Have ultra-wealthy investors discovered the key to successful investing? LGT’s Riccardo Petrachi reveals what other investors can learn from this client segment.
Riccardo Petrachi, people having more than 20 million francs in investible assets are considered ultra-high-net-worth-individuals (UHNWIs). Do these people invest differently than «normal» rich people?
Clients often ask me how billionaires invest. They think that billionaires have some sort of recipe for success. My answer is always the same: It depends.
On what?
UHNWIs can be broken down into several sub-segments that differ significantly in terms of their investment behavior. Take family offices, which are an important sub-segment for us. There are several studies published about this segment every spring that examine a variety of topics, including investment behavior.
We’ve analyzed a number of these studies and discovered something interesting, namely, that many family offices, especially the larger and more professional ones, tend to invest very similarly to our owner, the Princely Family of Liechtenstein.
That is something we’ve also ascertained based on our own experience with this client segment.
So how does the Princely Family invest?
The Princely Portfolio is an endowment fund managed by LGT with a significant allocation to private markets such as private equity and private credit, as well as other alternative investments such as hedge funds. The allocation to bonds and other fixed-income instruments is comparatively small.
The similarities here are quite striking. However, there is one important difference between the Princely portfolio and the family offices that were analyzed, namely the share of real estate. The Princely Family has consciously limited its allocation to three percent.
But there’s a simple explanation for that: the Princely Family’s non-bankable assets include a very large property portfolio.
Private Markets are generally less liquid. Do large family offices reap the benefits of the illiquidity premium?
Several studies have been done on that topic too. They suggest that the larger the investment volume, the more is invested in private markets and the higher the returns. You see the same phenomenon if you look at market indices: if you compare private equity with the MSCI World, for example, private equity had an annualized annual excess return of between three and four percent over the last 25 years compared with the global stock index.
That’s on average. But those who, like LGT, have coveted access to leading private equity managers stand to benefit even more.
You mentioned other UHNWI sub-segments. What are they and how do they invest differently?
Entrepreneurs are an exciting sub-segment that includes both active entrepreneurs and entrepreneurs who have sold their companies. Entrepreneurs who have recently sold their companies usually need to completely reorganize their financial situation.
Many of them go about this very professionally and ensure they are well-diversified. That includes working with different banks, to which they allocate specific mandates according to their specific strengths. After selling their company, they might start considering setting up their own family office or engaging in philanthropy.
But you also see entrepreneurs who know their sector and the companies in that sector inside-out, and who end up with cluster risks as a result. They invest heavily in similar companies, often in their home market – which of course they are most familiar with.
Some will also make direct venture capital investments. This can mean they massively exceed their risk budget without even realizing it.
What is your advice in cases like that?
The most important thing is to ensure they are well diversified, not just in terms of countries and across asset classes, but also within asset classes. For example, people who invest directly in start-ups can diversify these investments with private equity funds that have a different investment style and geographic focus than the direct investments in their portfolio.
We also always advise our clients to keep part of their assets separate as a kind of «safety bucket», especially keeping the next generation in mind, and to invest these assets conservatively.
Sustainability has become a megatrend in the investment business. How relevant is it for UHNWIs?
The sub-segments approach this topic differently, too. For both public and private foundations, for example, taking ESG criteria into account is very important, especially a portfolio’s carbon footprint. Professional family offices also consider ESG criteria, of course, but they tend to focus more on the associated risks.
In other words, their main focus is avoiding the risks that can arise if ESG criteria are not taken into consideration. This doesn’t mean they’re not interested in having a positive social and environmental impact. They just tend to try and achieve that through impact investments in the private markets or by engaging in stewardship activities.
Do UHNWIs tend to be active investors?
That depends on how sophisticated they are. I often see independently wealthy clients, so people who don’t own a company or have a family office and who have often inherited their wealth, invest a significant amount of time in selecting securities – even though empirical studies show that this only makes a small contribution to overall performance.
Many professional family offices, on the other hand, separate their overall portfolio into an alpha and a beta component. They invest the beta portion in efficient markets that are liquid and well covered by analysts. They usually invest in these markets through inexpensive ETFs.
For less efficient markets, they tend to invest in active instruments that offer a «skill premium». This is a good approach that all investors can benefit from. Foundations with a focus on sustainability that wish to exclude certain sectors or companies from their investment universe rarely use passive instruments, as exclusion isn’t an option for these types of investments.
How much investment expertise do UHNWIs usually have and what do they look for in a banking partner?
That depends to a significant degree on the size. Independently wealthy individuals might work with an external advisor who guides them and supports them with their investments. However, these advisors are unlikely to have access to the comprehensive data required for professional portfolio management, for example, data on performance, volatility, and the correlation between markets and individual instruments.
If they are looking for access to this kind of data, they will probably have to work with a professional banking partner who among other things, has the ability to analyse and optimise a portfolio’s strategic asset allocation. The same applies for most foundations.
Large family offices, on the other hand, usually have their own Chief Investment Officer and also have the necessary infrastructure. As a result, they don’t require our direct expertise and are instead interested in being able to talk to our experts and get a second opinion.
Often, this will include comparing capital market assumptions, which are the expected short- and medium-term return and volatility expectations for equities, interest rates and currencies that serve as a basis for strategic asset allocation.
Apart from investment expertise, what does a bank need to offer to be attractive for UHNWIs?
I think it’s important to pursue a broad, holistic approach. This includes having expertise in areas such as family governance, international asset structuring, and philanthropy. Capabilities and access to private market networks are also very important. In addition, a company must be able to differentiate itself authentically.
Two things that are very helpful for LGT in this regard are the fact that our owner, the Princely Family of Liechtenstein, has a strong entrepreneurial background and that our clients can invest in the same investment solutions as they do.
Also, UHNWIs want to work with highly skilled people who can talk to them on their level and aren’t afraid to challenge them.
For a traditional private bank, LGT has quite a high UHNWI penetration of more than 50 percent. What is your view in terms of the future of this segment at LGT?
I’m very confident about it. The UHNWI segment continues to grow, which is in part attributable to its above-average investment performance. At the same time, the market is very fragmented. So if you are good at what you do and have a compelling value proposition for this client segment, there is a huge amount of potential.
Having said that, while we want to continue to grow in the UHNWI segment, we also want to make sure we maintain a balance between the UHNWIs and our HNWI and affluent clients, as these three segments mutually benefit and complement each other.
Riccardo Petrachi has been Head of UHNWI Solution Partners at LGT Bank Switzerland since 2016 and Head of UHNWI Europe at LGT Private Banking since 2021. After working in investment banking, among others at Goldman Sachs in London and Zurich, he held senior positions in private banking at UBS and was Head of Private Banking at Rothschild Bank in Zurich.
