Banco Espirito Santo’s unholy mess


If there is a lesson in the sorry tale of Banco Espirito Santo, the family-controlled Portuguese banking business that has been bailed out by its government to the tune of €3.9bn, it is that diversification is a good thing. But it has to be done properly.

The Salgado family’s tale is a very Portuguese one. The group started life as a small shop in Lisbon in 1869, and quickly grew into a banking dynasty. Some family members became closely connected to the Salazar dictatorship, and when it fell in 1974 were imprisoned. Family assets were taken by the state, including the Espirito Santo bank, but the Salgados bought it back in 1989 and the family’s fortunes revived.

The family’s 70-year-old patriarch Ricardo Espírito Santo Silva Salgado was known in Portugal as “Dono disto todo,” or the “owner of everything”. Things were not as they seemed at the group, though, and a €2.55bn hole was discovered in the finances. Salgado is currently out on police bail while an investigation is carried out.

What went wrong? Lax oversight is partly to blame. It seems that despite different parts of the Salgado empire being registered in Portugal and Luxembourg, nobody was looking too closely at the books. The accounts of the main holding company were signed off by a former director, who was still working in other Salgado businesses, but no alarm bells went off.

The deeper problem, however, was that the “everything” Salgado controlled was mostly in Portugal, and mostly in finance. Businesses outside that core tended to be in the Portuguese-speaking world: a hospital group and a hotel chain were both in Portugal, and other holdings were in Portuguese-speaking Brazil, the Azores – administratively part of Portugal – and a bank in former Portuguese colony Angola, which is in dire economic straits. A huge soybean farm in Paraguay doesn’t seem to have been enough of a hedge.

The closeness, both geographical and cultural, of these holdings meant that the Salgado businesses ended up as a messy tangle of interconnected holding companies which owned bits and pieces of each other.

Superficially, the group had spread its bets. In fact, there was far too much exposure to the troubled Portuguese economy. And the complexity meant it was too easy for problems to get buried.

It is a classic case of what asset managers call “diworsification”, when an attempt to diversify goes awry because all your investments fall at the same time.

If you want to see how to diversify well, look at Li Ka Shing. The Hong Kong billionaire’s family groups’ recent investments include a UK broadband provider, a Canadian airport parking lot operator, Australian gas pipelines, and an Irish jet-chartering firm. He also owns a British water utility and telecoms businesses in solid countries such as Austria and Sweden.

In a sense Li Ka Shing’s problem is the same as Ricardo Salgado’s. Both made their fortunes in territories whose future is uncertain, Hong Kong because Beijing’s intentions towards it are unclear, and Portugal’s because its economy had become fragile. While one burrowed deeper into what he knew, the other looked outward.

The man Hong Kongers call “Chiu-yan” – or “Superman” – seems to have had the better tactics.