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A profile of Stanhope Capital and a market overview from founder Daniel Pinto

Date: 08 Aug 2011

Citywealth

Stanhope Capital, who have ten partners, with Daniel Pinto and Julien Sevaux as the founding partners, work with a hundred private family groups as well as fifty institutional clients, charities, university endowments and pension funds, which include the ICR (Institute of Cancer Research) and the LSE. On a personal level, both Pinto and Sevaux come from privately wealthy family backgrounds, which were married with M&A institutional backgrounds professionally.

From their offices in Portman Square, Pinto explains the reasons he and Sevaux decided to start Stanhope Capital which now has UHNW clients who are 50 percent British, 30 percent European and 20 percent from the US, and emerging markets include Russia, Brazil and Arab countries.

“Firstly, we saw an opportunity because banks seemed more interested in creating pipelines and products to distribute to private clients without managing risks properly. Many were taking excessive risks for their clients with the added problem of conflicts in their products often with third party commissions also involved,” explains Pinto. “Secondly, we were both private clients – Julien was part of the Worms & Cie family, a group involved in banking and shipping. They sold their business in the late nineties to the Agnellis of Fiat.” Pinto had amassed personal wealth throughout his career and his family had been involved in a large, soft commodities business called Sucden. “We sold our stake fifteen years ago. Both of us had experienced the highs and lows of private banking services firsthand as had our families.”

Pinto and Sevaux founded Stanhope Capital in 2004, which now has ¬£4.5bn under management “We are large for a multi-family office operation,” says Pinto. “We’ve become big enough for clients to understand that we have an institutional investment process like the large banks but they appreciate that we can and do operate in a service-led way. We’ve grown because we operate along strong, guiding principles. I have all my personal, liquid wealth invested along with our clients, as do all the partners at Stanhope. Secondly, the only payments we receive are from our families and clients, any retrocessions will get passed back to them. Finally, that we are a partnership where the key individuals, as shareholders, have a vested interest in the long term well being of our clients. We have smart people but so do a lot of institutions, so we know it’s crucial to keep the model pure and to always stick to these principles.”

Stanhope Capital’s 60 staff have backgrounds in a range of areas including asset management, private equity, hedge funds and M&A. The average size of clients is ¬£35mn with bigger clients at circa ¬£250mn and smaller ones at ¬£10mn, which is entry level. They have a mix of entrepreneurs and inherited wealth and these entrepreneurs tend to be around the 50 age mark. Pinto comments: “There is no real cluster of businesses or ways clients have made money but, for instance, clients have done well with commercial property and from selling a business to private equity players.”

The recent big news for Stanhope in June was their acquisition of charity investment manager Jewson Associates. Pinto says he benefited from Lord Browne’s advice on the advisory board but that the discussions were already under way before he joined.”There were two reasons for the deal,” explains Pinto, who says this was a one off opportunity for them. “We are not an acquisition machine with a plan to sell out, we believe charities and endowments increasingly look for the same things as private clients, particularly after the credit crunch. They want managers operating on an open architecture basis and able to invest globally. They no longer want portfolios focused on UK equities and Gilts,” which Pinto says is one of the key trends with this segment. “They want an absolute return approach to limit the downside and need a global outlook for better returns and to make portfolios less vulnerable to local downturns. Many charities used to put 80 percent of their capital into equities as a standard move. As a result, too many took losses of 30 to 40 percent in the credit crunch, which really shook people up. When we speak to charity trustees now they prefer to focus on strategy and hand over day-to-day investment responsibility to professionals. This is the opportunity for us.”

“The second reason for the merger was the similar client base and culture between the two firms”, says Pinto. “Their staff had a good educational and career pedigree similar to our people and had chosen similar managers and funds. We were on the same page with our strategies and outlook.” The merger meant that Jewson’s founding partner became a partner in the business at Stanhope Capital and a separate unit called Stanhope Jewson for charities and endowments was created. “We are already seeing synergies,” says Pinto in their bright, understated but well designed offices in Portman Square. “Clients using Jewson for traditional consulting are increasingly asking about our implemented consulting services, an area where I think we can add value and where we should pick up new mandates. Small and medium size Charities can’t afford an investment team on the inside and having a board of trustees who meet only three or four times a year isn’t enough anymore, the markets are too volatile as a consequence of the 2008 crisis. We have 60 employees and 15 of them are involved in pure investment and manager research so that we are on top of changes and developments.”

I suggest that for charities there is often a simple template that investment managers apply but Pinto disagrees, saying things are more complicated now. “Our staff are very international and their diversity helps us seek opportunities to make money globally. Global investing is a risk management tool because, for instance, a UK client investing in a region like Asia gets exposure to a different growth story. People in the UK and other domestic markets too often let the currency tail wag the investment dog. We think you can invest globally but hedge back into sterling if this is your wish. It’s perhaps a new way of thinking.”

I ask about his institutional background, which pure private client managers usually say doesn’t always translate well into the private wealth industry. Pinto disagrees: “The institutional training that most of the partners have received is very helpful because the training is excellent. What we dislike with large institutions, as I suspect others do, is the factory approach because it simply doesn’t work with private clients. Wealthy clients need the personal touch. You have to be in tune with their specific objectives, their risk tolerance, time horizon and income requirements. Also whether they are active investors or not and what they understand about investing. We keep things very simple and don’t use jargon, something I think the wealth industry is fond of doing. We translate all phrases like alpha and gamma. The subject matter is not rocket science but can be made to appear so.”

The Stanhope process

“We put a roadmap together for clients. We try hard to help them understand risks and know that whatever people say they really don’t like to lose money. We deploy capital over a few months, not in one go, so that we can see how the client reacts to decisions and market movements. Then we adjust the strategy based on what we hear. We like to do a three to five year roadmap because, in less time, it’s not easy to make a positive difference in portfolios. The roadmap is not rigid – we can move left or right of it to manage risks properly but always keep an eye on the clients agreed parameters.”

Investment thoughts: “We are not excessively worried about equity markets in the short to medium term”

“Contrary to the consensus we are not excessively worried about the equity markets at the moment. We feel we are in a paradigm where cash gives you the certainty of negative real returns and where bonds will suffer with rising inflation and interest rates. We are looking for security with investments into large cap quality companies – those that have businesses that aren’t cyclical, plus those that have good brands and solid balance sheets. We invest through funds or indices, not individual stocks. We like large cap quality stocks because they are relatively cheap at 11 times earnings, less then the overall market, and they are at the same time defensive if the cycle were to turn in the wrong direction.”

A typical investment spread with Stanhope

“Although we invest through funds or indices, we have very liquid portfolios, with over 80 percent of our positions providing daily liquidity. At the moment, a medium risk portfolio would have 45 percent in equities with a majority in large cap stocks. Of this equity exposure, 30 percent is in Asia and emerging markets; roughly 20 percent is in bonds – we have been reducing this exposure, largely inflation linked bonds and high yield bonds; 12 percent is in hedge funds – macro/ long /short equity and fixed income long /short; five percent is in gold, and three percent in commodities – energy, metals and agri’. 15 percent is in cash kept for short term tactical purposes and to let us seize opportunities.”

Just say no to banks

“We are avoiding banks at the moment because their margins are under pressure with the new Basel 3 ratios preventing them from expanding their loan book. They are also vulnerable to disruptive events like sovereign bonds defaults, which means things could get very bad.”

The Eurozone “tornado” and the development of a Euro bond

“In Europe the problem is the scale of sovereign debt across the continent, particularly in Southern Europe, and the threat this could turn into a full blown banking crisis. However, I don’t think this will be the case in a pre-electoral year. The French and Germans have no choice but to save the system. European politicians have been behind the curve, offering to do too little too late, but I am less pessimistic than most on this front and I don’t think the Euro will unravel. I think we will see new innovations such as the issuance of Euro bonds backed by the entire Union. Euro bonds will help stabilise the Eurozone because it means individual country credit ratings will be less important. I also think the size of the Financial Stability Fund will be increased. Eventually, after a lot more pain, a unified credit rating for the Eurozone will appear.”

No way out for Europe but unification

“A closer monetary and credit union will have serious political consequences because you will need a central government overseeing the budget of member countries. The Germans will tell the Italians how to manage their affairs, which will create significant political and social tensions, but there is no choice. There is no other way out.”

Pinto on dealing with wealthy individuals from different countries

As there is much talk about ‚Äòdifficult Russians clients’ in the industry, I ask him for his take on dealing with a variety of international private clients. “British clients tend to have a real equity culture and more tolerance for volatility whereas the French and Germans tend to be more conservative even when Germans are risk takers in their own businesses (Germany has a very high proportion of family businesses). Russians are difficult to deal with because they’ve often seen very large returns in their businesses – to the tune of 30 or 40 percent per annum – and they often don’t understand why they should accept less. The Russians, culturally, tend to be testosterone-filled and either do extremely well or lose everything, and so wealth protection can be an alien theme. Although Russians with a European mindset are easy to have as clients. Some of our clients have made money in financial services and understand what investment managers can and cannot do.”

Indians and deal making – helping the Mittals

“The Indian economy contains mostly large, family-owned businesses with a long term outlook. It often puts them at an advantage over their Western counterparts driven by the short term demands of public markets. Our Indian clients tend to be entrepreneurial and like co-investment deals. It’s important for some clients that we offer them a deal service. We have three working in this area led by my partner Tarek AbuZayyad who has 20 years in the M&A, private equity and venture capital fields. It’s publicly known that he has advised the Mittals on some of their transactions. Historically, most of the transactions we have advised on have tended to be client-led but we plan to expand into this area in the future. We tend to find families get so much private solicitation that often the best advice immediately is ‘don’t do it’.”

China – are just returning to former power

“On Asia, I would recommend your readers look at the Kissinger book ‚Äòon China’. It puts perspective on the Chinese rise in dominance. Kissinger reminds us that China has been the leading world power for 18 out of the last 20 centuries, so what we are going through now is a return to the norm. The Chinese remember that their demise a few centuries ago was caused by stopping trading with the world when they got suspicious about foreign influence but they have a different recipe now. They are now playing an expansionist game and have reserves of $2trillion to play with.”

China being stopped in Brazil and on the search to buy IP and tech’ intelligence

“The Chinese are big in Brazil but I see problems for them there because a law has been passed to stop foreign buyers purchasing farmland. This hasn’t happened in Africa. In my opinion, their next move is trying to acquire intellectual property and intelligence, for instance, in the aerospace and technology industries. The Chinese are buying Eurozone bonds to be in the centre of the rescue position and over time will trade their newly gained influence in the West to get cheaply into high tech companies,” Explains Pinto. “They have clout and want more, and they have a very long term time horizon. They need to meet their food and technology needs for decades to come.”

The West and their bargaining chip

“I think we should influence China to change by interacting with them but we have to use the World Trade Organization to be tougher on protecting our intelligence, tech and intellectual property.” Pinto adds, “I also think there should be more pressure on the Chinese government to let the Renminbi rise in value.”

Commodities

“We are positive about them. We feel the recent correction was well overdue. My own family was involved in soft commodities – sugar and coffee. We never thought commodities would become an asset class of choice for so many mainstream investors. Back then, it was a game for professionals only. Now a taxi driver talks to you about silver prices. It is probably a dangerous development for producing countries who now have to cope with big speculative swings in prices. For instance, if the price of cocoa decreases by 50 percent then it can take down the whole of the Ivory Coast.”

Oil – The rise of NOCs

“NOCs will be the driving force in the next decades. Countries have realised they should be in control of their own oil reserves. They now have the know-how to exploit and commercialise their reserves but the sheer scale of investment needed to do so means some cost sharing. For instance, Russia has enormous oil reserves, and large local players, but they still need to co-invest with Western companies.”

“In general, I believe we will continue to see a rise in government intervention in the economy, whether it is to save the financial system, as we have seen in 08, or to secure sources of raw material supply. Market forces will obviously continue to play a central role but government intervention will become a very important theme going forward.”

The US looking East

“Obama being in office has changed the strategic relationships that the US wants. Obama has spent a lot of time in Indonesia as child and it has influenced his view of the world. It’s the first time a US president is seeing Asia as a more tangible reality than Europe. Since the Second World War, the Europeans have always shared power with the Americans in large international organisations whether it is the UN, the World Bank or the IMF. This is going to change now.”

Strategic buddies: Russia and Germany

“For the past 20 or 30 years, German companies have always been much more pro-active in Russia than their British or French counterparts. Putin is very close to German industrialists.”

What questions are UHNW clients and trustees concerned about?

“Clients are concerned with the macro crisis in the world. They have lots of questions about Europe and the debt crisis and they want to understand how to protect their capital in this uncertain environment. With inflation becoming more of an issue down the road, it’s important to make clients understand that they need to readjust their way of thinking.”

Private equity: the silent revolution and hedge funds having to come out of the shadows

“Private equity is undergoing a silent revolution because fund managers now have to make money with much less debt. Banks are lending a lot less, so they actually need to create real operational value in the businesses they are working with. The leverage effect will no longer be the magic wand, which means many PE firms will have to change or disappear. Others are growing successfully but exits for their portfolio companies, particularly through the public markets, are not easy these days. If you look at the returns in many private equity funds, they often don’t add up anymore. The track record of public equities has been roughly 80 percent per year for the past 40 years. Given the illiquidity, expected returns in private equity should be at a significant premium compared to private equity, roughly ten to 20 percent over public returns. The reality is that only a tiny proportion of private equity managers have achieved these kind of returns and the few who have did that largely fuelled by leverage. A patient investor in public equities borrowing money would have achieved private equity type returns but with much more liquidity. PE firms have to reinvent themselves by actually adding value to the businesses they acquire.”

Final word on hedge funds. “We’ve reduced our exposure.”

” Hedge funds are similarly having to provide more proof of what and how they do things. It used to be ‚Äòtrust me’ but now they have to explain step-by-step. It’s one of the reasons we’ve reduced our exposure to hedge funds.”

 

http://www.stanhopecapital.com/

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