Mercantile buys share of Va. firm

19.9 percent stake in Winston Partners targets wealthy clients

March 26, 2002|By William Patalon III | William Patalon III,SUN STAFF

Mercantile Bankshares Corp. purchased a minority stake in a Virginia firm that operates hedge-fund products and invests in private companies, areas expected to bolster the wealthy-client business of the Baltimore-based bank, the companies announced yesterday.

The amount of the deal, which gives Mercantile a 19.9 percent share of the McLean, Va.-based Winston Partners, was not disclosed.

"This is an outstanding opportunity for Mercantile," said Wallace Mathai-Davis, chairman of Mercantile's investment and wealth-management operations. "I think Mercantile has made a very, very fine investment here."

When Edward J. Kelly III became Mercantile's chief executive early last year, he said he inherited a strong bank that only needed significant improvement in one area - its trust unit, which manages money for its wealthier clients.

Since the start of this year, Kelly has moved aggressively to bolster the unit: He's hired outsiders such as Mathai-Davis, and has bought into Winston to plug holes in the trust department's array of product offerings through the addition of hedge funds and private stock offerings.

Those are areas that wealthy clients increasingly expect to participate in, even though they will make up only a small slice of their portfolios, the bank said.

Hedge funds are typically much more complex than mutual funds, and are often managed with far fewer restrictions. And while hedge funds can be more risky than mutual funds, they also offer much greater returns.

Even so, Winston Partners relies on a "fund of funds" approach by including many different hedge-fund managers in its portfolios, strategy that's meant to lessen substantial risk through diversification, the firm said.

Private placements are another investment-product offering today's trust divisions need to offer to compete with their peers. These private stock offerings are essentially a way for outside investors to get in on the ground floor of a company that is still privately held, but needs money to finance its growth. Investors in private placements hope to profit in a significant way when the company is sold to a larger firm or taken public through an initial public stock offering, also known as an IPO.

With Winston Partners, most of the firms it finances are sold and not taken public, the investment firm said.

Kelly said he's known each of the Winston managing partners - A. Scott Andrews and Marvin Bush - for more than 20 years, which made the Virginia company the best one to link with, he said.

"They had credibility, and similar values [to those of Mercantile]," Kelly said.

Andrews said it was his comfort with Kelly that made the deal happen.

"The real theme here is the deep, longstanding personal relationship with Ned [Kelly]," he said.

Together, Mercantile and Winston are hoping to develop some hedge-fund-related products.

While these products would be sold through Mercantile, they also would be sold to other investors. Since these new investment offerings are expected to generate a lot of interest - not to mention fees - Mercantile opted to buy into Winston, to get a share of that extra business, Kelly and Mathai-Davis said.

Mercantile's trust unit has $39 billion under its administration, of which $15 billion is managed by the bank.

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