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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  

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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  1st,  2015  at  23:59  (Luxembourg  time).  The  PDF  shall  be  uploaded   via  the  web  page:    

   

http://www.lsf-­‐challenge.com/upload-­‐proposal.html  

             

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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.    

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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.    

     

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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.  

     

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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  

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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  

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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    

 

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50%   23%   15%   7%   5%  

Current  Portfolio  

Bonds   Equities   Gold   Commodities   Hedge  Funds  

Appendix  2  –  Portfolio  Asset  Allocation  2014  

                                                   

Asset  Class   Underlying  

Bonds   Global  Investment  Grade  Government  Bonds  Index   Equities   S&P  500  and  MSCI  Emerging  Market  Index  

Gold   Physical  Gold   Commodities   GSCI    

Hedge  Funds   Credit  Suisse  Hedge  Fund  Index  

     

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