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Why the Janus-Henderson Deal Was Just the Beginning
Tough times for active managers have bankers predicting an uptick in M&A.
This summer, PIMCO hired Emmanuel (Manny) Roman as CEO, marking a new era for the firm long identified with its outspoken founder — and former bond king — Bill Gross. Gross, who had built $1.5 trillion PIMCO from the ground up, and departed amid much rancor in 2014, was an investor, first and foremost. French polymath Manny Roman is a business builder and deal maker. He started his career with Goldman Sachs’ prime brokerage in the mid-1980s before joining hedge fund firm GLG Partners; in 2010 he was key in orchestrating the sale of GLG to Man Group. In joining PIMCO, the market speculated, Roman moved to Newport Beach not for the sunshine but to hash out a few more deals.
Asset management investment bankers are anticipating an uptick in mergers and acquisitions among traditional investment managers over the next 12 to 18 months. Indeed, it’s already begun.
London-based Henderson Group announced its merger with American money manager Janus Capital Group in October. Henderson CEO Andrew Formica says that since 2008 the challenges facing asset managers have deepened. Costs have risen, and clients’ buying behaviors have changed: “They are demanding greater transparency, greater depth, and fewer partners.” Even good managers are discovering that it is no longer easy to be a stand-alone boutique, Formica notes. “Clients are demanding more than just performance. The managers not being acquired may wither and die quite quickly.”
Among the most powerful trends causing asset managers to huddle together for warmth is the growth of indexing and quantitative approaches to investing. Furthermore, regulatory and technological changes have impacted firms’ means of distribution and, in the case of technology, their ability to generate above-market returns. Amid record-low interest rates and a roaring S&P 500, returns for active management have been mostly poor, with few firms consistently outperforming their passive brethren. Some outstanding boutiques may be able to flourish on their own. For everyone else the rules of the jungle apply.
For midsize active managers, this means finding a partner, courting acquisition by a larger firm, developing new distribution networks or products — or watching market share diminish. Even behemoths like PIMCO need to grow their footprint, experts say.
As managers jockey for position in the new world order, Ju-Hon Kwek, a partner with consulting firm McKinsey & Co., says that the asset manager league tables will look very different in five to ten years’ time. In a November white paper, “Thriving in the New Abnormal: North American Asset Management,” Kwek identified trends transforming the business, such as the end of 30 years of exceptional returns, a shake-up in active management with investors favoring low-cost providers, still more money moving into alternative investments, a true digital revolution in asset management, and heightened regulation. M&A is a vital element of managers’ response to these challenges as they seek new expertise or distribution platforms. Goldman Sachs sees similar shifts at work in the U.K. and continental Europe.
OM Asset Management and Pioneer Investments are two firms on the market today. Old Mutual, OM’s London-based parent company, announced early this year that it was planning a strategic separation of its four businesses, including the manager-of-managers. In May, Old Mutual was reportedly close to a deal with Affiliated Managers Group, but discussions fizzled out. Pioneer was put back on the block earlier this year for the second time in six years. Its parent company, UniCredit — also Italy’s largest lender — is being forced to sell the $242 billion asset manager as a nationwide banking crisis worsens. The divestment is part of UniCredit’s strategic business review, the results of which it is expected to announce on December 13.
Aberdeen Asset Management is among the U.K. asset managers considered to be possible acquisition targets, although CEO Martin Gilbert has called independence a business advantage. “I’ve never tried to sell the business, but we do get a lot of people wanting to buy us,” he admitted on Bloomberg TV in May (utterly failing to dampen speculation). “So far, we have managed to resist. There has been a lot of interest, but being independent is a massive benefit to us.”
In September, Goldman downgraded Aberdeen to a sell rating, pointing to concerns that recent fund flows into emerging markets — a particular strength of Aberdeen — have benefited ETFs far more than mutual funds, volatility in Aberdeen’s flagship funds, and Gilbert’s own sale of around 69 percent of his unrestricted stock in the company. If Aberdeen does not sell, it could look to acquire new businesses, as it has in the recent past, to build out its fund offerings.
Another oft-rumored merger contender is U.K.-based Jupiter Asset Management. In this case, vice chair and former CIO/CEO Edward Bonham Carter (brother of British actress Helena Bonham Carter) has repeatedly insisted otherwise. Some bankers still see Jupiter as a likely candidate, citing its brand quality and track record as desirable assets. Others, however, say that it is precisely these attributes which mean Jupiter might be one of the few boutiques able to continue plotting its own course.
Firms currently in an acquisitive frame of mind include HSBC and Amundi. Paris-based Amundi, which was formed in 2010 as a joint subsidiary between French banks Crédit Agricole and Société Générale and went public in 2015, has an excess of €1.5 billion ($1.91 billion) in cash on its books. In 2013 it bought Smith Breeden Associates, a play to enhance its fixed-income business and build U.S. market share.
Japanese and Chinese banks, asset managers, and insurers are other potential candidates for deals and partnerships as these institutions look to move into the U.S. and Europe while non-Asian money managers seek to develop a greater footprint and, importantly, distribution in the growing Asian marketplace.
With 2016 almost in the bag, the investment banking league tables are virtually complete. While 2016 has not been a record year in deal volume, it seems a harbinger of things to come. Through mid-November, 272 asset management M&A deals were announced, with a total value of $37.5 billion, according to Dealogic. The largest of the year at that point was Banco Santander’s $2.9 billion purchase of a 50 percent stake in Santander Asset Management, followed by the $2.8 billion Janus–Henderson union. But then, on December 12, Amundi announced a $3.8 billion all-cash offer to buy Pioneer.
The Janus–Henderson merger offers almost perfect product and market synergy, as both CEOs have observed. The two businesses complement each other with little overlap, and the deal give the combined firm access to markets across the globe. In Asia, Janus has a partnership with Dai-ichi Life Insurance Co. — its biggest shareholder and Japan’s largest listed life insurer. Such a merger may appear as the model for other managers to replicate, but success will ultimately depend on meaningful integration of the two companies.
Performance is the dog yapping at the heels of many traditional active managers looking to get hitched. Report after report has shown that the average active manager fails to beat the index after fees. Most recently, a scathing study from U.K. regulator the Financial Conduct Authority slammed that country’s industry, saying “our evidence suggests that actively managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperformed their benchmarks after costs — while products available to pension schemes and other institutional investors achieve returns that are not significantly above the benchmark.”
PIMCO CEO Roman agrees with that assessment — overall. In October 2013, as head of alternatives firm Man Group, Roman recorded a TEDx talk on luck versus skill. One reason for the performance failure of the mutual fund industry, he suggested, might be that most skilled investors work in hedge funds and alternatives. Now, at PIMCO, Roman needs to diversify. Acquiring an active equity manager or, more likely, individual equity teams could be a path for the still bond-heavy firm. Another move would be investing in an alternatives business. One firm, which Roman knows well, springs to mind: $81 billion Man Group.