Is Wall Street’s wealth boom ending?

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In today’s newsletter:

• The wealth boom at banks fizzles

• The Body Shop’s meltdown

• Japan’s deal-hungry chipmaker

Banks face pressure keeping the ultra-rich happy

This week, Morgan Stanley began cutting hundreds of staff in its vaunted wealth management unit and the FT reported its rival Citigroup is tracking how many calls its private bankers are making to clients in an attempt to increase their efficiency.

Citi’s private bankers must now turn in call reports to record each conversation they have with a client — whose net worth typically has to be at least $10mn to qualify for the private bank — and also what was discussed, people familiar with the matter told the Financial Times.

Although the two banks hold radically different positions in managing money for wealthy people, the signs of pressure to bolster profits from both groups are a warning. They signal that one of Wall Street’s big goldmines is facing challenges.

Coming out of the 2008 crisis, big investment banks bet much of their growth on wealth management, understanding that a new regulatory regime would make it hard to earn large trading windfalls.

Morgan Stanley, under James Gorman, who recently retired as chief executive and is now chair, plotted the most successful strategy, pinning much of the bank’s growth on wealth. One of his big early bets was to buy control of Smith Barney from Citigroup and use it as a foundation to build the unit into a powerhouse with almost $5tn in client assets.

But as Gorman has turned Morgan Stanley over to successor Ted Pick, the division’s performance has struggled of late as investors have kept a greater portion of their money in cash because of rising interest rates.

Last month, Pick warned the wealth management business would fall short of profitability targets in the near future. Now come some cuts, which appear to be mostly targeted at support functions.

Citigroup has been in a far worse position after divesting Smith Barney near the market bottom. Chief Jane Fraser recently hired Andy Sieg, the former president of Merrill Lynch Wealth Management, to revive the bank’s wealth business.

The customer call mandate is an edict from Sieg, people told the FT, but it has been badly received by some employees, who felt it was not a productive use of their time.

Zoom out beyond Morgan Stanley and Citi and their moves hint at broader pressures.

Many top wealth teams inside these banks — and UBS and Bank of America — have left in recent years to create their own independent firms.

Lending, one area keeping rainmakers in place, has fallen off in demand as higher interest rates makes leveraging assets less attractive. If customers aren’t gorging on subscription lines, margin loans, interest-only mortgages and other tailored debts, it diminishes the selling points of a bank.

Of course, there is customer service and access. But even those face tests.

The largest alternative investment groups such as Blackstone, Apollo and KKR have created “retail” funds that are easy for investors to get into, making brokerage offerings increasingly bland.

For the ultra rich, there are also new entrants such as multi-family offices such as BDT & MSD that are capturing interest from billionaire families, a veteran wealth manager told DD, making it harder than ever for banks to keep their whales as clients.

“It is all getting commoditised,” the executive said. “If we were not in a rip-roaring bull market, imagine what this would look like?”

The Body Shop falls apart after PE deal

The UK high street and private equity have a troubled relationship. Over the course of more than two decades, buyout firms have repeatedly burnt themselves financially and reputationally on household brands such as Phones 4U and Debenhams.

Their tactics — in which they made money even as the companies they owned struggled — have attracted criticism from politicians and newspapers alike.

So when Brazilian conglomerate Natura put British ethical beauty chain The Body Shop up for sale last year, it needed an investor of supreme skill and courage to succeed where others had failed.

London-based “turnaround investor” Aurelius stepped up, striking a deal to buy The Body Shop in a transaction valuing the company at £207mn.

It was their latest contrarian bet on the difficult sector, having bought sportswear retail chain Footasylum and the owner of LloydsPharmacy in recent years.

Aurelius promised to “re-energise the business” and restore the brand to its former glory as a champion of ethical capitalism, which not only made money but improved society too.

Things haven’t quite gone to plan. After taking over the business at the turn of the year, Aurelius discovered The Body Shop was in worse shape than it had envisaged.

The firm immediately got to work trying to save its investment.

The Body Shop took out loans from its owner, pledging some of its most valuable assets to Aurelius as collateral. This gave Aurelius a claim over them if the company ran into trouble.

A spat also broke out with former Body Shop employees over money they allege they are owed by its new owner.

Earlier this week, administrators were called in for the group’s UK arm. The next day, The Body Shop’s German unit filed for bankruptcy.

As Aurelius struggles to salvage its investment, the path to restoring private equity’s reputation as responsible owners of UK retail is rockier.

Japanese chipmaker takes shopping spree down under

Tasmania is best known for strange marsupials, wood chips, salmon, cricketers and actor Errol Flynn.

Yet it has now made its mark on the semiconductor world after acquisitive Japanese chipmaker Renesas Electronics paid nearly $6bn for a company that traces its roots to the “Apple Isle”.

Renesas, a key supplier of chips to the automotive industry, has been on a deal spree as it looks to diversify, which included adding the Apple supplier Dialog to its stable.

The latest deal is to bring in Altium — creator of design tools to make circuit boards — to the family, in the latest sign that Japanese companies are looking overseas for deals and growth.

While on the surface the Altium deal makes sense for Renesas, our colleagues at Lex warn its growing list of big ticket acquisitions should raise eyebrows.

Altium was founded in the small southern city of Hobart in the 1980s with the aim of making the development of electronics more accessible. It moved to China, and then to California, but maintained its roots in Australia via a listing on the ASX where it has traded since 1999.

It knocked back a takeover bid by Autodesk which tried to buy it in 2021. But Renesas’ cash offer, pitched at a 34 per cent premium, has gained Altium’s backing.

The sale, if consummated, marks another example of the Australian markets being fertile ground for deep-pocketed foreign buyers with Afterpay, Newcrest and Livent among those sold in recent years.

Job moves

• Lingotto, the asset manager backed by Italy’s Agnelli family, has hired Pam Chan to open its New York office and as chief investment officer of its new Mosaic Fund, the WSJ reports. She leaves BlackRock after 12 years.

Smart reads

Small but mighty Baylor University has traded its way to the top of the university endowment performance rankings, the WSJ reports.

Cash machine OpenAI is one of the fastest-growing companies in history, but it faces questions about the long-term viability of its business model, the FT details in this Big Read.

Klein time The talented banker Michael Klein has found himself in the US Senate’s crosshairs for his work with Saudi Arabia, according to Puck.

News round-up

JPMorgan sued by chief executive of fintech it co-owns (FT)

Former Goldman analyst found guilty of insider trading and fraud (FT)

Deutsche Bank threatened with fines over flawed money laundering controls (FT)

What Barclays’ history tells us about its current predicament (Opinion)

Independent in talks to take control of BuzzFeed and HuffPost in UK (FT)

Elon Musk to make another break with Delaware by moving SpaceX to Texas (FT)

Cambridge-led coalition of universities threatens banks over fossil fuel financing (FT)

JPMorgan and State Street quit climate group as BlackRock scales back (FT)

Start-ups worry over EU’s Big Tech crackdown (Opinion)