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Super-Rich Shun Banks, Advisers for Next Big Deal

Mark Zuckerberg
Josh Edelson | AFP | Getty Images
Mark Zuckerberg

Tycoons are shunning banks and wealth managers, preferring to put a flood of money from selling stakes in companies into property and new ventures rather than trust industries whose reputations have been battered by the global financial crisis.

Thomson Reuters data show that proceeds for shareholders selling stakes in companies, excluding governments, have tripled since 2008 to $183 billion last year, creating new millionaires and making many wealthy people much richer.

But little of that cash appears to have made its way to the wealth-management industry, which specializes in looking after - and increasing - the riches of the world's multi-millionaires.

The average increase in assets run for clients by wealth managers and banks was 6.55 percent for the 100 largest institutions in the sector, according to the most recent analysis by finance industry consultants Scorpio Partnership which based its research on published company earnings for 2011.

"Forgetting all the other ways of getting new money (for banks and wealth management firms), there is a deficit there," said Cath Tillotson, managing partner at Scorpio.

Wealth managers argue that people enriched by share sales are often serial entrepreneurs, and so more likely to invest in another business venture than bank the proceeds or put them in the care of an investment manager.

"They would tend to look for a relatively liquid and short-term cash position while they look for the next long-term opportunity, as opposed to saying:'I'm an entrepreneur, I've made a lot of money, I'm going to cash out and become a typical wealth client'," said Paul Patterson, deputy chairman at RBC Wealth Management's 'ultra high net worth' international division servicing the bank's richest clients.

However, strong growth in other sectors favoured by the super-rich, such as London's property market, suggests there may be a problem for banks and wealth managers.

Research from property consultant Savills shows the amount spent on London homes worth more than 5 million pounds reached 4.1 billion pounds ($6.6 billion) in 2012, with the number of transactions nearly doubling since 2008.

Property in stable jurisdictions appeals more than conventional investments offered by banks, in part because of the reputational damage they suffered in the financial crisis, said Yolande Barnes, a research director at Savills.

"You could put it down to they (the super-rich) just don't trust banks to make them or keep their money," Barnes said.

Banks have sought to access new clients through the rush to luxury London property by offering rich buyers mortgages on their Mayfair townhouses, but most of the clients at that end of the market are cash buyers, she added.

"REMARKABLE GROWTH"

Wealth managers and banks have long blamed the weakness of equity capital markets for their subdued performances.

But the Thomson Reuters data show that, stripping out share sales aimed at raising money for companies and stake sales by governments, the last few years has seen a boom in money raised by private shareholders selling stakes in companies.

"In the four years since the market bottom, we've seen remarkable growth in proceeds to selling shareholders - an over 30 percent compound annual growth rate, with well over half a trillion dollars monetised since the beginning of 2009," said Stephen Case, global head of deals and private equity at Thomson Reuters.

Equity sales in 2012 that generated big pots of personal wealth for entrepreneurs were dominated by the $16 billion initial public offering (IPO) of social network Facebook.

The deal generated proceeds of more than $9 billion for selling shareholders including founder Mark Zuckerberg, though the shares subsequently slumped and investors who subscribed to the deal were left out of pocket.

Also prominent among the 680 transactions in which owners cashed in by selling their shares last year was the $1.8 billion IPO of Russia's second-biggest mobile phone operator MegaFon , controlled by Russia's richest man Alisher Usmanov.

According to research firm Wealth-X, 28-year-old Zuckerberg's net worth stands at more than $16 billion, while Usmanov is worth more than $22 billion.

One of the problems for banks and wealth managers is they have relatively poor penetration in parts of the world where much of the new money is being made.

"Wealth is being generated much quicker in markets like Asia where the banks' ability to convert that wealth into assets under management is much tougher because wealth management as a concept is poorly understood and in many cases less needed," said James Lawson, a director of Ledbury Research, which analyses trends among the world's wealthy.

Banks and wealth managers are pushing hard to expand into Asian and other emerging markets. But they are also having to invest time and money in meeting new regulations aimed at preventing a repeat of the financial crisis and which could ultimately help to rebuild their reputations.

"Banks have been so distracted by regulation, they haven't been able to grow," said Scorpio Partnership's Tillotson.