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Rothschild & Co | Annual Report 2017
53
1. Overview
4. Financial statements
3.
Management report
2. Business review
5 Significant events after the end of the
financial year
On 3 January 2018, the Group acquired an additional 4,049 shares in
Martin Maurel Sella Banque Privée SAM, a Monaco subsidiary. The shares
were bought for cash of €13.95 million. Thanks to this acquisition, the
Group now controls 100% of this subsidiary.
6 Outlook
In Global Advisory, the Group continues to maintain its position as one of
the leading global advisers. Despite lower global M&A market activity in
2017, principally at the large-cap end of the market, the conditions for M&A
continue to be relatively positive. Rothschild & Co therefore expects current
activity levels to persist into 2018, although the Group remains alert to
the risk of volatility. The Group’s focus remains on growing the business,
particularly in the US market whose contribution is increasing as a result of
our on-going investment and where Rothschild & Co continues to foresee
strong potential for growth.
Private Wealth & Asset Management is well positioned to deliver net asset
inflows and improving profitability. The Group’s strategy of focusing on its
core target markets, leveraging its network and targeting entrepreneurs is
bearing fruit across our geographies. In France, the operational integration
of Martin Maurel is on track to be finalised by the end of the year.
Merchant Banking is committed to growing its assets under management.
Within the Private Equity funds, FAPI II has successfully deployed in excess
of 70% of its commitment and Rothschild & Co will therefore aim to launch
FAPI III in the course of 2018. In the Private Debt funds, following the
successful FADL fundraising, the Group will continue to expand its product
offering both in Europe and the United States of America. Overall, its
portfolios’ performance remains strong but, consistent with its investment
philosophy, the Group remains cautious in its capital deployment efforts,
focusing on attractive risk-reward opportunities with appropriate downside
protection features.
Overall, financial markets have been much more volatile in recent weeks
than seen for the whole of 2017. If such volatility were to continue through
2018 then that could impact market sentiment with a negative effect on the
Group’s businesses. However, if markets continue to be benign Rothschild
& Co would expect our performance to be broadly in line with recent years.
7 Specific risks related to global economy
and financial markets
7.1 Brexit
Following the vote for Brexit, the full impact of this decision on the
relationship between the United Kingdom and the European Union is
far from clear, and it is not sure what progress will be made in 2018.
The recent agreement on certain transitional matters is a positive step
but it seems likely, given the complexity of the issues at stake, that we
will continue to face an extended period of uncertainty before the final
negotiated position is reached.
As a firm which has operations in all the major economies of Europe the
implications for our business model are relatively modest. Our multiple
location model is resilient and very few changes to our legal and operating
structure are likely to be required as a consequence of Brexit. The biggest
risk for our business is the impact on the United Kingdom’s economic
environment.
We continue to monitor these issues closely. Nevertheless, as previously stated,
we believe that overall, Brexit will not be a significant challenge for our business.
7.2 Potential impacts of the low interest rate
environment on Rothschild & Co (and more
specifically on the Private Wealth and Asset
Management businesses)
The low interest rate environment of recent years impacts our business
directly through the returns we make on our cash holdings, although
there is variation between different currencies. Rothschild & Co’s strategy
has been to maintain a low risk profile for such holdings, which are
predominantly invested with central banks but also in investment grade
bonds, systemically important banks and more recently, money and debt
funds. Rothschild & Co has also deployed funds to support its strategy of
growing private client lending in response to clients’ increased demand for
credit. This growth is primarily in segments with strong collateral backing,
such as Lombard lending and residential mortgages, based on conservative
loan to value ratios.
From a client investment perspective, Rothschild & Co has not passed
on negative interest rates to clients but the low interest rate environment
makes it expensive to hold cash on their behalf, particularly Swiss francs
and euros, and we are vigilant to ensure that any enhanced yields, where
available, do not come at the expense of significantly higher risk. More
generally, low yields even on longer-dated fixed-income securities can affect
both advised and discretionary portfolio construction processes. However
we interpret low rates as primarily the result of central bank policy and
long-term liability management by institutions rather than as a sign that
wider business conditions have taken a turn for the worse. Corporate
profitability, outside the volatile energy and banking sectors, has been
historically respectable and the corporates held in our portfolios in general
have not responded to low rates by recklessly gearing their balance sheets.
There are indications in the major economies that this prolonged period
of low interest rates could be coming to an end, with gradual increases
expected by central banks.
Details on the other main risks identified by the Company for the 2017
financial year are set out on pages 68 onwards of this report.