LGT Private Banking, the international private bank owned by the princely family of Liechtenstein, is making inroads into the ultra-high net worth (UHNW) client space. Today it sources 50 per cent of its SFr220bn ($256bn) in client assets from family offices and ultra-rich individuals, up from 30 per cent 10 years ago.
A key reason for this “tectonic shift”, says LGT Private Banking’s head UHNWI EMEA Riccardo Petrachi, is the bank’s expertise in alternatives and private markets, which have represented a key portfolio building block in LGT’s Princely Strategy. Launched 25 years ago, it is today one of the largest European endowment funds with $18bn in assets.
The strategy, which aims at achieving “equity-like returns with fixed income volatility”, was made available to ultra-rich clients just seven years ago, after the UHNW share class was tested for two years. Private clients must have at least SFr20m with the bank to qualify as ultra-rich and invest in the bespoke, diversified and multi-asset portfolios.
Princely strategy’s asset allocation 2023
• 22% private equity
• 6% private credit
• 5% insurance linked securities
• 7% real assets
• 17% ‘liquid alternatives’ (i.e. hedge funds)
10% fixed income
What differentiates the private bank from competition is LGT’s owner alignment of interests with clients, says Mr Petrachi
“Having skin in the game matters to family offices a lot, because you have a different credibility,” he explains, adding that the princely family of Liechtenstein has invested “quite a substantial amount of money” in the bank’s flagship strategy.
LGT Capital Partners, the group’s asset management firm, manages $95bn in assets under management (AuM), with $53bn in private equity alone, and is effectively the “princely family’s family office”.
To meet increasing demand for impact investing, last year the group launched Lightrock, a dedicated platform focused on PE impact investment opportunities, which has SFr3bn in AuM.
Ultra-rich and family offices’ portfolios generate “much higher returns” than affluent or HNW clients’ because they allocate to illiquid assets, which significantly outperform equities, says Mr Petrachi. The price of liquidity can detract four to five per cent per annum from a portfolio’s performance and is even higher for first quartile PE funds. Illiquid investments can also include asset classes such as real estate or private infrastructure, but typically are private equity.
The asset class continues to attract strong interest from family offices, with the larger ones allocating up to 50 per cent of their assets to PE investments, more than double the 20 per cent recommended by LGT, reports Mr Petrachi.
Through club deals, UHNW individuals and family offices often like to invest directly in companies. “Direct deals are seen as more tangible investments, but our experience is that you increase the risk significantly if you start to do this sort of investment,” he warns.
LGT mainly offers funds of PE funds, believing they are the most appropriate vehicles to diversify risk. Over the past 25 years they have generated “double digit net returns, consistently outperforming public benchmarks”, he maintains.
Private equity is still “an under invested asset class and a megatrend”, says Mr Petrachi. In the US, today there are approximately only half of the 8000 companies listed 25 years ago, while the number of PE firms has increased significantly.
Moreover, two decades ago 80 per cent of mergers and acquisitions (M&A) transactions in the US were initial public offerings. Today they represent just 20 per cent of the total, with the remainder being M&As of PE firms, which remain private. This abundance of PE firms creates a wide range of investment opportunities, also generating a positive cycle, he says. “I think much more money is going to be allocated to private equity, which will increase the price.”
Direct deals are seen as more tangible investments, but our experience is that you increase the risk significantly if you start to do this sort of investment
However, the asset class is not risk free. There is a lot of dry powder waiting to be deployed, and not enough good opportunities for everyone. “You have to make sure that you’re first and second quartile investors, otherwise the risk is you are going to end up in bad investments,” says Mr Petrachi, boasting that through the bank’s industry network and long term partnership with managers, clients can gain access to the best strategies, often closed to the broad public.
While a big component of PE expected returns is the illiquidity premium, looming recession will have an impact on companies’ valuations. However, most of the PE vehicles are not fully invested, which means that PE managers will continue to invest and buy at lower levels, unlike equity managers, which are either invested or not invested, he says.
With 300 PE professionals globally, LGT Capital Partners specialises on small and mid-market PE managers, and on buyout strategies rather than venture capital. This market segment is “where the discrepancy between the very best and worst managers is much bigger” if compared to large PE firms, and where due diligence is most needed, says Mr Petrachi.
LGT Private Banking’s “ambitious goal” is to almost double its client assets by the end of the decade, potentially also through acquisitions, but especially by pushing further into the ultra-high net worth client segment. Mr Petrachi expects the ultra-rich may contribute to up to two-thirds of the bank’s total client assets by the end of this decade.
Clients are acquired through referrals, but especially through a rigorous approach. “We try and identify liquidity situations, such as the sale of a company. Sometimes it works, sometimes it doesn’t. We are systematic in approaching the richest,” he says.
His bankers diligently research and target individuals in lists such as the BILANZ 300 Richest in Switzerland and the Forbes list, as well as family office and foundation databases.
While the bank’s core business is investments and portfolio management, Mr Petrachi also attributes the bank’s success with the ultra-rich to its “ancillary services”, such as philanthropy advisory, wealth planning and consolidated reporting. Three years ago, based on the long history of the princely family, LGT Private Banking launched a service on family governance, supported by external specialists. “The princely family always say they had a lot of luck, but you don’t make it to the 26th generation just based on luck,” says Mr Petrachi, explaining the bank’s continued efforts to bring family offices together, building communities, and educating their members.