a woolly concept - organisational DNA. Specifically, what effect, if any, did consonances and dissonances between both banks’ DNAs have on the integration outcome? A lot of people in this region joined Coutts between 2011 and 2013, and one of the reasons they did so is because they wanted to join a boutique private bank that was committed to the region and to offering an Asian-centric offering to clients. UBP is many of the things that people joined Coutts for.
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aDV E RTO R IA L
Chubb Life brings true legacy planning to Asia with unique Whole Life solution
T
hough universal life products currently dominate the Hong Kong high net worth (HNW) market, HNW individuals have sophisticated and diverse needs that are not always addressed by the universal life product structure. One could even argue that the general uniformity of the high net worth life insurance space could be due to the scarcity of choices for solving their unique needs. Indeed, a recent Asian Private Banker poll found that over two thirds of relationship managers require more detailed product knowledge before they can refer more clients for life insurance solutions. So, to a large extent, the relative popularity of universal life stems from the product’s incumbency in the region, and is perpetuated by private bankers’ familiarity with the structure.
“...if the application process for joint life policy seems like it would be unduly complex or onerous, Chubb Life has worked hard to ensure that it is anything but.”
Brandon Szeto, Deputy General Manager & Vice President of APAC Wealth Management at Chubb Life, understands this point most. Szeto, who spearheads Chubb Life’s recent drive into Asia, believes that the growing HNW pool in Greater China and beyond will bring with it a marked increase in the need for wealth preservation and legacy planning solutions, and aims to address this need by introducing an innovative product offering to the region. The beating heart of Chubb Life’s proposition is the Perpetual Life Series - a Whole Life product that, in stark contrast to universal life, has true lifelong coverage. Whereas most products typically terminate when an individual reaches 100-120 years of age, Chubb Life’s Perpetual Life Series remains operative so long as the insured is alive - a compelling point of difference when considering that recent scientific advances promise to extend human longevity well beyond the 120-year mark. This in itself is significant because when a policy terminates at, say, the centurion mark, the benefit paid out could then be subject to tax if it is passed on to the next generation.
value into annuity to provide annuity income for as long as the insured remains alive. “We recognize that, in 10-20 years, for example, an individual’s needs may change,” said Szeto. He further explains that Single Life option addresses two critical aspects of a HNW individual’s life: the need to plan for the next generation, and the need to plan for one’s own later life. “It’s almost like having two policies; there is the annuity, and there is the leftover portion that will continue to accumulate value until the insured passes away, at which point the benefit is paid out,” he added.
But what truly makes Chubb Life’s Perpetual Life Series stand out from the crowd is the solution’s inherent flexibility, insofar as it offers two distinct options - Single Life and Joint Life. The Single Life option covers an individual for his/her entire life until he/she passes away while providing the policyholder with a number of annuity options and flexibilities. For instance, a policyholder may choose to convert part or all of the policy’s surrender
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Even more unique is the Joint Life option which is currently the only solution in the Hong Kong HNW market to offer a ‘second to die’ option. Joint Life option is a legacy planning solution in the purest sense because the benefit will be paid directly to the next generation only after both insured individuals have passed away. But if the application process for a joint life policy seems like it would be unduly complex or onerous, Chubb Life has worked hard to ensure that it is anything but. Typically, insurance companies will look at an individual’s health before deciding to underwrite a policy; and if that health fails to meet a certain threshold, the applicant will ordinarily be deemed ‘medically uninsurable’. The Joint Life option only requires that one half of a married
A DV ERTORI AL
couple is in ‘standard’ health for the provider to underwrite the policy. This flexibility extends to how Chubb Life assesses an applicant’s financial status. Because these are typically high sum assured cases, Chubb Life as with any underwriter will look to see if the benefit can be justified. But the company also understands that there are times when the core breadwinner in a married couple may also be ‘medically uninsurable’ in terms of his or her health. In such cases, there is still a need for insurance and legacy planning for the next generation, and so Chubb Life will only assess the healthier party, even if they are not primary earners. “If we know that you have bad health when you apply for our Joint Life solution, we will let you skip the medical check up altogether - so long as the other is in standard health,” said Szeto. In broader terms, Chubb Life’s Perpetual Life Series address some key features that are inherent in a universal life product structure but are often misunderstood by clients. “With any universal life product, there is always some uncertainty, because it is a crediting type of product, and therefore depends upon that year’s crediting rate,” continues Szeto. “Furthermore, universal life products typically deduct some
charges as well as the cost of insurance throughout the duration of the policy.” But as one ages, that cost will typically increase until, potentially, the costs and charges of a universal life product may exceed the interest accrued on the policy, thereby depleting the policy’s cash value. If the policy does not have a no-lapse-guarantee feature, the holder would then need to add funds into the policy or let it lapse, causing potential disturbance to the legacy transfer planning. “With our Perpetual Life Series policy, the guaranteed cash values are certain and never decreases,” points out Szeto. “If you’ve paid off all your premiums, you don’t need to worry about the policy - the sum assured is guaranteed and if the assets that our company invests in perform well, we may give more returns to our customers in the form of dividends.” Of course, only time will tell, but Chubb Life’s decision to forgo the ‘cookie cutter’ approach taken by many other providers in the region and to present to Asia’s HNW population with a Whole Life solution that offers flexibility and certainty bodes well for the HNW life insurance market as a whole.
RM NEXUS: HNW INSURANCE Hong Kong | October 18, 2016 | 12:30pm 6:00pm
For RMs by RMs Multiple New Solutions Growing End-client Needs Blossoming Revenue Growth ADVISORY COUNCIL Angel Wu
Alexander Tan
Christopher Marquis
David Sussman
Eleanor Yuen
Jim Man
Vivian Kang
Regional Head of Products & Solutions Asia & Middle East
ED, Wealth Planning Life Insurance & Financial Planning, APAC
Managing Director, Global Head, Private Wealth Solutions
Managing Director
Head of Wealth & Tax Planning Advisory Asia
Head of Wealth Planning, Asia
UBS Wealth Management
HSBC Private Bank
Director, Insurance Product Management, APAC
ABN AMRO
EFG Wealth Solutions
Julius Baer
RBC Wealth Solutions
Credit Suisse
Lead Partner
Conversation Partner
Networking Partner
Survey Partner
asian private banker 17
AP B M A N DATE
When impact investing met private equity
I
mpact investing - an approach that aims to effect a positive social impact and generate positive financial return - is yet to go mainstream. Even so, more (U)HNWIs are taking a serious look at philanthropic instruments, attracted by the unlikely marriage of philanthropy and private equity and the opportunity to make a difference while making money. Earlier this year, UBS Wealth Management raised an impressive US$471 million for the final closing of its impact investing fund dedicated to cancer research. Around 60% of this total came from the private bank’s Hong Kong and Singapore bases. And Credit Suisse Private Banking in Asia is aiming to amass US$100 million by the end of the year for an impact investment fund that has already seen 50% of first round investments flow in from the bank’s UHNW clients in the region. Indeed, in terms of financial instruments that are being used for investment, the 2015 Impact Investor Survey produced by the Singapore Management University revealed that private equity is the second most preferred vehicle (33%) behind debt (54%). Experts such as UBS’ Mario Knoepfel and Credit Suisse’s Bernard Fung believe that an important factor behind this uptick in private
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equity-driven impact investing is the structure of the asset class. Knoepfel, who serves as UBS Wealth Management’s Asia Pacific specialist in sustainable investing, points out that the private equity vehicle resonates with high net worth investors due to their familiarity with private equity as an asset class, especially in this “ultra-low yield environment”. He adds that the private equity model gives investors access to “smaller, private companies in niche markets and sectors which are underserved by most of the bigger national and global companies”. Fung, Credit Suisse’s head of family office services and philanthropy advisory, private banking Asia Pacific, explains that investors and private banks are incentivised to plough capital into institutional grade investments that take on a private equity structure, given that investors receive returns that are on par with market levels and private banks are able to apply the industry standard pricing fees. “Credit Suisse receives part of the management fee and of the carried interest above the hurdle rate. The pricing model is in line with other emerging Asian SME private equity investment solutions,” Fung tells Asian Private Banker. Indeed, the Swiss major’s private banking arm in Asia put this
“Employing private equity as one asset class in a portfolio mix considerably raises the expected return over a multiyear period.”
A P B MA NDAT E
model to work when it teamed up with UOB Venture Management last November to launch an impact investment fund exclusively for its global UHNW clients. The purpose of the fund (beyond generating returns) is to help small-to-medium size, fast growing enterprises across Asia that are facing social challenges. Credit Suisse Private Banking is acting as the impact advisor which involves providing input on social metrics and participating in the due diligence carried out by UOB Venture Management. Fung points out that the private equity model enables third parties to be compensated in line with the industry standard two-andtwenty fee structure. Knoepfel agrees that third parties need incentivising, but also points to the importance of returns for the end-client. “Employing private equity as one asset class in a portfolio mix considerably raises the expected return over a multi-year period,” he says. “While some investors rightly cite a higher risk/volatility and lower liquidity as drawbacks, investors can expect to receive improved returns.” Knoepfel compares the private equity route with the use of green or development bonds that entail lower risks and, therefore, “lower return expectations” due to the relatively higher liquidity of the latter. UBS Wealth Management is also doing its part to contribute to the relatively narrow universe of impact investment funds in the region. Last year the Swiss lender launched its second private equity-led impact investing fund in collaboration with MPM Capital, a bioventure firm, with the aim of improving academic research on and access to cancer care in the developing world. The fund’s structure mirrors that of the bank’s first impact investment fund, launched in 2013 with Swiss impact investing advisor, OBVIAM; and in September 2014, UBS WM launched a fundof-funds focusing on markets in education, health care, access to finance, infrastructure and clean energy, with a minimum investment of US$250,000. The fund has a 12-14 year term, with close to a
third of those clients who invested originating from Asia. These early offerings are providing momentum for an industry that, though relatively inchoate in the region, is pegged for big things.
The impact investing market is touted to grow to $500 billion in the next five years. Globally, the impact investing market is touted to grow to US$500 billion in the next five years and industry reports estimate that as much as 1% of global assets under management will sit in impact investment funds by 2019 (the asset management industry currently manages an estimated US$62 trillion). Indeed, a recent report produced by Credit Suisse and Campden Wealth Research found that (U)HNWIs in Asia are warming to the concept, with ultra rich investors and family offices expected to raise the portion of their “doing good” assets allocated to impact investments, from 30% in 2012 to 44% in 2018. Of course, hurdles remain - and none more so than investors’ reservations over how social and environmental returns are measured; but industry experts are relatively sanguine on this point, in the sense that they expect a clear set of metrics to emerge within the next five years as impact investing through private banks gains traction. It would seem, then, that private equity has an important role to play when it comes to the development of the impact investing space in Asia and, by extension, to the precipitation of positive social change.
asian private banker 19
In partnership with
INDU ST RY
Anthonia’s Way
A
nthonia Hui’s vibrantly decorated Millenia Tower offices in Singapore are a lesson in control. Clearly not one for the mid-century classics and banal minimalism, Hui, who is chairman and CEO for AL Wealth Partners, has surrounded herself with colour, ostensibly a reflection of her strong demeanour. I am somewhat surprised, then, when Hui, a linchpin of Asia’s wealth management scene, tells me that her career trajectory is not the result of some grand design. “To a large extent I built my career by accident; I don’t seek it, but I stumble upon it,” she reveals, before letting her trademark grit show through. “When an opportunity is presented to me, I do not let it go. I work hard and then it becomes meaningful for the people I’m interacting with - and for myself.” Indeed, Hui’s professional history is as storied as they come for a region that is in no short supply of ‘big’ careers. Having cut her teeth on the bond trading floors of Manufacturer Hanover Bank (now merged through Chemical Banks into J.P. Morgan) in the 1980s - a cauldron of machismo and choice language by all accounts - Hui landed a private banking role at Coutts, in what she calls “an experimental move” for the bank at the time. “Coutts had never before hired non-Caucasians and they were thinking about expanding into Asia.” There’s a bit more to it than that, of course. Coutts was already making a play for Asia, occasionally parachuting in a starchy private banker to drum up business in the region with negligible success (try
asian private banker 21
INDU ST RY
£500,000 over an eight-year period). Hui was brought in and was initially mistaken for a secretary by her own secretary. She proceeded to pull in £50 million in 1.5 years with a remit that covered South and East Asia and Oceania - effectively two-thirds of the world’s population. Since then, Hui has plied her trade at Credit Suisse - where she would have crossed paths with Boris Collardi, Thomas Meier and the late Alex Widmer - and BNP Paribas, before setting up her own independent wealth management firm in 2007 alongside Leonardo Drago. She is also the co-founder and president of the Association of Independent Wealth Managers (AIAM) in Singapore and one of the most vocal proponents of the external/ independent private wealth management model in the region. Hui, then, is an obvious repository for perspective on Asia’s wealth management industry. And it’s on the importance of client empathy where she speaks with the most passion. Indeed, Hui is of the perspective that female private bankers and wealth managers are, as whole, better-equipped to handle client emotions, particularly when things don’t go to plan. “In certain situations, a client can get annoyed or even abusive, usually because a particular investment has lost them money. A male might feel that his ego is under attack and seek to deflect part of blame, usually to the bank that had rated the product in the first place.” But a female private banker, according to Hui, typically approaches this differently. “A woman’s first thought would be ‘Oh my gosh, my client has lost money and I feel terrible’. Of course I may not be able to bail my client out of this situation, but my first concern is to disregard my own ego
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understand the client’s emotions. I treat my client’s money as my own money.” To demonstrate her point, Hui recollects an interaction with a private banking client during the ferment of the financial crisis in the late 1990s, when Hong Kong interest rates spiked from 6% to 280% in a 24-hour period, as a result of an attack by hedge funds on the USD/HKD peg. “One of my clients had a HK$100 million loan pledged against his business properties that was due for renewal on the day that interest rates reached almost 300%. After getting my head around the situation I informed my client that interest for a single day would come to around half-a-million, so I asked that they let me find a better solution.” Hui calculated that if she converted the loan into a yen loan, the interest rate would only be around 1% including the bank’s margin. “I told the client that it would be worth the currency risk, but I’d first have to get management to approve the HKD loan’s conversion into yen - and it was a French bank. So I called headquarters in France, explained the work I’d done, the pros and cons, the client’s credentials and why it was important to help him out. I also managed to convince the HK office treasurer to extend the cut off time to extend the loan. From a bank’s position, why should they care – after all, they make money. But after around 100 phone calls, I managed to convince the Credit Committee, receiving approval at 5pm to get the loan converted into yen.” Within a month, the market and interest rates had calmed down and, in fact, the yen had weakened, so the client was able to repay the loan with less capital. Since then, Asia’s independent asset management industry has grown at a steady clip, with the region now home to
no less that 115 firms managing in excess of US$27 billion, according to data from Julius Baer. But the fact remains that Hong Kong and Singapore are more than a few steps behind Switzerland, both in terms of AUM penetration (~5% vs 13-15%) and fee structure. This is especially true when it comes to Asian clients’ well-documented reticence to a flat fee of ideally 100 bps for advice - a sticking point for managers that espouse an ‘independent’ mantra, but agree to charge clients a lower advisory fee to begin the process of educating them on the “fee for advice” model. At the same time, and with the permission of the client, many of these firms may receive retrocession payments from banks to supplement any loss of income from the discounted fee. The reality, as Hui sees it, is that investors have been “spoiled by private banks that give out advice for free - and look what free gets you: accumulators (also known as “I kill you later”), mini-bonds and the like.” Ultimately, however, these firms must eke out a living, which means that ‘hybrid’ fee models are here to stay - at least over the short-to-midterm. In the meantime, Hui believes that more must be done to increase the exposure of independent/external wealth managers to Asian investors. “I would say that the change in perception towards I/EAMs [independent/external asset managers] is slow among Asian HNWIs, especially because we are careful with our profile and have a niche set of clients,” concludes Hui. “Unless there are more people who are willing to speak passionately about how I/ EAMs can add value and what they have achieved for clients, the concept will catch on at a slower rate in Asia.”
PE O PL E MO V ES
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asian private banker
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