The income of Degroof Petercam Luxembourg’s private banking division has not been dented by the coronavirus crisis. To the contrary, results have been ‘above expectations’ thanks to a sharp increase in trading revenue, says its head Kris De Souter in an interview with Investment Officer.
‘To our greatest satisfaction our results year-to-date have been excellent and above expectations’, he says. Because of the pandemic and the ensuing market volatility, clients have been ‘much more active than usual’, resulting in a sharp increase in transaction fees pocketed by the bank, explains De Souter.
‘This has more than compensated for the negative market impact on assets under management during the first quarter,’ he added. De Souter, however, declined to provide any figures substantiating this claim.
De Souter’s upbeat message echoes remarks made by Jurgen Vanhoenacker, head of Wealth Structuring at Lombard International Assurance, and State Street’s Luxembourg boss Eduardo Gramuglia Pallavicino to this publication. The latter said transaction volumes in March alone were ‘double the norm’, leading to a sharp increase in associated fees.
More diversification
The coronavirus crisis has had a huge impact on everyone’s lives as lockdowns were implemented and countries shut their borders. Perhaps the impact has been greatest on exactly the type of clients Luxembourg’s private banks typically cater: ultra-high net worth individuals (UHNWI’s) who lead highly international lives.
The crisis, however hasn’t made them reconsider their international lifestyles, says De Souter. ‘Because of Covid, clients realised their countries had closed and were left isolated. As some countries have been impacted much more than others, they see the current crisis as a trigger to internationalise their portfolios even more and spread their assets across more territories,’ he explains.
Over the years, Luxembourg’s private banks have come to depend ever stronger on UHNWI’s. According to figures from the Luxembourg banking association ABBL, some 56% of the Grand Duchy’s total private banking assets are held by clients worth more than €20 million.
According to De Souter, the increase in regulation since the global financial crisis has made it ‘ever harder’ to open banks accounts for multi-jurisdictional clients. ‘Therefore, the focus has shifted to higher net-worth clients. We don’t accept clients who are worth less than €1 million and are very careful opening accounts for clients with less than €2.5 million,’ he says.
Private equity & ESG
A focus on UNHWI’s naturally means an emphasis on illiquid assets too, besides the traditional allocations to listed equities and bonds. Degroof Petercam’s investment committee, which De Souter has a seat on, is especially keen on private equity. ‘The weight of private equity in the portfolio depends on the net worth of the client, their risk profile and willingness to abandon liquidity to invest on the long-run. Typically we allocate somewhere between 10-20% to private equity,’ says De Souter.
The asset class has performed very strongly in recent years, mainly thanks to an increase in multiples paid for the companies private-equity managers invest in. However, the coronavirus crisis has cast a shadow over the asset class, notably as some highly-leveraged companies are facing difficulties servicing their debt while others have been accused of irresponsible behaviour by refusing to pay their rents or offloading the burden of the crisis to their suppliers.
‘We do not invest in the type of private equity that fire a bunch of people to turn it profitable, leverage up the company and then aim to sell it for largest possible profit after a few years,’ asserts De Souter. ‘Our bank itself was founded by entrepreneurs with a long-term approach to create value and therefore this is what we look for in private equity managers too.’
‘Instead we look for private-equity managers that buy mid-sized companies to improve their functioning, with a focus on long-term sustainability. We also see ESG-criteria are becoming ever more important for our clients. Especially the second and third generation of our clients increasingly want us to avoid companies that are bad for health, for example. We are seeing a collective move towards sustainability. The silent pressure that follows from this makes everybody moving in the same direction.’