Is the City selling Britain short?
Growing numbers of UK financial firms are cashing in by selling out to foreigners Fprince strtap
Sunday 23 November 1997
Explanations abound. When last week Mercury Asset Management Group, Britain's number one fund manager, agreed to be bought by Merrill Lynch for pounds 3.1bn, many argued Merrill had made Mercury an offer it couldn't refuse. Even the Wall Street Journal ran a headline: "Is the Price Too Rich?"
Others sniffed hidden motives. "The firm has been bearish for months," said a competitor. "Mercury has just made its biggest and best bear trade ever."
Others cited globalisation. The convergence of the world's financial markets is spurring concentration in financial services, so the theory goes, and this concentration inevitably spells a British sell-off because City financial firms, no matter how expert, cannot stand up to Wall Street's size.
There is, however, a different, less comfortable explanation. The fact is that some current City firms are being sold not because they are small but because they cannot compete. The most persuasive demonstration of this theory is not Mercury, but another once proud City fund manager now up for sale called GT Management.
Ownership of GT has migrated out of the City. It rests in Vaduz, Liechtenstein, home to 28,500 citizens and 80,000 letterbox companies. In 1989 the ruling family of Liechtenstein bought GT. There are 120 Liechtenstein royals, although only 18 of them, all males, vote in family conclaves.
Head male is Hans-Adam II, 52, the Prince of Liechtenstein, a postage stamp between Switzerland and Austria, and Europe's last absolute monarch. Current and former GT employees refer to Hans-Adam as the "big prince" and describe him as sardonic and choleric.
When a Liechtenstein supreme court judge challenged Hans-Adam's power after the prince ruled he would not be reappointed as a judge, the monarch responded: "If they do not want the head of our family to be the reigning prince, that is OK. But then they will have to find another head of state willing to pay the costs out of his own pocket. Maybe Bill Gates will be interested and then they could call themselves Microsoft instead of Liechtenstein."
The chairman and chief executive of the company managing GT is Hans-Adam's younger brother, Prince Philipp, 51, described by GT employees as sensitive if slightly flakey and referred to as the "little prince".
Soon after the Liechtenstein royal family acquired GT, Prince Philipp established an Alpine academy where GT employees go to hone their work skills. "Mind-mapping" is taught. According to LGT's 1995 annual report mind-mapping is "a thinking technique which constitutes the major factors for improving memory: imagination, association, and location, with the prime cortical skills: words, numbers, logic and analysis."
When in 1995 the Liechtenstein royal family changed the name of GT (for the initials of the company's two British founders, Tom Griffin and Richard Thornton) to LGT (for Liechtenstein Global Trust) Prince Philipp circulated a memo announcing the name change with a vacuum-packet sachet attached. "In case of any perspiration caused by change," he wrote in a post-script, "please help yourself to the LGT refreshing towel."
Prince Philipp aspires to make LGT "another Goldman Sachs", according to current and former employees. Yet he sounds distinctly uneasy when discussing the nuts and bolts of his firm's business. "What he's good at," says a former employee, "is giving the troops pep talks about the importance of developing a culture of excellence."
A senior GT executive adds: "The little prince is chairman and chief executive officer. But the big prince calls the shots." Prince Hans-Adam often relies for advice on Cuno Pumpin, a professor at the University of St Gallen in Switzerland specialising in portfolio theory and the use of computers in investment decisions. Pumpin is chairman of LGT's strategy committee.
More than scraps about the Liechtenstein royal family are hard to come by. Liechtenstein's secrecy laws - which shielded Robert Maxwell when he raided Mirror Group pension funds and the Fayeds when they purchased Harrods - are among the world's tightest.
GT is owned by the Prince of Liechtenstein Foundation, one of many secret companies controlling the royal family's estimated pounds 1.5bn fortune. Prince Hans-Adam and his relatives own forests in Austria, rice fields in Texas, a claim on 600 square miles in the Czech Republic, and the last Leonardo da Vinci work in private hands.
The story of GT and Liechtenstein shows how British-owned City firms come to be sold, and what happens after they are. The story has quite a history attached.
Managing other peoples' money became a modern
profession in the early 1960s when employers began offering employees retirement benefits. "I joined SG Warburg in 1962," recalls Andrew Smithers, a founder of Mercury Asset Management. "At that point pension funds were insured." Young turks realised it was unrealistic to insure pension funds. The way to preserve savings was to invest in stocks and bonds. Thus active portfolio management for pension funds was born.
In 1969 two more young turks, Griffin and Thornton, broke from Foreign & Colonial fund managers and set up their own firm, GT, with pounds 20,000 of capital and backing from the Berry Trust and UK Provident.
GT prospered almost immediately. It lured Oxbridge graduates with the promise of fabulous salaries. Stockpickers focused on Asia when Japan was known for exporting cheap transistor radios. In the mid-1980s UK Provident, lost money on North Sea oil investments. To raise money it sold its prize asset, GT, in a public flotation. Investors snapped up shares at 210p.
Still, the October 1987 stockmarket crash nearly wiped out the firm. "Directors took salary cuts of 15 per cent, everyone else 10 per cent," recalls a former GT executive. GT management decided the firm needed more capital. They met with the Swedish financier Christian Norgren. Since 1981 Norgren had been managing some of the Liechtenstein royal family's financial affairs, and had advised on the modernisation of the family- owned Bank in Liechtenstein.
Norgren persuaded the royal family that its bank should diversify into global fund management. In 1989 the royal family bought GT for pounds 92.5m and folded GT into the Bank in Liechtenstein, but left Norgren and the professionals in London to get on with their business.
As the deal closed, GT's British fund managers were shocked when the US Securities and Exchange Commission accused Norgren of insider dealing. He was charged with improperly dealing in shares during the takeover of a US company called Combustion Engineering Corp by the Swiss-Swedish industrial giant ABB Asea Brown Boveri, on whose board Norgren sat. Norgren paid a $300,000 civil penalty without admitting or denying wrongdoing - and parted company with the Liechtenstein royal family.
Relations between Vaduz and GT in London deteriorated further after the Bank in Liechtenstein shares with which GT management had been paid for their equity in the firm fell in value from Sfr8.5 (pounds 2) to under Sfr4.
In 1989 US investors woke up to the fact that there were stock markets beyond America. GT was one of a band of firms with a reputation for international fund management. David Minella, the head of marketing for GT in the US, built demand for GT unit trusts. Between 1989 and 1992 GT's funds under management rose from $300m to $9bn.
Three years on, however, the Wall Street competition had begun to develop their own overseas mutual funds. GT's profits dipped and the royal family decided to sell. Vaduz negotiated the sale of GT to Boston-based insurer Liberty Mutual for pounds 220m. But the sale did not go through. "Nine of the 10 senior people at GT declined to sign contracts committing them to work for Liberty Mutual," says a former GT fund manager.
The collapse of the Liberty Mutual deal angered the Liechtenstein royal family. Prince Philipp took over as chairman and chief executive of GT. Power inside the firm tilted away from the City towards the US. Oxbridge culture gave way to American marketeering culture as David Minella became the favourite of the royal family.
In December 1994 the Mexican peso crisis hit, causing plunges in the emerging markets which are GT's specialty. In 1995 GT lost important US institutional clients, including AT&T. The fund manager's after-tax 1995 net profit fell 25 per cent to $101.7m.
The royal family's response was to impose even tighter control over the City fund manager. It paid consultants Sibson & Co $4m to tighten up the firm's incentive-based compensation regime. In July 1996 the news leaked in the New York Post that the royal family was paying $300m to acquire New York-based Chancellor Fund Management.
"We see ourselves competing against the JP Morgans, the Morgan Stanleys, the Fidelities, the Schroders," GT president Minella said at the time.
Other GT employees portrayed the acquisition differently. "The family bought Chan- cellor to cover up the mess," one said. "GT was falling apart."
The merging of GT and Chancellor has not gone well. The firm's fund investing in blue chip companies for US pension funds underperformed the market in the final quarter of last year and the first quarter of this year.
The Liechtenstein royal family commissioned management consultants Bain & Co to recommend what it should do with the GT-Chancellor combine. "Bain told the Prince there was no synergy between fund management business and the Bank in Liechtenstein, and recommended the fund management business be sold," reports an employee.
In February David Minella resigned as president of the fund management group. In August Warren Shaw, the Chancellor chief executive, resigned. Last week the news leaked that the royal family had retained Goldman Sachs to sell the British fund manager it acquired in 1989 and turned from a British company into a Swiss-style company with American marketeering overtones.
It remains to be seen what price LGT will command. Paying pounds 3.1bn, Merrill bought Mercury for a sum equal to 3 per cent of Mercury's funds under management. If LGT, which has $65bn under management, goes for anywhere near this valuation, the royal family could realise $1.5bn from the sale.
The story of GT is fundamentally different from that of Mercury. MAM is a story of an adequately capitalised British company making a fine judgment and deciding its best interests lay in selling up to foreigners. GT's is a story of an under-capitalised British company selling up to foreigners and suffering terribly.
Neither story answers the question: Is the City selling Britain short? Mercury argues that its sale to Merrill guarantees London jobs and helps secure the City's place as a world capital of finance.
But the story of GT stands as a warning. Ten years ago GT stood alongside Mercury as one of the City's bright lights. Since passing into the hands of the Liechtenstein royal family it has added little to the City in the way of either jobs or reputation.
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