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Features - July 2011



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The LATAM investor

The LATAM investor

Among emerging markets, the Latin American region offers unparalleled opportunity for The Bahamas

The Bahamas Investor Magazine
July 13, 2011
July 13, 2011
Steve Cotterill

With accelerated economic growth and swelling ranks of high-net-worth individuals (HNWIs), it is not surprising that the Latin American (LATAM) region is garnering the attention of offshore jurisdictions, and none more so than The Bahamas.

Although new wealth generation in Brazil has been well documented, other economies in the region are also performing well, registering 6-10 per cent growth in countries such as Chile, Peru, Colombia and Argentina. According to the 14th Annual World Wealth Report 2010, produced by Merrill Lynch Wealth Management, Bank of America Corp, in collaboration with consulting, technology and professional services company Capgemini, the HNWI population in Latin America grew 8.3 per cent to 0.5 million in 2009 (see graph on page 26). HNWI wealth in the region jumped 15 per cent.

Although the wealth of Latin America’s HNWI population did not grow as much as that of Asia-Pacific HNWIs in percentage terms in 2009, it was nevertheless eight per cent greater than it was in 2007, according to the report. During that same period, wealth among Asia-Pacific HNWIs grew just two per cent.

This growth presents a golden opportunity for banks and other financial services providers that operate out of The Bahamas.

“It is clear that The Bahamas is well placed to serve much of international business flowing into and out of the Americas, due to: strong existing business contacts; well recognized tax and regulatory jurisdiction; tested and flexible Bahamian structures; accessibility, time zone and the ability to have a physical presence; competitive investment freedom, among others,” writes Vince Colvin, an independent advisor to major banking and insurance institutions and government ministries around the world, in an article titled Forming a Strategy: Key Steps published in The Bahamas Financial Services Review 2010.

“Accordingly, several potential opportunities have been identified that take advantage of the flow of funds owned by LATAM taxpayers that are booked outside their host country, the enormous investment into infrastructure investments into the LATAM region, and the possible establishment of targeted efforts in Asia to manage monies that support commercial activity between Asia and LATAM.”

Across the region
Each country in the LATAM region has different characteristics of course, but there are similarities that bind the top performers.

“When you look at Brazil, Chile, Peru and Colombia, for example, you see fast growing economies that are stable, have tremendous resources in terms of commodities and human capital,” says Beat Paoletto, managing director and chief executive officer at UBS (Bahamas) Ltd. The bank is aggressively targeting the LATAM market with approximately 300 staff in Brazil, 80 in Mexico and a regional presence in almost every other Latin American country. “We believe that the conditions for ongoing rapid development in the region are perfect. You have everything you need for growth.”

To seize the opportunity, it is imperative that financial services providers thoroughly understand the needs and wants of HNWIs in
Latin America.

“The first thing to understand is that Latin Americans are not part of the mainstream Anglo-Saxon investment culture. They look at things very differently,” says Dr Fabrizio Zanaboni, chief executive officer at FAB Portfolio Management, which specializes in family office services for Latin American and Eastern European clients. “The Latino culture is much more family oriented and they consider the main driver in any relationship to be personal, not business. They do not look for a bank; they look for a person. In Anglo-Saxon culture there is a division between family and business, but not so in Latin America.”

This tendency means that many wealthy families in LATAM countries already have trusted financial advisors that have been with the family for years. This poses certain obstacles when trying to enter the market, notes Zanaboni. “The financial advisor is often like the consigliere for the family, often a former banker who is a close friend of the family, and always the same age or older than the head of the family.”

This presents another problem for the modern financial services provider. “With these people, analytics don’t cut much ice, because many of them are not necessarily computer literate. The key is to help younger families, who are just growing their wealth, then you can become part of their success and establish trust when they are still on their way up. It is much harder to get into the more established wealth market.”

Second generation
Paoletto at UBS says that this “second generation” of HNWIs is the bank’s target market in the region. “Although in LATAM many of the major businesses are still owned by large families, the second generation of business owners looks at investing in an entirely different manner than their predecessors. Relationship management in LATAM has changed in that they demand value added discussions. The human capital driving the growth in this region is highly educated, extremely entrepreneurial by nature and they want things done fast.”

To cater to this demand for speed from HNWI LATAM investors, the bank has set up a specialist team of traders based in Nassau that has a dedicated trading platform which trades across multiple asset classes and currencies.

Ivan Hooper, senior vice president at Winterbotham Trust Company Ltd, agrees that although certain fundamentals remain the same, the LATAM investor profile is changing rapidly. “Many of the younger generation have studied abroad, are well educated and more international in their thinking. They are much more familiar with investment products on the market.”

This creates more opportunities for business in the region, Hooper suggests. “You get more families who are travelling more and that, by nature, creates possibilities of setting up businesses through international structures. You have local businesspeople who are successful and can afford to send their children overseas to school; they may not come back or they may marry overseas and that raises questions for shareholders and creates cross-border issues for the business, with succession planning implications for example.”

Offering the right product
Although hedge funds and SMART funds are proving popular in the more sophisticated Brazilian market, most LATAM clients, even those in the new wealth sector, remain cautious to some extent. “They are by nature extremely conservative and they do not invest in a lot of fancy products,” says Zanaboni.

This claim is substantiated by the Merrill Lynch report, which points out that HNWIs from Latin America and Japan remain the most conservative, with HNWIs in each region holding 52 per cent of their aggregate portfolios in either cash/deposits or fixed-income investments, despite surging equities prices. Home-region allocations were up three percentage points to 47 per cent in 2009, in contrast to the global trend. Hedge funds clearly dominate alternative-investment holdings and accounted for 49 per cent of all such holdings in 2009, but this represents a relatively small proportion of the region’s overall wealth.

“The average LATAM investor is happy with a 3-4 per cent return on investment,” says Zanaboni. “They are interested in asset preservation more than massive returns.”

Range of services
Paoletto suggests that for banks and financial services providers looking to enter the market, the need to offer a broad range of services is essential. “The biggest opportunities banks have is if they have the capabilities to combine the services of investment banking and wealth management. The combination of services is imperative, as many of these second generation owners want to launch their family-owned companies through IPOs (initial public offerings) or gain access to liquidity from the capital markets to grow their businesses. These monies have to be managed. Companies that can look after the whole wealth chain will be the winners in the long run.”

Hooper says that at Winterbotham they are seeing an increase in the trust side of the business. “Whether it is because Latin American lawyers are becoming more efficient with the vehicle, more familiar with the product, or certain laws have changed in certain countries and that generates more need for a trust type of vehicle, I am not sure. It may be that the younger generation of HNWIs who have studied abroad in the US or UK have a better feel for the laws and understand what a trust is. Either way, we are seeing growth in that area from Latin America.”

Promoting The Bahamas
For The Bahamas to capitalize fully on the obvious logistic benefits of being so close to a region experiencing rapid, sustained growth, LATAM investors have to know what the jurisdiction has to offer.

“The Latin American investor does not have a clear value proposition when you speak about The Bahamas,” says Paoletto. “It is often eclipsed by what other jurisdictions such as Bermuda or Cayman or BVI [British Virgin Islands] might offer. The investor may think positively about the jurisdiction, but there is a basic lack of knowledge about what The Bahamas has to offer when it comes to financial services and wealth management in particular.”

One of the stumbling blocks may be that a lot of banks with a presence in The Bahamas use the jurisdiction as a booking centre for Latin American clients rather than a base for full-service offerings. “Historically, some banks have used The Bahamas as an administration and execution centre for the management of assets,” continues Paoletto. “We approach it differently. To deliver value added ideas takes a lot more leg work and dynamism.”

It also takes specific skills. “Language skills are extremely important,” adds Zanaboni. “Latin American investors do speak some English, but they are obviously much more comfortable speaking and reading in Spanish or Portuguese. We also have to fully understand the ins and outs of the laws of each specific country and market our strengths. That needs language skills too.”

“It falls to all of us–the banks, financial institutions, the public and private sector–to promote the brand of The Bahamas,” says Paoletto. “There is enormous potential in emerging markets such as Latin America, and we have to make sure that The Bahamas is the place that comes to mind in the first 30 seconds when an investor thinks of where he is going to put his money.”

Sidebar: Global wealth

  • The world’s population of high-net- worth individuals (HNWIs) returned to 10 million in 2009, increasing by 17.1 per cent over 2008. HNWI financial wealth increased 18.9 per cent from 2008 levels to $39 trillion. After losing 24.0 per cent in 2008, ultra-HNWIs saw wealth rebound 21.5 per cent in 2009. The total global HNWI population remains highly concentrated in certain areas, with the United States, Japan and Germany accounting for 53.5 per cent of the world’s HNWI population, down slightly from 2008.
  • Source: 14th Annual World Wealth Report 2010

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