Latin America represents significant potential for Equity Bank And Trust Bahamas Limited to build out its boutique private banking business as the continent enjoys shoots of economic growth. Dillon Dean shares his views on the `significant potential' on offer, not only to extend the bank's HNW client relationships in Brazil, Mexico and other key markets, but to help The Bahamas raise its profile as a gateway to the Americas.
Latin America represents a fountain of opportunities for financial services firms based in the Caribbean and given its proximity to a triumvirate of markets – Central America, South America and North America – The Bahamas is uniquely positioned to respond to the changing economic conditions of the region.
There's no doubt that Latin America is a strategic hot bed for those wishing to bring bespoke financial services to the growing HNW investor base in markets such as Brazil and Mexico.
At a macroeconomic level, Brazil has, of course, experienced particular volatility.
As the World Bank points out, between 2003 and 2014, Brazil's economic progress lifted 29 million people out of poverty. Average income levels rose 7.1 per cent. However, GDP growth has slid in recent times, dropping from 4.5 per cent on average between 2006 and 2010 to 2.1 per cent between 2011 and 2014. It contracted by 3.8 per cent last year and is forecast to contract by a further 3 per cent in 2016. Political turmoil (President Dilma Rouseff was impeached on 31 August) and crashing commodity prices have eaten in to Brazil's economic development.
"Brazil's medium-term outlook will depend on the success of the current adjustments and the enactment of growth-enhancing reforms. Raising productivity and competitiveness is the main challenge for the country to achieve higher growth in the medium-term," cites the World Bank1.
Still, there are signs that Brazil is stabilising, with former Vice President Michel Temer now installed as President. The Brazilian real fell to 4.02 against the US dollar early in 2016 but has since recovered to 3.23 at the time of writing. This is a country with 200 million people and huge natural reserves. Despite losing 1.4 per cent of their wealth last year, Capgemini's "World Wealth Report 2016" shows that there are still 148,500 HNW individuals in Brazil2.
Brazil and Mexico on the radar
Equity Bank And Trust Bahamas Limited certainly views Brazil as a key market. As Dillon Dean, its Managing Director, explains: "Our initial focus is on Brazil, which is Latin America's largest market. Admittedly its economy fluctuates and goes up and down but we've seen confidence returning post the latest political turmoil. We are hopeful that the Petrobras situation will be resolved shortly and that Brazil will stabilise because the potential there is tremendous in terms of infrastructure and building out its economy.
Brazil is Latin America's largest individual economy, accounting for 40 per cent of the region's total GDP. Brazil's businesses are even more dominant, comprising 45 per cent of the region's companies, and capturing 51 per cent of the revenue generated by the Latin Trade Top 5003.
"Naturally, the proportion of wealth being created in Brazil outweighs the other Latin American jurisdictions. Thus it calls for attention to the number of wealthy Brazilians that may utilise the services we offer," adds Ivylyn Cassar, Equity's Vice Chairperson.
"Nonetheless, we remain welcoming to all of Latin America, as the region collectively boasts `Latin America is a large market with high growth potential that is increasingly important to the world economy'. The region's GDP of USD7.4 trillion already accounts for 8.5 per cent of global GDP, and by 2017 its real GDP growth rate is expected to surpass that of all other regions except the Middle East and North Africa."
Another important market that Equity Bank is training its sights on is Mexico, Latin America's second largest jurisdiction.
"We also have our eyes on Colombia where we have seen a lot of reform, a lot of movement in terms of growing that economy but there's still a long way to go," says Dean. "We believe that Colombia, with its natural resources – similar to Brazil and Mexico – has significant growth potential and The Bahamas is looking very closely at this jurisdiction. Furthermore, Peru and Chile have potential and Argentina has cleaned up its debt problems and appears to be open for business again. They are more on the periphery of our radar. For now, our immediate focus will be on Brazil, Mexico and Colombia."
As Latin America grows, Dean feels the Caribbean will likewise grow. The Bahamas is just three hours from Mexico City, for example, and Panama, which is a hub for Central and South America. It is in the same time zone as Miami and New York. Between North, Central and South America it is very well positioned with respect to the type of services that Equity Bank, and others, can provide.
Latin America is "on the radar" of the offshore captive industry, opines Cassar, with its proximity being only one factor that makes it an alluring proposition as a potential source of business and insurance products, which are quite popular in jurisdictions such as Chile and Peru4.
"The flexibility of our legislation allows for adaption to the cultural norms of the countries. This is evident by the ICON fund which emulates the limited partnership style of business in Brazil. Our opportunity is resident in the ability to provide tax-saving strategies to Latin Americans emulating the business structure norms of their jurisdictions.
"Furthermore, we provide centralisation services for their banking, trust, and family office needs. The government of The Bahamas has an advantage in that it has a public private partnership with the financial services sector and is very responsive to changes in regulation, cultural norms and the needs of Latin Americans," explains Cassar.
Full banking services available
One recent development that is likely to boost Equity Bank And Trust's business potential in Latin America is the approval of its banking license by the Central Bank of The Bahamas. This now enables Equity Bank And Trust to offer full banking services and is being headed up by Alain Kunz, who brings more than 20 years' private banking experience to the table having previously worked for UBS and several Bahamian based asset management groups.
"We see banking as the next obvious growth area of the business," stresses Dean. "We took our time introducing it because the provision of banking services is a sensitive area and we wanted to be fully prepared. Initially, we led with trust services and ancillary corporate products and, specifically with respect to Latin America, we led with investment funds such as the ICON, which the Brazil market is very familiar with."
Now, with banking services at its disposal, it gives Equity the ability to leverage synergies in terms of cross-selling opportunities: for example, it can act as the custodian, the asset manager, provide payment services and so on.
"We can do more with our existing clients rather than just provide investment structures for them. We can take on their assets and safeguard them as the custodian. What we have found, as a boutique private bank, is that by partnering with larger institutions – particularly in Brazil – we can provide them with services that they are not necessarily well positioned to provide for their clients: custody services, investment fund administration services, etc.
What Equity Bank And Trust is finding, from time to time, says Dean, is that clients will tell these large institutions that they don't want to put all their eggs in one basket as it relates to custody services. `Why not put 20 per cent of my assets in custody with Equity Bank?' they ask. This makes sense as it reduces their counterparty risk exposure.
"As a result, having a banking license should prove to be a useful growth extension to what we do," adds Dean.
Kunz and a team of senior relationship managers will offer Equity's growing private banking client base customised front and back office services. In short, private banking is just one of four areas of expertise that Equity intends to focus on as it looks towards Latin America. In total, they include:
- Investment funds provision
- Private banking
- Residency options
- Family offices and multi-family offices resource sharing
Two-fold growth strategy
To continue briefly on the private banking point, by building relations with Latin American banks, Equity Bank And Trust is seeking to better support HNW clients who wish to extend their onshore domestic investment programmes by finding the most efficient offshore fund structuring options.
"We have a number of institutional contacts with whom we liaise and who provide us with introductions. Alain is fluent in Spanish, French and English. I am fluent in Spanish and speak some Portuguese, and we have another relationship manager joining us who is fluent in Portuguese. Not only can we provide Latin American clients with a jurisdiction of choice, but as a smaller boutique institution we can speak to HNW investors in their preferred language. This will be advantageous for us in building out the business and demonstrating that we understand their culture. Speaking the same language bridges many gaps," says Dean.
He goes on to explain that the growth strategy is two-fold.
Firstly, Equity's private bank has built a client book in excess of USD1 billion in assets under administration and in custody. Most of these assets, however, are held with third party custodians. As such, over the next three to five years, Dean confirms that the plan is to take in at least one third of those assets under the Equity Bank roof.
"The second avenue of growth we are pursuing," says Dean, "is to approach new clients directly as we feel we have the infrastructure in place. We want to position ourselves to Latin American clients as a private bank that is open for business.
"These will be the two primary growth drivers for us."
Another, more recent opportunity that Equity is keen to provide to Latin American HNW clients is with respect to the need for alternative residency solutions. The Bahamas is the `gateway to America' and is located just 50 miles off the eastern Florida coast. Lynden Pindling International Airport lies approximately 16 kilometres west of Nassau, the capital and commercial centre of The Bahamas on the island of New Providence. It takes just 30 minutes to get to Miami and 90 minutes to get to New York.
"The availability of high end luxury housing options, a favourable tax regime, a sophisticated financial services infrastructure and a stable, democratic political system are features of living in The Bahamas which we need to convey," emphasises Cassar.
Brazilian and Mexican HNW individuals prefer to own a home in the US. But in some circumstances, they prefer not to take up US citizenship because of tax reasons.
As such, from a domicile standpoint, The Bahamas offers them an option to still own property in the US or the UK, whilst using The Bahamas as their tax domicile.
"They can own a home in Paradise Cay, for example, and have the best of both worlds, living in the US for a certain number of weeks a year. That is something we are pitching to LatAm clients who are interested in looking for resident status here. There are lots of luxury developments in Nassau. The Atlantis Paradise Island resort has seen quite a number of HNW individuals take up residence," says Dean.
Tailored products for LatAm market
With respect to investment funds provision, the products that Equity Bank can offer Latin America are tailor-made compliant products.
In Brazil, for example, the Smart Fund 007 is a vehicle that has been designed specifically for that market; whether it is a private fund or a retail fund, the structure of the Smart Fund 007 allows that fund to invest a certain amount of assets offshore in The Bahamas.
This gives Brazilian investors more international exposure and diversity and allows assets to be invested outside of the country.
"Then there is the ICON fund, which is another customised product for Brazil and other civil law jurisdictions. Unlike a regular entity, when income is distributed out to beneficial investors in the ICON it retains its character as a capital gain and is not treated as a dividend payment, which would then be subject to tax, (10 per cent in Mexico, for example). So this brings certain tax advantages as it relates to assets being distributed out of the fund, in addition to deferred tax opportunities for assets remaining in an investment fund, until those assets are redeemed.
"We've seen significant growth for such compliant products in Latin America and we think we will continue to see strong growth going forward," suggests Dean.
The Smart Fund series has been a great success. Smart Fund 004, for example, can have a maximum of five investors operating as a private investment company and is popular with single and multi-family offices. Then there is Smart Fund 007, which is increasingly being adopted by Latin American investment managers. This is because the flexibility of Smart Fund 007 allows for it to be offered to up to 50 `super-qualified investors' who must each make a minimum initial subscription of USD500,000.
When the fund gets to a certain size, the investment manager can then upgrade their license to a professional fund to take on additional investors. So it's an effective route to market for managers wishing to build performance and AUM in the fund.
Whether it is a HNW investor or an investment fund manager, they can use the SMART Fund product to customise it based on their specific needs and objectives.
ICON Fund: Broader LatAm potential
In Dean's opinion, the ICON Fund illustrates a level of innovation from The Bahamas in terms of how to understand a jurisdiction (Brazil) at a fundamental level. The Investment Condominium is very familiar in Brazil and as Dean comments: "Structuring the ICON to mimic a fund structure in Brazil was a stoke of genius because people there immediately understand the tax ramifications and consequences to using such a structure; it makes it much easier to market the product as a result."
He says that Equity has started to pitch the ICON to Mexico, which is also a civil law jurisdiction. "Once it is used in combination with trust products, the ICON can provide estate and succession planning opportunities to the next generation so it is multi-layered in terms of its approach. It is still an emerging product in Mexico but we are seeing interest as we present the advantages to prospects and we aim to build on the success we've enjoyed so far in Brazil," confirms Dean.
He adds: "I think the ICON has the potential to become a flagship product in civil law Latin American jurisdictions. We will continue to liaise with industry professionals in Mexico, and possibly Colombia. In Chile and Peru, insurance products are often used by HNW individuals with respect to tax planning. It is therefore possible we could couple the ICON with an insurance product to offer in those markets."
The following, according to Cassar, are some of the main features of ICON that serve to illustrate why it has met with such success in Latin America:
1. There is a tax deferral on earnings within the ICON allowing monies to be grown tax free until withdrawn
2. As the ICON shares some similarities to a partnership, it does not have an independent legal identity, which makes it transparent to Latin American tax regimes.
3. The flexible reporting regulations of Bahamian funds (including the ICON) allows for the exemption of the need for an ICON to be audited (with total consent from the investors).
"This allows for cost savings in many situations, especially in the instance of managing Real Assets, in which there is not active cash flow for the fund to necessarily afford this additional expense. This waiver of an audit is also helpful when the planning is being done for the centralisation of a multi-geography audit in a single jurisdiction for consolidation purposes," says Cassar.
When asked to conclude on how he views the future for Latin America, Dean is pragmatic and realises that whilst there are significant improvements needed in markets like Brazil, things are heading in the right direction.
"The Brazilian real has strengthened slightly but given that it exports a great deal having a weaker currency actually works to their advantage. I think Brazil will grow, slowly but surely. Mexico likewise. There has been a lot of political and tax reform and it is better positioned than previously. It is a manufacturing hub with a large skilled workforce and the US is just one of several important export markets.
"With respect to Colombia, it has cleaned up a lot of its internal difficulties and we think it is on a path of long-term economic growth. We want to be part of that growth as HNW individuals look at succession planning and offshore planning from a financial services perspective."