Kleinwort Benson Group Plc
Kleinwort Benson Group Plc
20 Fenchurch Street
London EC3P 3DB
Assets: £9.57 billion (US$17.31 billion)
Stock Index: London
During their golden age, there was an air of exoticism and romance surrounding British merchant bankers. Many were foreign merchants who had moved to London to escape the turmoil of the Napoleonic wars, and their fraternity had a distinctly international quality. In time, they diversified into banking and loaned money overseas, providing capital for the expansion of the British Empire. As their descendents assimilated into British society, their banks became decidedly British institutions. But the increasing integration of the world’s financial communities over the last 20 years has forced Kleinwort Benson, one of Britain’s largest merchant banks, to regain something of the industry’s old international flavor by building a network of diverse financial enterprises that stretches from London to New York to Tokyo.
Kleinwort Benson was formed in 1961 when the firm of Kleinwort, Sons & Company merged with Robert Benson, Lonsdale & Company Limited. Both houses were British merchant banks of long standing. Kleinwort could trace its roots to 1838, when a Hamburg shipping clerk named Alexander Kleinwort emigrated to Cuba and joined a Havana trading company run by James Drake. Kleinwort relocated to London in 1855. He quickly became the dominant partner, and by 1883 he and his sons were in sole control of the company and had given it their family name. Kleinwort also shifted its focus from trade to merchant banking during these years.
World War I caused trouble for British merchant banks by disrupting foreign trade, and Kleinwort, which relied considerably on business in Germany, was among the hardest hit. Nonetheless, the firm suffered no permanent damage from the war, and even had slightly more capital in 1918 than it did in 1913. But the merchant banks’ traditional business of raising money for foreign ventures never fully recovered after the armistice, due to informal restrictions on foreign trade and increased competition from banks in New York and other up-and-coming financial centers.
In response, Kleinwort joined the industry-wide trend toward raising money for domestic industry in the 1920s. It did so under the guidance of Herman Andrae, Alexander Kleinwort’s grand-nephew, who had become a partner in 1907 and whose influence in the firm waxed as that of his aging uncles waned. Kleinwort took on more domestic underwriting business than it had in the past, but it also embarked on unsuccessful forays into shipbuilding, cotton manufacturing, and fire insurance. In the first two cases, the firm found itself with unprofitable investments in failing companies that it was also forced to manage; in the third, it loaned money to insurance entrepreneur Clarence Hatry, only to lose all of it when Hatry was convicted of fraud in 1929. Kleinwort’s profitable activities in precious metals and foreign currency trading during this decade helped offset these fiascos.
The Depression proved disastrous for many British merchant banks, slowing foreign trade to a virtual standstill. Even worse for Kleinwort, the German government declared a moratorium on the repayment of foreign loans in the wake of that nation’s bank crisis of 1931. In response, foreign bankers with loans outstanding in Germany declared that they would grant no more credit to German interests. Because of its traditional reliance on trade with Germany, Kleinwort was hit harder than most of its competitors by the crisis. But at least Kleinwort survived the Depression, when other merchant banks folded or needed a handout from the Bank of England.
The German debt problem continued to dog Kleinwort after the outbreak of war in 1939. At the time, it had £4.4 million in German, Austrian, and Hungarian bills outstanding. It tried to recover its money through foreign courts, but without success. After 1945, the destruction of the German economy, the loss of prewar loan records, and the fact that Soviet Union did not want to see money repaid to Western bankers from its zone of occupation complicated the matter of settling the debts. In 1951, the West German government and the banks reached an accord whereby the banks would end the credit freeze and German companies would repay their debts, figured at a 4% annual rate from 1939 to 1953. By 1959, Kleinwort had recovered £2 million.
The Benson family came from the Lake District and were of Quaker stock. By the 1780s they had gone into business in Liverpool as cotton merchants. The firm moved to London in 1852 and gradually began to specialize in investment banking. By the end of the century, the Bensons had scored a major prestige coup by providing capital for the railroad construction boom in the American West. In 1948, Robert Benson & Company Limited merged with Lonsdale Investment Trust, whom it had served as bankers, to form Robert Benson Lonsdale.
In 1958, Robert Benson Lonsdale became embroiled in what became known as Britain’s Great Aluminium War. The fracas started when Reynolds Metals, in cooperation with the relatively new British investment firm Tube Investments, made an unfriendly bid to take over British Aluminium, which was then considering a friendly offer from Alcoa. A syndicate of 14 old-line merchant banks, which was led by Hambros and Lazard Brothers and included Robert Benson Lonsdale, came to the aid of British Aluminium. But S. A. Warburg, another London banking house of long standing, sided with Reynolds, producing a bitter and divisive rupture in London’s merchant-banking fraternity. Reynolds finally won, acquiring 80% of British Aluminium stock by early 1959. The Great Aluminium War altered merchant banking by turning mergers and acquisitions into a high-profile, high-profit business.
When Kleinwort and Robert Benson Lonsdale merged in 1961, The Economist described it as “a marriage of essentially complementary partners.” Kleinwort had strong overseas connections thanks to its history of involvement in foreign trade, but was weak in corporate finance and investment banking. Robert Benson Lonsdale’s strengths lay in corporate finance and underwriting, but it had done little business in more traditional areas of merchant banking. The resulting Kleinwort Benson Lonsdale held assets of £60 million. Its new-found size and strength stood it in good stead for the hectic times to come.
The 1960s and 1970s were years of fierce activity for merchant banks, marked by increased competition both from foreign firms and from domestic rivals spurred on by a 1971 Bank of England policy statement encouraging looser regulation of British financial institutions. As a result, merchant banks had to diversify and shuck their traditional specialist status. By 1977, Kleinwort Benson had become involved in unit and investment trusts, factoring, leasing, insurance brokering, venture capital, tax planning, executor and trustee services, property development, commodity dealing, and bullion brokering and dealing, among other services.
In 1965, Kleinwort Benson entered the oil and gas business when its subisidiary Kleinwort Benson Energy began drilling on the continental shelf. Two years later, Kleinwort Benson entered a consortium with 17 other partners, including Barclays and the Bank of Scotland, to form Airlease International, a company specializing in aircraft leasing. In 1986 it entered the domestic life insurance business by buying Transinternational Life from Transamerica Corporation and, even more importantly, prepared itself for the impending deregulation of the British financial markets known as the Big Bang by acquiring the securities brokerage Grieveson Grant.
Kleinwort Benson’s 1984 annual report spoke of the firm forming a “global chain.” In fact, its international expansion had actually been underway for over a decade. In 1967, it opened an investment bank in New York, using its strong reputation in the Eurobond market to get underwriting business. In 1970, it opened an office in Tokyo which, combined with its subsidiaries in Thailand and Hong Kong, gave it a stronger presence in Asia than any other British merchant bank.
In 1984, anticipating the new opportunities that the 1986 deregulation of the financial markets would bring and aware of the increasing interdependence of the world’s financial markets, Kleinwort Benson redoubled its efforts, making several major acquisitions in the United States. In New York, it bought ACLI Government Securities Incorporated, a U.S. government securities dealer, from the investment bank Donaldson, Lufkin & Jenrette, renaming it Kleinwort Benson Government Securities (KBGS). The deal made Kleinwort Benson the first foreign bank to own a government securities firm that dealt directly with the Federal Reserve Bank of New York. In Chicago, it acquired the institutional and funds operations of Virginia Trading Corporation, a futures brokerage. And in Los Angeles, it purchased the services of a group of brokers specializing in interest-rate swaps and renamed it Kleinwort Benson Cross Financing. Also in that year Kleinwort Benson Australia acquired a 50% interest in Australia Gilt Company Group, a dealer in Australian government securities.
Some of these moves worked well; others didn’t. Kleinwort Benson Cross Financing proved to be a consistent moneymaker, while KBGS disappointed its parent’s expectations. Kleinwort Benson had made the acquisition in order to acquaint itself with price trends and auction techniques in the American treasuries market. But KBGS seldom participated in auctions, nor was its familiarity with the demand for treasury securities as strong as had been hoped. In 1988, Kleinwort Benson sold a 25% interest in KBGS to Fuji Bank. In addition, Kleinwort Benson’s Australian banking and securities operations were sold to Security Pacific in October, 1989.
In 1986, The Economist called Kleinwort Benson the “great white hope of British merchant banking,” stating that Kleinwort Benson and S. A. Warburg were the only British merchant banks poised to become world-class financial institutions. But as it turned out, the year of the Big Bang was not entirely kind to Kleinwort Benson. The worldwide slump in bond prices, a decrease in mergers and acquisitions activity in Britain, and problems with Kleinwort Benson’s settlement system all hurt its financial performance and left it in need of capital. Before the year was out, the house had sold a 4.9% interest to American Can, which sold its shares to Morgan Stanley International several months later. Late in 1987, Kleinwort Benson sold a 1.5% stake to Sumitomo Life Insurance, and Consolidated Gold Fields bought a 50% interest in Kleinwort Benson Energy. In 1988, American International Group acquired a 5.3% interest in Kleinwort Benson.
Thanks to the integration of the world’s financial markets, the American stock market crash of 1987 was felt around the world. Nonetheless, Kleinwort Benson survived the crisis in better shape than its competitors. It was one of the few British securities firms that made a profit on equities dealing in late 1987 and early 1988. It also disclosed in its 1987 annual report that its treasury division chalked up “record operating income” due to volatility in the dollar and interest rates.
But Kleinwort Benson did not fare as well in the second half of 1988. Its securities business lost more than £45 million, reducing the bank’s overall pre-tax profits to £17.7 million that year as compared to £51.6 million in 1987. Thanks to this poor performance, its stock price neared a four-year low in the spring of 1989. But Kleinwort Benson remained committed to securities. Jonathan Agnew, who succeeded Michael Hawkes as chief executive of the Kleinwort Benson Group in 1989, staked the firm to the prospect of becoming an integrated investment bank based on the conviction that a strong securities business would help market the products generated by the bank’s other activities. Such an attitude was not surprising, coming from a man who was elevated to chairman of Kleinwort Grieveson Securities in 1987, following the acquisition of Grieveson, Grant and Company, in an effort to give the former Grieveson Grant younger and more aggressive leadership.
Nonetheless, Kleinwort Benson’s share of the British equities market remained at 5% in 1989, not enough to put it in the front ranks of Britain’s securities firms. Corporate finance continued to account for a large share of its revenues and according to The Economist, it also had “the biggest banking book of any British merchant bank, with some £3 billion of loans outstanding.”
With its place in the securities industry somewhat uncertain, the future of Agnew’s vision of Kleinwort Benson as a fully integrated investment bank seems equally up in the air. But merchant bankers have always had to live with uncertainty. No matter what its future, Kleinwort Benson still deserves credit for its ambitious program of expansion and diversification in the 1970s and 1980s, which recalls the golden age of the British merchant banks. Back then, the influence of the merchant bankers extended to the far corners of the world as they provided the money that built the empire. Kleinwort Benson recognized early on that the future of merchant banking also lay over the seas. By 1989 it could boast of offices and subsidiaries in ten countries and four continents—a small empire of its own.
Kleinwort Grieveson Securities Ltd.; Kleinwort Benson Securities Ltd.; Kleinwort Grieveson Charlesworth Ltd.; Kleinwort Benson International Ltd.; Kleinwort Benson International Inc.; Kleinwort Benson Industrial Finance Ltd.; Robert Benson Lonsdale & Company Ltd.; Fendrake Ltd.; Kleinwort Benson Development Capital Ltd.; Kleinwort Benson Investment Trust Ltd.; Kleinworth Grieveson Investment Management Ltd.; Kleinwort Barrington Ltd.; Kleinwort Benson International Investment Ltd.; Kleinwort Grieveson Financial Services Ltd.; Kleinwort Grieveson Insurance Brokers Ltd.; Kleinwort Benson Trustees Ltd.; Sharps Pixley Ltd.; J.S. Knight & Son Ltd.; Edward Day & Baker Ltd.; Vale & Weetman Ltd.; Harley Mullion & Company Ltd.; Renown Energy Ltd. (50%); Kleinwort Benson (Guernsey) Ltd.; Fenchurch Navigation Corporation (Hong Kong); Kleinwort Benson (Jersey) Ltd.; Kleinwort Benson (Europe) S.A. (Belgium); Banque Kleinwort Benson SA (Switzerland); Fitrust Fiduciaire et Trustee S.A. (Switzerland); Kleinwort Benson Inc. (United States); Kleinwort Benson U.S. Finance Inc.; Sharps Pixley Inc. (United States); Kleinwort Benson Government Securities Inc. (United States); Virginia Trading Corporation (United States); Kleinwort Benson Cross Financing Inc. (United States); Kleinwort Benson Australia Ltd.; Kleinwort Benson (Hong Kong) Ltd.; KGIM Pacific Ltd. (Hong Kong); Kleinwort Benson (Hong Kong) Trustees Ltd.; Kleinwort Grieveson Securities (Asia) Ltd. (Hong Kong); Sharps Pixley Pacific Ltd. (Hong Kong); Rodskog Shipbrokers Ltd. (Hong Kong); Kleinwort Benson Investment Management KK (Japan); Kleinwort Benson (Singapore) Ltd.
Channon, Derek. British Banking Strategy and the International Challenge, London, Macmillan Press Ltd., 1977; A Short History of the Kleinwort Benson Group, London, Kleinwort Benson Group, 1988.