All across Asia, Africa and the Middle East, successful business owners are growing their wealth rapidly on the back of burgeoning trade and consumer spending. To private banks, these emerging market entrepreneurs represent a potentially huge new client segment, but to serve them, we must do things a little differently.
First of all, to many first-generation emerging market business owners, there is no such thing as ‘private’ wealth. Typically, they are heavily involved with the day-to-day running of their company, and will reinvest any spare cash into the business.
Business before wealth
A recent report Standard Chartered bank commissioned on high net worth business owners in Asia, Africa and the Middle East, confirms this clear tendency to put business before wealth.
Most of the around 60 entrepreneurs we interviewed did not have a strategy for growing their personal wealth. “I’ll think about it when the time is right,” as one of them commented.
What was striking about our survey, conducted by Campden Research, was the degree of similarity between the entrepreneurs. Whether in the UAE, Nigeria, India or China, the majority were firmly focused on the needs of the business, with personal wealth featuring much lower down on the agenda.
This is in stark contrast to the west where businesses tend to be older and more established, and the assets of the business and the owner therefore more clearly divided.
The findings suggests that a huge and rapidly growing client segment for private banks – cutting right across emerging markets – cannot necessarily be reached with traditional private wealth management products, or at least not in the first instance. An emerging market entrepreneur is a lot more likely to come to the bank looking for a business loan than a wealth fund.
For private banks, there is one obvious answer to that: add commercial banking to your offering and start providing business finance. That’s what we’ve done at Standard Chartered, creating a combined private and commercial banking segment that allows us to serve high net worth business owners seamlessly as their businesses grow.
The second important difference to note is that most emerging market entrepreneurs don’t have clear strategies for succession planning.
Planning for the future
Formal management and governance structures, such as the inclusion of non-family members on the board and senior management team, help when the time comes to transfer the business to the next generation, or to an external buyer.
However, in our recent study, high net worth business owners in Asia, Africa and the Middle East attached a relatively low importance to formal planning for the succession or future strategic agility of their businesses.
Some were sceptical as to the need for external managers to help their businesses grow. As one high net worth family business owner commented, “Family members are more likely than external advisors to care about and nurture the business.”
These findings suggest an implicit, if often unidentified, need for advice among emerging market business owners, as their businesses expand and their wealth accumulates. We’ve seen this need increasingly among our own clients in the last few years.
To serve emerging market entrepreneurs, private banks will increasingly need the ability to provide advice on succession and wealth planning, as well as steps to improve formal governance and management structures – alongside a more traditional private wealth management offering. For example, in recent years we’ve seen the crafting of increasingly sophisticated and flexible succession planning structures to accommodate the international needs of clients and their families.
What should be clear to everyone is, at least, that the wealth creation of this group of clients will continue to grow rapidly and become much more important to private banks everywhere.
Private banks must adapt
The World Trade Organisation predicts that so-called south-south trade – trade between emerging markets – will more than double to 43% of total world trade by 2035, lending considerable support to entrepreneurs across Asia, Africa and the Middle East. And further momentum will come from urbanisation, technological innovation and a growing middle class boosting domestic spending.
This year, Asia is expected to become the world’s largest high net worth wealth market, with the region predicted by Boston Consulting Group to account for almost three-fifths of the global growth in wealth in the next three years.
Meanwhile, private wealth in the Middle East and Africa is likely to grow to an estimated US$6.5tr by the end of 2017, with most of the increase coming from new wealth creation in oil-rich economies.
This implies a very significant shift in the private banking market towards these regions.
All successful private banking relationships start with the client and what the client wants to do. Considering that much of the wealth now being created in emerging markets is linked to family businesses, it’s time for private banks to adapt. The guiding principle is very simple – if you want to bank the owner, bank the business.
Michael Benz is global head of private banking clients at Standard Chartered bank.