Blackstone Group’s purchase of a controlling stake in Luminor won’t alter plans to prepare the Baltic bank for an initial public offering, according to its chairman, Nils Melngailis.
The need to go public “might be less urgent,” after the deal, he said in an interview in Riga, Latvia.
“Blackstone is in no rush to do it, so I think our timetable might extend, but it depends,” he said. In October, Melngailis said an IPO could take place in 3-5 years depending on market conditions, which he says is still the main scenario.
Blackstone has agreed to pay Nordea Bank AB and DNB ASA 1 billion euros ($1.2bn) to buy 60 per cent of the third-largest lender in the Baltic region, the banks said on Thursday. The investment comes amid a string of money laundering scandals, which have added to misgivings about a region that has been characterised by a lack of liquidity and geopolitical tensions due to its proximity to Russia.
Melngailis said that concerns about money laundering, most recently at the Estonian branch of Danske Bank A/S, are “clearly on the top of everyone’s minds, including our own.” But he also says Luminor has taken extra steps to ensure it’s protected from such forms of financial crime, including cutting the kind of non-resident business that has tended to be associated with laundering.
“We’ve been very diligent ever since we established Luminor,” he said. “We’ve come in with a new management team, we’ve quite actively been reducing our non-resident business.”
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Luminor said last month it has imposed tougher requirements for business involving non-resident clients and Baltic and Nordic customers now make up more than 99 percent of its customer base. In the second quarter, the bank’s Estonian unit implemented a “low-risk policy” for private banking customers that resulted in a 2 per cent decrease in deposits.
The Luminor deal isn’t the first time Melngailis has collaborated with Blackstone. He led a failed bid backed by the private equity firm for a management buyout of Latvian telecommunications company Lattelecom a decade ago. He then briefly acted as an adviser for Blackstone before becoming chief executive of Parex Banka, which the Latvian government had taken over after a run on the lender’s deposits. Melngailis used Blackstone to help negotiate with Parex’s syndicated lenders.
Luminor will be “in a better position” to issue bonds to replace its parent funding after receiving a Baa1 deposit rating from Moody’s Investors Service earlier on Thursday, Melngailis said. The lender expects to be able to sell covered bonds next year, chief executive Erkki Raasuke said in a separate interview.
Raasuke, who served as Swedbank AB’s chief financial officer in 2009-2011, will also work with his former boss, Michael Wolf, who is now a senior adviser to Blackstone.
“I don’t think we’ll be strategically expanding our balance sheet unless there are some unforeseen circumstances, if there is a portfolio that we see is attractive,” Melngailis said. “I think we can get our plans in place more quickly then we otherwise would have done.”
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
