Walsh Bay Partners is a private wealth group providing personalised service to its clients with an institutional flavour to its investment advice. [i3] Insights speaks with CIO Tim Peters about what this means in practice.
Walsh Bay Partners was founded less than a decade ago, but already the firm has established itself as a key player in the growing private wealth sector in Australia, representing more than 50 families, foundations and charities with significant wealth.
The firm was founded in 2015 by Arun Abey, a veteran of the wealth management industry, who was also the co-founder of ipac securities in 1983. Ipac grew into one of Australia’s largest financial advice and wealth management companies and developed a global partnership with the AXA group.
Abey and fellow shareholder, former Mallesons partner, John Edstein stress an alignment model, where the aim is to partner with family offices on a flexible basis to provide access to world class strategies, including succession, estate planning and wealth management.
Drawing on their expertise, the firm attracts clients at the top end of the high net worth individual and family office space.
Walsh Bay Partners takes an institutional approach to investing and is staffed with a diverse array of specialists including individuals from superannuation funds and insurance groups, amongst others.
Tim Peters, Chief Investment Officer at Walsh Bay Partners, is one of them. Peters previously worked for First State Super, now Aware Super, as a senior portfolio manager, specialising in alternative and fixed income assets.
“It’s not going to surprise you that we try to emulate an endowment fund model,” Peters says in an interview with [i3] Insights.
“Even though that word is used everywhere now, we mean it in the context of how to maintain a well-diversified portfolio and use skilled investors around the world to help clients get that exposure,” he says.
From the [overseas] fund manager's perspective, we're a diversification to their investor base. I don't think superannuation funds have played that card as much as they could, especially with US fund managers, who have many of their chips on the US pension system
“The concept of endowment investing comes from those that could invest for the long term, beyond any single individual’s lifetime. And our group of clients have self-selected for that timeframe. They are seeking capital preservation and growth beyond their lives.”
Walsh Bay Partners is not a super fund and, therefore, has less resources compared to an Australian Super or Australian Retirement Trust. But equally it isn’t constrained by YSYF regulations. And Peters has found that international fund managers are willing to partner with the firm and supplement their global offering.
“From the [overseas] fund manager’s perspective, we’re a diversification to their investor base. I don’t think superannuation funds have played that card as much as they could, especially with US fund managers, who have many of their chips on the US pension system.
“We are different. We are an Australian-based, multi-family office that represents 50 to 60 families, foundations and charities, each with significant wealth. So we’re a diversifier in their book and that’s a strong card to play.
“They don’t have to do the educational piece. The fund manager is not expected to rock up on a quarterly basis and present to each individual client about their performance. That’s our job.” he says.
Creating Wealth
Walsh Bay Partners’ client base are predominantly self-made people. Over 90 per cent of its clients have made their wealth through the establishment and running of companies.
This means their client base is business savvy and has a high level of strategic but niche skill. But Peters says this doesn’t necessarily mean they have a clear purpose in mind for their money after exiting a business or making a decision to invest.
“It is amazing how little planning is done post a business being monetized,” he says. “If you’ve got $100 million dollars in the bank as opposed to a $100 million dollar operating business, then you’ve completely changed the dynamic of what you can and can’t do. Very few people stop to appreciate that difference and what is required.”
Wealth destruction by subsequent generations is so prevalent that some cultures speak of the ‘third generation curse’, where by the third generation most of the wealth has dissipated.
And this is not just some corny quote found on a kitchen tile. A 20-year study conducted by wealth consultancy The Williams Group involved over 2500 families and found that only a third of families were able to hold on to their wealth by the second generation, while 9 in 10 lost it by the third generation.
If you've got $100 million dollars in the bank as opposed to a $100 million dollar operating business, then you’ve completely changed the dynamic of what you can and can't do. Very few people stop to appreciate that difference and what is required
“It’s not the investments that blow up; it’s governance, it’s strategy, it’s the purpose and it’s keeping your kids on track,” Peters says.
He argues that the number one priority for clients is to figure out what they want their money to achieve. When an individual has dedicated their life to an operating business, this is not an easy task.
Is it to serve as an inheritance? Is it to buy another business? Or is it simply play money? How does that choice effect family dynamics? The answers are different for every family.
“I would say we operate a model process, rather than a model portfolio, that is applied to every family. But when you go through that process, many asteriskses are added on because of how different each family can be,” Peters says.
“Even if two families have the same wealth and the same number of people, there are different objectives, different legacy assets, different potential tax bills, different philanthropic pursuits, different attitudes to ESG and different cash flows,” he says.
The potential investment options for clients can also differ quite significantly, depending on their appetite for complexity and willingness to spend time on understanding their options.
“If I’m acting for myself with $50,000 to invest, then I can’t just call up a credible global alternatives manager and ask them to put $10,000 into an institutional private equity fund. But if you’ve got 100 million dollars, then you can play a different game,” he says. “There is this vast space between retail and institutions.”
“Yet, complexity is a massive leap for some families. So the stuff that is commonplace for investment professionals, such as the drawdown nature of private equity funds, initially confuses people. This makes sense, if you aren’t an asset owner managing private equity, you likely have never heard of a pacing plan.”
“Some clients are keen to embrace the complexity, but others are not, they just want to keep it simple,” he says. “And that’s fine. Know what game you are playing. Know what restrictions you have.”
Determining the risk appetite of a client can also be tricky, as many of Walsh Bay Partners’ clients have made their wealth in a specific business or sector, which causes them not only to have a preference for certain assets but also to have an expectation of returns based on their business experience.
The benefits of diversification, the bread and butter of institutional investors, can therefore be a hard sell.
“The hardest thing to change is people’s perception of what is safe. As humans, we are so tied to our personal experience,” Peters says.
“For example, you love property if you were born in Australia post 1960, because you’ve just rode that journey up. But if you talk to someone from, say, parts of America or Ireland, where their markets have faced difficult times, the average person in the street may have a different opinion of property.”
“Regardless, investing in any individual asset class is not safe and any investment professional will tell you no single asset class can make up a safe portfolio,” he says.
Insto versus Retail
In recent years, a number of wealth management groups have been set up in Australia. While some draw their staff from the institutional space, others are more grounded in their retail heritage.
Peters argues that the mindset between the two sectors is still large, one reason being the different consumer protections when investing.
Retail investors are protected under the Corporations Act 2001 and the Financial Services Reform Act 2001, in addition to regulations made by the Australian Securities and Investments Commission (ASIC).
But institutional or wholesale investors are expected to do their own homework. “The interesting bit is where retail wealth advisers are going into this type of wealth advice and move away from the [consumer] protections of retail assets. Some people are getting their eyes opened.
we researched a fund with underlying documentation that stated its manager was indemnified for fraud. An institutional investor wouldn’t allow that to pass. Neither did we. However, we found out through the process that some advised clients had gone into the fund without seeking additional protection, such as a side letter
“For example, we researched a fund with underlying documentation that stated its manager was indemnified for fraud. An institutional investor wouldn’t allow that to pass. Neither did we. However, we found out through the process that some advised clients had gone into the fund without seeking additional protection, such as a side letter.
“Now, it is never fun explaining to clients why some products are down 10 or 20 per cent, whether that’s the markets or the strategy, but we can explain that. That’s our day job.”
“But I can’t say if manager xyz commits fraud: ‘Oh, they’re allowed to do that and we can’t do anything about it because it was buried on page 47 of the IM’,” he says.
While Walsh Bay Partners doesn’t provide legal or tax advice on the investments they recommend, they seek to review all documents of their approved products, including those that are in the retail space and have a product disclosure statement (PDS).
“We use our in-house legal counsel to help review IMs and PDSs. Where products are established offshore, we seek external parties based in that domicile to assist. That approach to due diligence comes from the institutional side where large funds have a team of lawyers to undertake this work” Peters says.
“I expect more institutional professionals are coming into the private wealth space, partly due to super fund mergers. All things equal I think that lifts the quality of the sector and is something I wholeheartedly welcome,” he says.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.