Banker to the Queen Hunts U.K. Startups for Risk-Hungry Clients

(Bloomberg) -- When British entrepreneur James Dean decided to raise money for his tech startup this year, he did what company founders usually do -- he talked to venture capitalists. Yet Dean disliked what he heard, so he sought an alternative. He didn’t choose equity crowd-funding or peer-to-peer loans. Instead, Dean turned to Coutts & Co.

As a 326-year-old private bank that caters to Britain’s ultra-rich and counts Queen Elizabeth II as a client, Coutts may not be the first name that jumps to mind as a tech disruptor. The firm, after all, still requires its male employees to wear neckties when meeting with clients.

Yet in what’s believed to be the first program of its kind in European private banking, Coutts runs an invitation-only investment club that connects clients with handpicked U.K. companies seeking early-stage funding. The price of admission: an initial investment of 250,000 pounds ($329,000).

The move is a departure for a private bank that prides itself on preserving capital for its well-heeled clients, not helping them wager on enterprises that may take years to pay off, if ever. Venture capitalists typically declare victory if just one out of 10 plays deliver mammoth returns. That’s why Coutts opens the club solely to professional investors with the capital, the expertise -- and the stomachs -- to handle the risk. (It helps that investors are eligible for tax breaks, such as not paying capital-gains levies, thanks to a U.K. government program that supports small businesses.)

Banker to the Queen Hunts U.K. Startups for Risk-Hungry Clients

“Not everyone wants to go down this road,” said Alan Higgins, Coutts’s chief investment officer, over afternoon tea in the bank’s marble-clad headquarters near London’s Trafalgar Square. “It is likely that there will be cases where individuals make huge gains, but equally, there will be cases where people lose lots of money.”

Yield Hunting

The investing tastes of the super-rich are shifting in an era where low interest rates and the rise of blockbuster tech unicorns are spurring broad interest in early-stage companies. While private equity and venture capital have been staples in portfolios for two decades, many high-net-worth investors may want to do more than plow their cash into vast funds that charge steep “2 and 20” management and performance fees, but offer little in the way of direct engagement with entrepreneurs.

About 250 of Coutts’s private-banking clients, many of whom are worth tens if not hundreds of millions of pounds, have joined the club to get that hands-on experience. They deal directly with company founders, join their boards, and introduce them to members of their own business networks, which could lead to other deals.

“With the state of global markets, people are looking for yield, and active collaboration between investors and entrepreneurs is a natural step,” said Richard Jones, the co-founder of Cambridge Sustainable Investment Partners, a consulting project for the asset-management industry at the elite British university. “A lot of these investors have made money in tech, and so they understand the opportunity and the risks.”

Coutts, which is indirectly an arm of the state thanks to the crisis-era rescue of parent company Royal Bank of Scotland Group Plc, is taking some risks of its own. While Coutts doesn’t take stakes in the firms, it is putting its reputation on the line by showcasing them as investments to its clients.

‘Goose Egg’

By contrast, VC firms such as Accel Partners and Hoxton Ventures are steeped in the idiosyncrasies of early-stage enterprises in the U.K. and can draw on long track records as they size up new business models. And both buyout and VC funds spread their risk across dozens of names in their portfolios, while Coutts club members commit to just a handful.

“People may like the sound of an early-stage firm, but chances are it’s going to be a goose egg,” said Chris Adelsbach, managing director at Techstars in London, an accelerator program for startups. “To have a diversified portfolio, you have to have at least 20 positions.”

For Coutts, the club offers a way to deepen its relationships with select customers at a time when competition is jolting London’s sleepy private-banking industry. Tech savvy robo-adviser upstarts are circling at the same time giants such as UBS Group AG and Credit Suisse Group AG are expanding their market share. Switzerland’s Union Bancaire Privee is poised to buy London-based wealth manager ACPI Investment Managers, according to people knowledgeable with the transaction.

Those customer relationships won’t be enhanced if Coutts can’t unearth promising prospects. To that end, Coutts managing director Mohammad Kamal Syed leads a team of five who criss-cross the U.K., hearing pitches from hundreds of companies in sectors ranging from retail to light manufacturing to tech. Some are startups, and some are more established firms that need growth capital.

Banker to the Queen Hunts U.K. Startups for Risk-Hungry Clients

Sometimes, the small-business bankers at RBS and its NatWest retail lender refer names to Syed. Those that make the grade are then featured on a members-only portal on Coutts’s website. Coutts charges clients a small percentage of the capital they invest.

“We have entrepreneurially-minded clients who want to invest in private companies, but they don’t have a lot of time to source deals,” said Syed. “We filter deals for them.”

Those transactions can take time to ripen. In mid-2017, for instance, Dean, the entrepreneur, pitched Coutts on his company, which is called SenSat. Aimed at helping the construction industry improve its planning processes, it uses drones and proprietary software to create 3D topographical maps that are so precise they show details as small as a soda can. At that time, Coutts passed because SenSat wasn’t generating enough revenue.

Over the next few quarters, the startup signed on more than two dozen customers, including Highways England, the government-owned company that manages the national highway system. Eager to raise capital, Dean made the rounds with VCs. But he found their terms too onerous, or disliked their ideas about growing his business. So Dean got back in touch with Coutts, which saw enough momentum to introduce the company to its club members.

“These high-net-worth investors had either built and sold multi-billion pound businesses from near scratch, or managed some of the largest private equity funds in Europe,” Dean said. By June, SenSat had raised 2 million pounds from the Coutts club members.

One of them, a private-equity veteran, used to make decisions based on reams of financial analysis developed over months of due diligence. Now, Coutts does ample vetting for him, and he subsequently spends a couple hours talking with management of the companies he’s sizing up.

Ultimately, he said he makes a call based on a gut feel. For now, the investor, who asked not to be identified to protect the privacy of his personal assets, is slightly down on the 1.4 million pounds he’s put into SenSat and four other companies. But more than anything, the investor said, the club has strengthened his relationship with Coutts.

That’s exactly what Syed wants to hear. Coutts may have a historic nameplate and still provides, quite literally, white-glove service for clients when they meet with their bankers over tea or a luncheon. But it needs an edge in a changing marketplace, and for all the risks, offering up clients ready-made direct investments in small growth companies doesn’t hurt.

“The combination of financial returns and the experience -- that’s a great combination for many of our clients,” Syed said. “And we do the heavy lifting.”

©2018 Bloomberg L.P.

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