Mar 22, 2023
SVB’s Big Bet on Troubled Private Bank Ends on the Auction Block
(Bloomberg) -- During one of the greatest periods of wealth creation in history, Boston Private was struggling to grow.
A commercial bank that catered to small businesses and homebuyers across New England, it pushed big into wealth management in the mid-2010s.
It scored a major coup in 2014 with its $60 million purchase of Banyan Partners, a respected adviser with $4.3 billion in client assets, only for the founder to quit after less than two years. Partners of another multi-billion dollar team bought back their stake and departed not long after.
Meanwhile at Silicon Valley Bank, its tech clients were becoming so rich that their needs — crafting estate plans, forming charitable foundations — were outgrowing the bank’s offerings.
Days into 2021, SVB said it would acquire Boston Private for $900 million, part of its “vision is to be the premier financial partner for the innovation economy.”
The price struck some industry experts as steep, with the total price tag expected to exceed $1 billion including the costs of stitching the two far-flung businesses together.
By the time SVB collapsed this month, the company and Boston Private had yet to fully integrate their operations or even unify their retail branches.
The merger is back in the spotlight as institutions weigh whether to buy SVB’s private bank subsidiary in an FDIC auction. Bids are due Wednesday, with the regulator allowing parties to submit separate offers for Silicon Valley Bridge Bank NA and the wealth manager to simplify the process.
It’s a downbeat end to SVB’s ambitious bid to vault itself into the competitive world of managing money for the ultra-wealthy. In doing so, it bet on a bank mired in turmoil, with challenges that long predate its parent’s implosion.
SVB didn’t respond to a request for comment.
After Boston Private bought Banyan, executives tasked its founder, Peter Raimondi, with building a wealth advisory juggernaut leveraging the bank’s existing wealth assets.
The effort required a change in mindset.
As registered investment advisers, “we operate under the fiduciary duty — clients matter,” Raimondi said. “At the bank, profits matter. Products matter. My job was to reverse that culture and reverse that thinking.”
After a year and a half, he quit. Raimondi started another firm, Dakota Wealth Management, after his non-compete clause expired and he said eight of his former Boston Private colleagues have joined him.
The wealth management offerings at Boston Private became more institutionalized to make them more scalable, he said. The bank lost another advisory team, leaving a hodgepodge of teams overseeing a smaller pool of assets despite a global wealth boom.
“The bank culture won out,” Raimondi said.
Meanwhile, as SVB’s business boomed on the West Coast, its management was urged to hunt for a private bank to buy. The goal was to keep clients in-house for questions ranging from trusts to the merits of buying versus chartering private jets.
They landed on Boston Private and its $16 billion in client assets, offering $900 million in January 2021, a 30% premium to where its stock was trading at the time. By comparison, Goldman Sachs Group Inc. had bought United Capital, a RIA managing $25 billion, for $750 million two years earlier.
Still, Boston Private also had commercial banking assets, and its largest shareholder, hedge fund HoldCo Asset Management, was irate over the offer. The firm called it “grossly too low” based on the book value multiple and accused the bank’s board and executives of mismanagement and pursuing a sale out of self-interest.
The hedge fund staged a campaign urging other shareholders to vote the deal down. In a March 2021 presentation, the firm blamed the rich valuation of SVB for artificially inflating the value of its cash-and-stock offer.
“SVB has disproportionately benefited from its ties to the technology industry, a sector that thrived during the pandemic but that we now believe faces significant valuation headwinds,” the fund’s managers wrote.
Boston Private’s shareholders voted in favor of the sale, which was made official on July 1, 2021.
For SVB shareholders, the purchase was more costly than it appeared. It committed to spending another $200 million to combine the businesses, a merger cost that was about three times bigger, as a percentage of the overall deal, than the median of similar transactions.
At the same time, SVB’s scattered workforce and breakneck growth during the pandemic sowed confusion among employees, said Patrick Dwyer, a wealth manager for Boston Private before it was bought by SVB. He left the company after the deal and is now a managing director at NewEdge Wealth.
SVB’s private banking group was less sophisticated than other parts of the firm. It focused primarily on offering mortgages for clients, often with flexible terms, and did some capital call loans. Attempts to break into the business of financing private jet acquisitions didn’t stick.
“At the end of day they were a community bank at the right place at the right time,” Dwyer said. SVB “grew like crazy and probably needed a more sophisticated leadership team as the business got larger and more complex.”
The Boston Private executives who helped orchestrate the deal left shortly after the sale. SVB Private’s assets shrunk by more than $2 billion in the 12 months through Dec. 31, according to fourth-quarter financial statements.
Some of its advisers have already left to join a rival, according to three people familiar with the departures who asked not to be identified because they weren’t authorized to discuss it.
SVB Private is on the auction block at a time when buyers are more discerning than just six months ago. The number of transactions in the RIA industry dropped 20% in the final three months of 2022, the first year-over-year quarterly decline in more than four years, according to DeVoe & Co.
First Citizens BancShares Inc. is still hoping to strike a deal for all of SVB, and may participate in the auctions, Bloomberg reported this week.
The series of bank failures in recent weeks may also make wealthy individuals more careful about where they park their money. SVB Private is a relatively new entrant, cobbled together through wealth-manager acquisitions — what the industry calls “roll-ups.”
“If an amalgamation of firms coming together is the culture, then who wins?” said Kevin Neal, founder of client advocacy company Moenio. “Do I want my client in the middle of that?”
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