Luxembourg School of Finance Wealth Management Case Competition March 2015 This case was written by LSF Master students, used for the sole purpose of a student run- and organised case study competition. All pertinent names mentioned in this work are fictitious. Any resemblance to real persons, living or dead, as well as real companies, is purely coincidental. LSF CHALLENGE 2015 TO ORDER COPIES OF LSF CASE COMPETITION 2015, SEE DETAILS ON BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION FROM THE ORGANISING COMMITTEE OF THE LSF CHALLENGE.
RULES AND GUIDELINES Each team has to provide one single merged PDF file (max. 20MB) containing the following: 1. Cover page with the name of your team, as well as the participants, your university, and your areas of study; 2. Your proposal of maximum 2,000 words; 3. An Executive Summary of maximum 1 page. The deadline is May 1 st, 2015 at 23:59 (Luxembourg time). The PDF shall be uploaded via the web page: http://www.lsf- challenge.com/upload- proposal.html LSF CHALLENGE 2015 Page 1/8
HISTORY Jorgos Paros was born in 1954, in the suburbs of Athens, from a rather modest family. After the death of his father, Mr. Paros and his mother moved to Lille (France) where, at the age of 16, Mr. Paros started working in the construction industry. During the next 20 years, the young Mr. Paros would excel in his professional duties, and eventually become project leader of a new venture of the company. This division became so profitable, that Mr. Paros eventually proposed to spin it off from the parent company. In 1990, after a very successful MBO, Mr. Paros was elected CEO of this newly created entity. Since then, he runs the Paris- based company BuildingBlocks, which provides residential- and commercial construction services, as well as materials. It focuses mainly on the Western European market, but has also a growing exposure in Eastern Europe. During the coming years, BuildingBlocks would further expand in Europe and achieve considerable success in the construction business. This motivated Mr. Paros to gradually buy out every other shareholder, leaving him with 100% of the share capital. In 1999, eager to finally finance a global expansion of his company, Mr. Paros approached several renowned private equity firms and proposed them to join the capital of BuildingBlocks, selling 49% of his stake. Later in 2005, after a very successful global expansion, BuildingBlocks decided to go public on the French market. Mr Paros stake remained unchanged, while the PE exited two thirds of their initial investment. CURRENT SITUATION Mr. Paros and his family live in a spacious apartment in Paris. He is happily married to Rafaella, an Italian citizen, and is a proud father of two kids, Charlotte and Nicolas. Charlotte is currently pursuing her Bachelors degree at the University of Oxford and would like to start an MBA in two years time, preferably in the United States. Nicolas just graduated with a Bachelors degree from MIT and is planning to relocate to Silicon Valley in order to raise capital and found his first Start- Up focused on green- tech, in about one year s time. Rafaella on the other hand, is a former dressage champion and is now looking to open a shop for horse accessories in Paris. For the launch and development of this concept, a budget of EUR 500,000 is expected. In his spare time, Mr. Paros enjoys art exhibitions and is a vivid wine enthusiast. He is also a firm supporter of Olympique Lyonnais since his early childhood. LSF CHALLENGE 2015 Page 2/8
FINANCIAL SITUATION Mr. Paros activity as member of the board of directors of BuildingBlocks provides him with an annual salary of EUR 2MM (before taxes). He is looking into selling 18% of his stake to three of his most trusted senior managers, knowing how important it is to involve the younger generation to further develop the organisation. The proceeds, he wants to park in a personal bank account for future projects. In the meantime he asks you, as his potential advisor, to provide him with a reasonable estimation for a sales price. Also, the board of directors of BuildingBlocks has recently decided to reinvest all distributable amounts over the next five years (Appendix 1). The Paros family owns their duplex in Paris (300 sqm, on Rue des Francs Bourgeois near Place des Vosges) and a newly built vacation house in St. Tropez (600 sqm at Cap des Salins). They recently acquired a newly renovated apartment building in Berlin Kreuzberg (1,500 sqm), which is fully rented. The house in Paris and the villa in St. Tropez have strong emotional values to the family, whereas the apartment building is considered as a long- term investment. These real estates are valued at current market prices. Furthermore, the family is looking into expanding their real estate assets exposure in Europe. Ms. Paros is leading this project and has asked you to guide her. She looks at an investment of up to EUR 10MM. In the last decades, Mr. Paros built a rather risk averse portfolio of EUR 50MM, composed mainly of bonds and equities, which is managed by Banque d Investissement Rosenblum & Cie. in Paris. His bankers just provided him with the latest YE 2014 figures, which show a positive annual return of 2.7% *. The same portfolio yielded a 3.3% return in 2013 and a 3.4% return in 2012. Mr. Paros is not satisfied with either the performance or the composition of his current portfolio (Appendix 2). He is now looking to optimise his portfolio so as to increase the expected returns while still preserving a reasonable exposure to risk. Mr. Paros modest background inclined him to keep a fairly big amount (EUR 25MM) of his wealth in a simple SICAV money market fund in France, held by the same bank. He understands that this amount is not yielding sufficient returns, hence he is thinking of allocating a part of it to a new and more profitable investment. He is keen on engaging into a riskier investment strategy, and has asked you to provide him with an investment proposal, based on a unique and creative trading strategy. He wants to see a track record of at least three years. The family s yearly expenses are about EUR 1MM. * Real returns net of fees LSF CHALLENGE 2015 Page 3/8
FUTURE SITUATION Mr. Paros has started looking into his estate planning. He wants to assure a comfortable income for his family, especially for his children, and help them to fund their personal endeavours. Therefore he asks that at least 10% of his wealth to be invested in liquid assets. Furthermore, he expects the family s cash requirements to increase over the next five years. YOUR CHALLENGE As a rising private banker at Aurum Bank & Co. you are asked to provide the Paros family with a comprehensive wealth management advice, taking into account their current financial situation, future needs and precautions to fund and enable their future projects. A current client of yours, and very good friend of Mr. Paros recommended you for such a service. Keep in mind that you try to pitch- and ultimately win the client. Therefore a holistic and innovative approach is required. It is at your discretion to focus on whatever areas and aspects you feel most important and to assume all the necessary details needed. Try to think out of the box to persuade the family. LSF CHALLENGE 2015 Page 4/8
Appendix 1 BuildingBlocks Key Figures in Million except for Shares and Return data 2012 2013 2014 Market Capitalisation 328.5 152.4 297.2 Shares Outstanding 11.1 8.3 12.1 Return on Common Equity - 21.01 3.76 13.99 Return on Assets - 3.38 0.82 2.43 Return on Capital - - 4.63 8.29 Return on Invested Capital - - 2.51 3.67 Income Statement in Million 2012 2013 2014 Revenue 2,212.5 2,314.8 2,694.2 EBITDA 1.2 93.7 105.6 Operating Income - 54.8 32.5 43.5 Pre- tax Income - 83.1 22.0 60.5 Minority Interests 2.7 0.7-0.2 Net Income - 72.9 17.3 52.8 Net Income Available to Common Shareholder - 72.9 11.7 46.4 LSF CHALLENGE 2015 Page 5/8
Balance Sheet in Million 2012 2013 2014 Assets Cash & Near Cash Items 153.8 110.4 332.9 Short- Term Investments - - - - - - Accounts & Notes Receivable 602.6 610.1 651.0 Inventories 55.1 81.1 96.1 Other Current Assets 147.4 157.6 147.8 Total Current Assets 959.0 959.3 1,227.8 LT Investments & LT Receivables 468.1 389.3 281.0 Net Fixed Assets 409.8 393.5 449.2 Gross Fixed Assets 818.7 801.3 867.6 Accumulated Depreciation 409.0 407.7 418.4 Other Long- Term Assets 300.2 318.6 338.5 Total Long- Term Assets 1,178.1 1,101.4 1,068.7 Total Assets 2,137.1 2,060.7 2,296.5 Liabilities & Shareholders' Equity Accounts Payable 470.5 515.2 613.4 Short- Term Borrowings 157.5 254.6 192.9 Other Short- Term Liabilities 362.4 345.5 439.4 Total Current Liabilities 990.4 1,115.3 1,245.7 Long- Term Borrowings 632.3 442.3 497.4 Other Long- Term Liabilities 211.1 180.6 205.7 Total Long- Term Liabilities 843.4 622.9 703.1 Total Liabilities 1,833.8 1,738.2 1,948.8 Total Preferred Equity 0.0 0.0 0.0 Minority Interest 2.9 3.9 2.8 Share Capital 141.2 141.2 163.8 Retained Earnings 159.1 177.4 181.0 Total Equity 303.2 322.6 347.7 Total Liabilities & Equity 2,137.1 2,060.7 2,296.5 LSF CHALLENGE 2015 Page 6/8
Cash Flow Statement in Million 2012 2013 2014 Cash From Operating Activities Net Income - 72.9 17.3 52.8 Depreciation & Amortisation 56.0 61.2 62.1 Other Non- Cash Adjustments - 27.4-14.6-18.0 Changes in Non- Cash Capital 83.9 47.0 109.7 Cash From Operations 39.5 110.9 206.7 Cash From Investing Activities Disposal of Fixed Assets 21.6 25.5 42.7 Capital Expenditures - 127.0-115.9-55.9 Increase in Investments - 23.5-17.5-14.2 Decrease in Investments 11.0 0.6 17.2 Other Investing Activities - 8.1-1.0 21.9 Cash From Investing Activities - 126.0-108.3 11.7 Cash from Financing Activities Dividends Paid - 1.5 - - - 3.8 Increase in Long- Term Borrowing 154.8 59.7 48.8 Decrease in Long- Term Borrowing - 68.2-103.9-37.9 Increase in Capital Stocks - - 0.0 9.1 Other Financing Activities - 57.1-1.7-12.2 Cash From Investing Activities 28.1-46.0 4.1 Net Change in Cash - 58.3-43.4 222.5 LSF CHALLENGE 2015 Page 7/8
Appendix 2 Portfolio Asset Allocation 2014 Current Portfolio 50% 23% 15% Bonds Equities Gold Commodities 5% 7% Hedge Funds Asset Class Bonds Equities Gold Commodities Hedge Funds Underlying Global Investment Grade Government Bonds Index S&P 500 and MSCI Emerging Market Index Physical Gold GSCI Credit Suisse Hedge Fund Index LSF CHALLENGE 2015 Page 8/8