IAMs, From asset manager to liability manager

The 2010s were undoubtedly characterised by historically low inflation and interest rates. However, for several months now, economic conditions have tightened, resulting in less favourable financing conditions for clients. Even so, the credit needs of wealthy clients remain high, and they expect their advisers to be able to support them in their projects. Against this backdrop, how can independent asset managers (IAMs) satisfy this need and meet their clients' expectations in terms of returns?

 

By Christophe Cantala
Head of the Independent Asset Manager Market,
Societe Generale Private Banking Switzerland                         

 

A less favourable environment

As a reminder, over the last decade, one of the main benefits of credit was the leverage effect generated by the differential between low interest rates and higher returns on the operations financed. What's more, this mechanism was supported by historically low inflation (0.43% per annum on average in Switzerland between 2000 and 2021[1]), which hardly eroded the income generated. As a result, the macroeconomic climate was particularly conducive to financing all kinds of transactions on credit.

However, from 2021 onwards, this quasi-state of grace was largely undermined by the effects of the COVID-19 crisis and the Russian-Ukrainian war, which precipitated the return of high inflation and, consequently, the tightening of monetary policies at international level. Switzerland is no exception, with the consumer price index up 3.4% year-on-year in February 2023, which undoubtedly contributed to the SNB raising its key rate by a further 50 basis points to 1.5% on 23 March[2].

While it is still possible for IAMs to achieve satisfactory returns, the fact is that, with interest rates and inflation on the rise, leverage is no longer a given.

 

So, what's the point?

Despite the current environment, credit remains an essential tool for acquiring property, a safe haven if ever there was one, against a backdrop of volatile financial markets. While the resilience of real estate raises questions at international level, UHNWIs have access to a market that does not seem to be going through a crisis: luxury properties. According to Coldwell Banker Global Luxury's Trend Report 2023, the global market for exceptional properties is set to remain stable this year, or even increase slightly, driven by both the growth in the number of millionaires worldwide and the growing appetite of wealthy individuals for secondary homes. The demand for mortgages from IAMs’ clients therefore shows no sign of abating, and their ability to finance the acquisition of real estate in different countries will undoubtedly be an important differentiating factor.

In addition to this rather traditional use of credit, it has other, perhaps less obvious, virtues. While the pledging of common movable assets (life insurance, pension assets, etc.) is a well-known procedure, there are other possibilities. By using less traditional assets as collateral, credit can open up new horizons.

Some banks, of which there are still very few on the Swiss market, offer to use shares in unlisted companies as collateral, with a recommended holding period of five to ten years. For the client, this strategy makes it possible to obtain additional value (LTV or loan-to-value) on relatively illiquid assets and to trigger other performance drivers. For IAMs, it is an additional opportunity to increase their assets under management. Given the growing popularity of private equity among (U)HNWIs, this type of financing has real potential, which IAMs should be able to tap into.

Art lending, which is even less common on the European market, involves pledging works of art or collectors' items. In so doing, it enables value to be extracted from a 'passion asset' that is a priori illiquid, without actually selling it. This type of transaction makes it possible to 'monetise' or 'generate growth' from assets that are usually immobilised and have negative equity, while retaining them.

Finally, specific offers, such as Sharia-compliant financing, can enable an IAM to extend geographical coverage to fast-growing territories such as the Middle East. While investment and deposit products that comply with the principles of Islamic law are becoming increasingly widespread, the same cannot be said of financing solutions. By exploiting this type of 'niche' offering, an IAM willing to penetrate a particular market can build up a real competitive advantage.

While these mechanisms do not revolutionise the practice of credit, they do considerably enrich and diversify the existing offering. However, not all banks provide these differentiating solutions, and an IAM wishing to offer them to its clients will need to work with the right institution.

 

Finding the right partner

When it comes to financing, there are a number of 'golden rules' that need to be observed when selecting a robust and versatile partner financial institution. Firstly, to be credible, a company must have a sufficiently large balance sheet and adequate credit ratings.

Secondly, to enable an IAM to meet the financing needs of UHNWI clients, the bank in question will need to have experts and decision-making bodies capable of analysing the credit files (borrower, purpose, structuring, collateral, etc.), from the simplest to the most sophisticated, and ruling on the feasibility of the project, particularly from a risk perspective. The aim is to protect both the client and its IAM, as well as the bank. On this risk aspect, the IT infrastructure and tools also play a fundamental role, since they must enable the structure's exposure to risk to be captured over time, i.e., track and monitor all the risks associated with the transaction throughout its duration. It is essential that client files are analysed in depth, as they can generate a variety of risks: cross-border, rising interest rates, devaluation of collateral, etc.

Finally, some IAMs serve clients whose portfolios are relatively heavily invested in corporate assets (often listed) in a given country. In this case, structuring the credit and analysing the associated risks requires specific, in-depth expertise - which not all financial institutions have - since the regulatory and, above all, legal obligations and constraints are different in each territory.  For example, clients in the Middle East with substantial portfolios holding local large cap equities with very high trading volumes will be able to obtain very competitive LTVs; but to achieve this, the lending institution will have to set up a whole infrastructure in line with the local standards and regulations, in particular for (single or double) pledge mechanisms or local custody.

Ultimately, in terms of offering, credit is a fantastic opportunity to open up the realm of possibilities for IAMs and their clients. And in a highly competitive Swiss market, innovative financing solutions can undoubtedly be a decisive factor in differentiating IAMs from their competitors, in the service of a highly sought-after clientele.

 

 

Biography

Christophe Cantala joined the BNP Paribas Group in 2004 as a risk analyst and continued his career at the General Inspection Department as an inspector and then Head of Mission. He then moved to Switzerland to become Chief of Staff to the CEO. After joining the Corporate & Institutional Banking division as COO EMEA of Energy & Commodities and then Head of Sales & Marketing of the Specialized Trade solution business, he joined Wealth Management Switzerland in 2019 where he managed the IAMs and LATAM markets. In January 2023, Christophe joined the sales teams of Societe Generale Private Banking Switzerland as Head of the Independent Asset Manager Market.
Christophe is a graduate of the Ecole Supérieure de Commerce de Toulouse and of the ENS Paris-Saclay in France.

 

 

[1] Source: OECD

[2] Source: SNB