Bloomberg News

Ex-Goldman’s Kagawa Aims to Boost Japan Private Wealth

November 25, 2011

(Updates with an analyst comment in eighth paragraph.)

Nov. 17 (Bloomberg) -- Kagawa Asset Management Co., run by a former Goldman Sachs Group Inc. banker, is aiming to boost its private banking assets by 67 percent as Japan’s rich seek to preserve their $4.6 trillion wealth amid the global market rout.

Kagawa Asset is seeking to boost assets under advice by 10 billion yen ($130 million) in 12 months, said Yuichi Kagawa, the founder of the Tokyo-based firm. Kagawa has grown assets under advisory to about 15 billion yen since starting in April 2009 and currently has about a dozen clients who are business owners of both publicly traded and private Japanese companies, he said.

Lower costs and a cultural preference for local expertise may help Kagawa win business in the nation with the world’s highest number of millionaires after the U.S. Demand from high- net-worth individuals is rising as the yen surged to a post World War II high against the dollar and global markets head for the first annual loss since 2008 amid Europe’s debt crisis.

“There aren’t that many players yet in Japan’s private banking business who can provide the kind of services that the Japanese rich are looking for,” Kagawa, 43, who worked at Goldman Sachs’s private-banking business for a decade, said in an interview in Tokyo on Nov. 15. “This is the time for us to be building up.”

Boosting Market Share

Japan’s high-net-worth wealth pool of $4.63 trillion increased 6.97 percent in 2010 from the previous financial year, according to Scorpio Partnership, an adviser to wealth management institutions and family offices. The number of millionaire households increased by 12.2 percent in 2010 to about 12.5 million, led by the U.S., followed by Japan, the Global Wealth Report by Boston Consulting Group in May shows.

Other so-called boutique Japanese firms are aiming to take up market share in the wealth management business in Japan, which is currently dominated by the country’s biggest banks.

Star Mica Asset Management Co., also run by a former banker at Goldman Sachs, is aiming to use its expertise in real estate investment advice to more than double its assets under advisory to 20 billion yen in two years. Book Field Capital Co., co- headed by a lawyer and a Goldman Sachs banker, started a hedge fund this year to raise money from wealthy individuals that are seeking to diversify their investments.

“Japan remains a complex riddle for international private banks,” said Sebastian Dovey, managing partner at Scorpio Partnership in London. “Many have attempted to grow domestic businesses but have failed. A large part of the reason for this is that Japanese wealthy investors are very much in favor of utilizing local operators for their domestic requirements.”

‘Justifying Costs’

Japan’s top three banks manage about half of the wealth in the nation’s three-biggest regions of Tokyo, Osaka and Aichi prefectures, according to Hiroyuki Miyamoto, the general manager of Nomura Research Institute Ltd.’s financial business consulting department in Tokyo. Local brokerages account for 20 percent, while foreign brokerages, trust banks and regional banks make up more than 20 percent.

“The boutique-type firms don’t have a big market share yet, but those with some expertise in the type of investments they provide are becoming more popular,” Miyamoto said.

Japan’s smaller private wealth firms typically earn advisory fees rather than trading commissions. That means they tend to have lower staff costs because they don’t execute trades, so don’t need trading desks, back office staff and risk managers.

“Major global players face the difficulty of justifying the costs related to keeping a relatively big team of private bankers in Japan,” Kagawa said.

Navigating Volatility

Kagawa Asset is currently offering dollar-based foreign bond-related funds as well as alternative investments such as hedge funds for Japanese high net-worth individuals who are seeking stable returns amid the market rout exacerbated by Europe’s sovereign debt crisis, Kagawa said.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged more than 70 percent this year amid Europe’s debt crisis and stalled U.S. economic growth. The Japanese currency has strengthened more than 7 percent against the dollar in 2011, while the benchmark stock index has slumped 18 percent, heading for its worst annual performance since 2008.

Japan’s rich are more conservative investors compared with those in the rest of Asia, according to a report by Capgemini SA and Bank of America Corp.’s Merrill Lynch unit in October. Wealthy Japanese allocated 19 percent to equities in 2010, compared with a global average of 33 percent, while fixed income made up 25 percent of assets versus a 22 percent global average. They held 29 percent in cash and deposits, almost double the 16 percent elsewhere in Asia.

Hotel Concierge

Star Mica is offering real estate advice along with wealth management services including investments in global equities and bonds, said Yutaka Kobayashi, a former Goldman Sachs banker who started the company as a unit of a property asset management firm, Star Mica Co., in June 2007.

Real estate accounts for 23 percent of wealthy people’s assets, according to the Merrill Lynch-Capgemini report.

Star Mica has about 17 clients and 8 billion yen in assets under advisory, he said. This year it started offering its own hedge-fund strategy that uses computer models for clients seeking to diversify assets, Kobayashi, 46, said.

“My understanding is that boutique private banks’ role is to provide a hotel concierge-type service,” Kobayashi said in a Nov. 15 interview. “Demand for investment advice from investors faced with this unstable and uncertain market is strong.”

--Editors: Malcolm Scott, Linus Chua.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net.


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