It has yet to generate any profits, or much in the way of revenues according to its most recent annual report and accounts. But the business model employed by London-based Saranac Partners continues to intrigue.
Since its inception in 2015 Saranac has invested over £30 million in establishing the infrastructure and manpower to establish what could turn out to be a very substantial wealth management firm.
Furthermore, all the money spent so far in establishing the business has been raised from a number of backers in the form of equity rather than debt.
Investors currently include Tom Kalaris, founder and a former chief executive of Barclays Wealth; Standard Aberdeen, a big London-listed UK-based investment management firm; and billionaire Jim Mellon along with Galloway Ltd., a firm in which Mr Mellon holds a life tenancy.
More recently thewealthnet reported that the Noe family investment management firm together with and the Zais Group, a New Jersey-based private investment firm, had also acquired equity in the firm.
Using equity rather than debt funding should make Saranac much more resilient going forward. But this does not necessarily generate business or, more importantly, revenues.
So given that it now appears to have all the necessary infrastructure in place, including a cadre of client facing personnel, 2018 should be a very significant year for Saranac in terms of proving its ability to attract client money, generate revenues and ultimately profits.
For Saranac has a high “burn rate” in terms of spending investors’ capital. During 2017 it effectively got through another £15.14 million according to its most recent annual report and accounts which has just been deposited at Companies House.
Around two thirds of this, or £10.34 million, is accounted for by employee expenses.
And Saranac’s employees certainly don’t appear to come cheap.
With 35 employees, including directors on the books the “average” employee accounted for £295,472 of costs during 2017. But this is an improvement on 2016 when its 19 employees accounted for £9,254,287 of costs, or an average of £487,068.
At present Saranac’s directors appear content with the situation pointing out that its £13.61 million loss “is in line with expectations and reflects the early stage of the business”.
Furthermore Saranac intends to recruit more client facing personnel during 2018, which will almost certainly increase employee-related costs further.
So how big will Saranac have to grow before it assumes profitability and over what time frame will this occur?
These are impossible questions to answer, not least because Saranac doesn’t appear to be totally dependent on investment management fees. Nor has it published an assets under management figure to provide the basis for an estimate of revenue yield.
Moreover, investment management fees accounted for just £432,358 of the £1.21 million of revenues booked for 2017 with non-investment fee revenue accounting for the remainder.
But this revenue breakdown may not be representative of what is to come. Investment management fees could become much more important relative to non-investment management-related fee income. Or perhaps not.
Now that it is in revenue generating mode the firm’s experience during 2018 should provide further enlightenment, especially when it comes to estimating both the size and the time at which Saranac will become profitable and in a position to generate dividends for its shareholders.
It may also provide an indication of just how sustainable its growth is.