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Comprehensive analysis of family wealth

August 12, 2014

A German family decided to invest the proceeds from the sale of part of its company in the capital market. A team of LGT investment specialists was able to win over the family with an investment proposal tailored to suit their overall wealth situation.

Analyzing the complex financial situation of entrepreneurial families: Walter Pfaff, Andreas Loretz and Philipp Becker.
Analyzing the complex financial situation of entrepreneurial families: Walter Pfaff, Andreas Loretz and Philipp Becker.

The increasing level of globalization, the difficulty of financing further growth, as well as the necessity of safeguarding succession are inducing many small and medium-sized businesses to adopt a new strategy for the future. They are considering selling off parts of the business that are not necessary for the operation of the company. It was precisely this process which a business family had gone through when they contacted LGT in spring 2011. One part of the proceeds from the sale was to be reinvested in the growth strategy of the company, the family wanted to invest the other part amounting to around EUR 120 million in the capital market. The goal was to better diversify the family wealth, which up to that point had been tied up exclusively in the company, and to accumulate free capital for the family’s next generations. LGT was invited to present a proposal indicating how a future investment strategy could be drawn up and implemented. LGT was not alone, other financial service providers were also invited to submit proposals.

Déjà vu

The initial situation for the entrepreneurial family was actually very similar to that once faced by the Princely House of Liechtenstein. Almost 15 years ago, LGT’s owner family had also sold part of its business and wanted to invest the proceeds in the capital market. Back then, the bank’s in-house specialists developed a solution, the Princely Strategy – a very long-termoriented investment concept, which combined traditional and alternative investments in an innovative manner. Nevertheless, the experience gained with the investment procedure at that time could not simply be adopted and used in this situation: “In our case, the business and private situation was very complex,” explains Andreas Loretz, Business Area Head of the German Market at LGT. Consequently, he formed a team of in-house investment and capital market specialists which was to carry out a comprehensive analysis of the German family’s situation.

For example, the analysis had to take into consideration that the family business was exposed to specific risks and opportunities in the industry in which it operated. As a metal-working company it was exposed to the fluctuations of raw materials prices, and also to currency risks in its main markets, the EU and the USA. In this context, the financial investments had to be analyzed and a certain balancing of risks with the industrial assets ensured. In addition, the personal situation of the family had to be considered. The different entitlements of no less than five branches of the family, whose members lived in various countries with different currencies, needed to be taken into account. 

“In such cases it’s not sufficient to simply take into consideration that part of the wealth that is to be invested,“ says Andreas Loretz. “One has to consider the family’s entire wealth situation because otherwise, for example, a sufficient diversification of the assets cannot be ensured.”

“An investor has a better basis on which to make decisions if he knows and understands the interaction between the various asset classes, as well as being able to assess their opportunities and risks.”

Stephan Kind

 

Complex outset situation

Walter Pfaff, Head Asset Allocation & Research at LGT, and a key member of the team set up by Andreas Loretz, concurs: “With such a complex starting position, there was no sense in drawing up an investment proposal without an exact analysis.” It was particularly important to bring together the different long-term wealth objectives of the family members. Moreover, discussions held with the family revealed that the family members had very different levels of knowledge about the financial markets. Whereas the son of the company founder held a doctorate in business administration and had profound knowledge of the capital markets, other family members were indeed successful entrepreneurs but had no experience whatsoever of financial investments. Then there were family members – for example, an historian and a musician – who had virtually no relationship with the business world. “Such a large difference in financial knowledge within a family presents us with a challenge,” confirmed Stephan Kind, Portfolio Manager of the Princely Strategy and also a member of the LGT team. “An investor has a better basis on which to make decisions if he knows and understands the interaction between the various asset classes, as well as being able to assess their opportunities and risks.” It is also important for Stephan Kind that his clients are in a position to critically question the strategic investment concept and the proposals drawn up.

“One has to consider the family’s entire wealth situation because otherwise, for example, a sufficient diversification of the assets cannot be ensured.”

Andreas Loretz

 

Consequently, working together with the family members and their external advisors, the LGT team not only analyzed the overall financial situation, they also provided the individual family members with knowledge of the financial markets at special workshops.  

On the basis of their analysis, the LGT team then presented the family with a wealth strategy, whose key emphasis lay on investments and currencies in Asia and emerging markets, and therefore counter-balanced the risks of the family company, which operates primarily in Europe and the USA.

In this case LGT’s thorough and elaborate procedure paid off for both parties: LGT won the contract on the basis of its concept, and the family is extremely happy with the results attained so far. For Andreas Loretz, this has also been further confirmed by the fact that three members of the family have also decided to entrust LGT with a substantial part of their private wealth in the meantime.

 

Comparison wanted

With the aid of scenario analysis, LGT develops so-called “robust portfolios“ with the best possible risk/return ratio. The declared aim here is not to gain the best possible short-term performance, whereby the risk of loss is correspondingly larger, but to attain a reasonable, stable return over the medium term. “Regarded over three to five years, we have no need to fear any comparison with our investment proposals,“ says Walter Pfaff, Head Asset Allocation & Research at LGT. “We are quite happy to suggest to our clients that they invest part of the capital planned for investment with a similar risk profile at another institution. Then they gain not only a second expert opinion, but more importantly a benchmark against which they assess the quality of our work.“

 

The article was published in the portrait of LGT.
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