Banks prefer embedded family offices – just look at UBS’ revenues

Want to know what type of family office banks like most – easy, it’s the embedded type. Or, more specifically, a family office linked to an operational business. Why? Because banks make more money from them.

Here’s what Philip Higson, vice chairman of the global family office group at UBS, says about embedded family offices: “They are the most interesting clients because you’re going to find there’s an entire corporate finance discussion to have with then.”

Higson says UBS deal with many embedded family offices, or at least those offices closely connected to the original operating business, where the money was first made. UBS certainly works with a lot of family offices. The Swiss bank says it has relationships with around 300 of them, mostly situated in Europe, the Middle East, and Asia. Although the bank has a weak spot when it comes to its family office business – the US. More on that later.  

The GFO group at the bank oversees invested assets of CHF91 billion ($92.3 billion) at the end of June 2016, compared with its total wealth management assets under management of around $1.7 trillion, according to the consultancy Scorpio Partnership. With revenues from these assets for the GFO business at CHF382 million at the end of June 2016, the unit is obviously a nice earner for the bank, particularly as these revenues have nearly tripled in the last four years. Interestingly, much of these revenues are generated by the investment bank part of GFO group, rather than the wealth management part. And the bank’s links to embedded family offices play a big part in these earnings.

Much of these investment banking revenues have grown from advisory fees linked to operational businesses, says Higson. Loan growth has also been substantial for the GFO unit, adds Higson. “The other thing that has grown is our balance sheet commitment to family offices. We are lending to our investment bank and wealth management balance sheets, and our commitments here are at least around the $3 billion to $4 billion mark.”

Some of that lending is linked to what Higson says are jumbo mortgages on residential property – typically around $20 million to $40 million, with the values of the properties usually twice that. So trophy houses in London, Monaco, Paris and the South of France for the world’s richest people.  

But again, a lot of lending of the GFO unit is connected to operational businesses. “Typical loans might be linked to the beneficial owner wanting to control more of the company, or when owners want to diversify away from the core company, but at the same time not sell the core business,” says Higson. “We do some significant loans in these areas – $100 million-plus loans aren’t untypical.”

Although UBS does business with many family offices, the bank has been less successful with gaining clients in the US, admits Higson. “The US should be bigger for us, but it’s not that big for us at the moment,” he says. The bank wouldn’t disclose the number of family office relationships it had in the US.

But it’s unlikely to be as many as in other parts of the world, despite the US having more family offices than anywhere else. Higson says this is to do with operational issues. “If you want to create a joint team coverage derived from cross-divisional investment bank and wealth management teams, as per the rest of world for our GFO units, the US compensation models are an impediment. The conclusion is that some competitors will cover the US family office space direct from investment banking but even this is suboptimal for client needs.”