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Martin Gilbert Leads Aberdeen to the Big Time
The serial deal maker is racheting up his activity in a bid to go global.
Martin Gilbert, co-founder and CEO of Aberdeen Asset Management, is a deal junkie. Over the past quarter century, he has built Aberdeen into one of Europes leading independent money managers through a series of roughly 40 transactions, ranging in size from the initial tiny £60,000 ($88,000) buyout of an investment trust in Aberdeen, Scotland, that gave the company its name to the £212 million acquisition of Deutsche Banks U.K. fund management business four years ago. Gilbert has used the deals to gain heft and expertise while wringing substantial cost efficiencies out of his growing empire. Along the way the CEO has had one big scrape with regulators and some spells of poor performance, but he has never wavered in his quest to build a leading European franchise.
Now, in the midst of the worst market meltdown in decades, the 53-year-old Scot is staying true to form: Rather than turning cautious, hes ratcheting up his activity in a bid to go global. Last fall Gilbert struck a deal with Mitsubishi UFJ Trust & Banking Corp. under which Japans biggest bank bought a 9.9 percent stake then worth about £100 million in Aberdeen on the open market in exchange for the exclusive right to market the firms products to institutional investors in Japan. (Mitsubishi has since raised its stake to 14 percent and can go as high as 19.9 percent under the deal.) In December the CEO agreed to buy the Sf75 billion ($67 billion) non-Swiss asset management unit of Credit Suisse Group in a transaction that will make Aberdeen the largest U.K.-listed fund manager, with about £150 billion ($218 billion) in assets, ahead of rival Schroders, which has £110 billion. Not content to sit still, he is already searching for his next target, with a particular eye on the U.S., even before the completion of the Credit Suisse deal, expected at the end of June.
Gilbert, who has degrees in accounting and law, says the arithmetic behind his acquisitiveness is simple: "Two and two make five in the asset management business, even in a difficult market," he tells Institutional Investor in an interview over sandwiches at Aberdeens offices overlooking St. Mary-le-Bow Church in the City of London. "Scale is everything."
Gilberts strategy of pursuing consolidation in hard times certainly resonates with investors. European mutual funds suffered record net client outflows of £400 billion last year, according to London-based mutual fund data provider Lipper FMI, and with economic activity and corporate earnings continuing to contract, the outlook remains grim. Yet over the six months to the end of March, Aberdeens shares have risen 0.77 percent, to 131 pence, compared with a 21.2 percent fall in the shares of Schroders, which also bid for the Credit Suisse business, and a 30.1 percent drop in those of smaller competitor Henderson Group.
"Aberdeen bought the Deutsche assets at a good price and stripped out a lot of the costs," says Richard Watts, a fund manager at London-based Old Mutual Asset Management, which owns about 1.7 percent of Aberdeen. "The opportunity to take out costs from the Credit Suisse business is also very high." Watts estimates that Aberdeen trades at about 11 times expected 2010 earnings but believes it could reach 15 times should stock markets recover.
The Deutsche franchise was troubled, but it gave Aberdeen much-needed expertise in fixed income. Gilbert got rid of all of Deutsches equity and multiasset portfolio managers except for two graduate trainees and transferred those portfolios £16.8 billion in assets to Aberdeens own fund managers. In fixed income, however, he kept most of Deutsches senior portfolio managers and adopted the units investment process. He managed to retain 75 percent of Deutsches clients, a good percentage for such a deal.
That careful, cost-conscious integration helped Aberdeen nearly double revenues, to £302 million, in the financial year ended September 2006, the first full year following the acquisition, and more than triple pretax profits. In the 12 months ended last September, revenue rose by 23.6 percent, to £430 million, and pretax profits edged up 0.9 percent, to £95.1 million.
Analysts are hoping that Gilberts latest acquisition will prove equally profitable. "The Credit Suisse deal is expected to enhance earnings by about 30 percent," says Andrew Mitchell, an analyst at Fox-Pitt, Kelton in London. "The terms of the deal look attractive, and they will likely take on a small number of Credit Suisse staff and use Aberdeens own investment strategies." Fox-Pitt, Kelton has an outperform rating on Aberdeen shares.
For Credit Suisse, which is taking a 24.97 percent stake in Aberdeen in exchange for the business, scale is not the only consideration. "One of the attractions of Aberdeen is that it gives us an opportunity to take part in the expected consolidation in the industry," says Gary Withers, the London-based chief executive of Credit Suisse Global Investors. "Martin is very open about being a serial deal maker, and hes done it very well."
Aberdeens moves are part of a wider European trend of consolidation. Frances Société Générale agreed in January to merge most of its traditional asset management business into a joint venture with rival Crédit Agricole, which will own 70 percent of the 638 billion ($863 billion) division, with Société Générale taking the remaining 30 percent. SocGen, which sold its troubled U.K. asset management arm to London-based hedge fund manager GLG Partners last year, is keeping its specialist alternatives subsidiary, Lyxor Asset Management.
"There is now a recognition that asset management is a very difficult business for banks," many of which have had poor performance, says Kevin Pakenham, an investment banker at Jefferies Putnam Lovell in London. "We think the development of a large independent asset management sector is the ultimate model for Europe."
Europe has trailed the U.S., where independents like Fidelity Investments, Franklin Templeton Investments, Legg Mason and Vanguard Group are well established. Although Europe has other independents, such as F&C Asset Management, Henderson, Invesco and Schroders, Aberdeen has been by far the most aggressive acquirer.
Still, Gilbert is not the only one with an appetite for deals. In January the recently appointed CEO of Henderson, Andrew Formica, beat out Aberdeen with the £215 million purchase of New Star Asset Management, the once-high-flying retail firm launched by entrepreneur John Duffield earlier this decade that was sold by its bank creditors after it racked up £230 million in debt. The deal boosted Hendersons assets by £10 billion, to £59.5 billion, and strengthened its retail distribution.
Gilbert now has to prove that Aberdeen can manage its newest assets more profitably than Credit Suisse did. Aberdeen has set a target cost-income ratio of 35 to 40 percent for the Credit Suisse business, implying an operating margin a key measure of profitability of 60 to 65 percent. (Credit Suisse wont disclose the businesss previous operating margin.) That compares with Aberdeens operating margin of 26.7 percent in the 12 months ended September 30, 2008. The higher target reflects Aberdeens acquisition of assets and up to 400 employees from Credit Suisse (but not any buildings or systems). Most analysts expect job cuts too, although Aberdeen declines to give a figure.
Even before the Credit Suisse deal, Aberdeen had announced plans to cut £77 million of costs by this September. It unloaded its institutional private equity division through a management buyout in September 2008 and three months later sold its Belgian property management division to BNP Paribas for an undisclosed amount.
Gilberts other big challenge is to prove that his business model isnt only about acquisitions and that Aberdeen can actually manage money effectively. Recent stumbles in its fixed-income portfolios, which represent 44.7 percent of total assets, give grounds for skepticism. Bad bets on the U.S. housing market and overweight positions in the European financial sector have dragged down performance in the groups bond portfolios, leading to net outflows in fixed income of £5.4 billion in the quarter ended December 31. That was partly offset by modest inflows into equities and property funds, but it still left Aberdeen with net outflows of £4.9 billion in the quarter, the first in several years. In addition to fixed income, 30.8 percent of Aberdeens assets are in equities and 24.5 percent in real estate.
"Investors are buying into the cost-cutting story for now, but eventually Gilbert will have to deliver organic growth," says Pakenham. "That is very hard when investment returns are down in key areas."
Aberdeens equity investing has held up better than fixed income under the stewardship of Singapore-based fund manager Hugh Young, who set up Aberdeens Asia-Pacific headquarters in 1992 and was later charged by Gilbert with overhauling the firms equity strategy, which it describes as growth at a reasonable price with a value tilt. Aberdeens funds beat their benchmarks in Asia ex-Japan, global equity and emerging markets in 2008 but were still down heavily, reflecting the worldwide plunge. In Asia, long the most profitable part of the Aberdeen empire, assets under management have fallen from about $50 billion to some $30 billion in the past year.
Gilbert expects the firms biggest growth to come from the battered U.S. market, where he acquired the asset management business of West Conshohocken, Pennsylvaniabased Nationwide Financial Services in 2007. The unit had $7 billion in assets under management at the time. "The U.S. is where all the money is in the institutional market," he says. Gilbert sees a big opportunity for Aberdeen in helping U.S. investors diversify their exposure into overseas markets, and he is looking for fresh acquisitions to build on his foothold.
Gilbert was born in Malaysia, where his Scottish father worked as a rubber planter. He left at the age of nine to attend Robert Gordons College, a boarding school in Aberdeen, on the northeast coast of Scotland. A keen mathematician, Gilbert graduated in 1978 from the University of Aberdeen with a masters degree in accountancy and a law degree. He spent three years with accounting firm Deloitte, Haskins & Sells (now part of Deloitte) in Aberdeen before leaving in 1982 to join the investment department of Brander & Cruickshank, a local law firm that managed Aberdeen Trust, a closed-end fund with about £100 million in assets.
Along with two partners of the firm, Ryan Scott Brown and George Robb, the then-27-year-old Gilbert took part in a £60,000 management buyout of Aberdeen in 1983. The trio then got backing from the Merchant Navy Officers Pension Fund and made a series of small acquisitions, including the £5 million purchase in 1988 of Sentinel Asset Management, which brought Young into the company.
"When we were doing the early deals, we were people from the backwoods up north," recalls Robb, who currently heads London-based Asset Management Investment Co., which finances fund management start-ups. "But Martin has a very good sense of what is doable and what the other side wants."
Short and stout with an easy manner, Gilbert has a facility with figures that makes him a good negotiator, says Ian Hannam, a JPMorgan Cazenove banker who has worked with the CEO on many deals. "He goes into talks without lots of books," says Hannam. "People are disarmed by his style."
Gilberts deal making, and a bull market, helped Aberdeen expand its assets to £34.6 billion, and pretax profits to £48.2 million, in the financial year ended September 2001. Then the business and his career very nearly fell apart.
Aberdeen was a big promoter of split-capital investment trusts, a once-trendy vehicle that had different classes of shareholders, some investing for income and some for growth, among other things. These trusts, often billed as low-risk investments, also employed high levels of leverage. When the equity bear market of 2001 02 depressed the value of the trusts and investor demand started to dry up, many trusts invested in other trusts, creating an illusion of liquidity. Eventually, the split-capital sector all but collapsed, and U.K. investors suffered losses estimated at as much as £900 million.
As the manager of the biggest retail split-capital trust at the time, the £57 million Progressive Growth Unit Trust, which fell by 24 percent in 2001 and 63 percent in 2002, Aberdeen suffered a major regulatory and reputational hit. At one low point a U.K. parliamentary committee member compared Gilbert to a "snake oil salesman" for aggressively marketing the funds. In 2004, Aberdeen agreed to pay £75 million in compensation under a settlement between 18 firms and U.K. and Channel Island regulators, leading the company to post a pretax loss of £87.6 million for the financial year ended September 2004. With its £174 million debt threatening banking covenants, Aberdeen turned to Bank of Scotland (now part of Lloyds HBOS), which bought out other members of a banking syndicate on £51 million in loans, helping Aberdeen avert insolvency. Gilbert recoils at the memory. "It was awful, a nightmare," he says. "The business took 20 years to build and one year to mess up."
Gilbert rebuilt Aberdeen by focusing on institutional investors; such clients accounted for 71.5 percent of the companys assets as of December 2008, compared with 21.3 percent in open-end mutual funds and 7.2 percent in closed-end funds. "Retail is a very different business," he says. "You sell funds that people want to buy, and thats always the wrong time." By geography, 34.7 percent of Aberdeens clients are in the U.K., 28.9 percent in the rest of Europe, 20.9 percent in the Americas, 8.6 percent in the Middle East and Africa and 6.9 percent in the Asia-Pacific region.
Gilbert ditched the star fund manager culture that had made Aberdeen a retail heavyweight, and directed Young to overhaul equities investment. Young decided that Aberdeen needed to "get back to basics and do the homework," as he puts it. He replaced the heads of U.K. and European equities and introduced a formal system of note-writing for all meetings with company management. Aberdeen aims to visit a company three or four times before it invests; staff make about 4,000 company visits a year.
The 2005 acquisition of Deutsche Asset Managements U.K. business remains one of Gilberts biggest coups. With about £46 billion in assets, the Deutsche division represented all that was left of the former Morgan Grenfell Asset Management, once one of the biggest fund managers in the U.K. Although Deutsche had suffered poor performance in equities and was losing staff and mandates, Gilbert wanted its £27 billion fixed-income business which included its Philadelphia-based actively managed unit as well as its U.K. operation to shore up his firms weakness. In fact, Aberdeen was an unexpected bidder, given its small market capitalization of about £200 million at the time, but it overcame bigger rivals Schroders and Frances BNP Paribas with the help of financing from investment bank JPMorgan Cazenove.
After a few years of strong performance, Aberdeens new fixed-income team suffered big losses in 2008 from bets on the U.S. mortgage market and European financial institutions. The firm had an overweight position in mortgages, especially commercial-mortgage-backed securities and nonagency home mortgages that were badly hurt in the liquidity crisis. Returns were also negatively affected by investments in junior bonds issued by European financial firms.
Aberdeens global aggregate bond portfolios, which invest about $6.4 billion in credit, emerging-markets debt and high-yield debt, lost 9.31 percent of their value in 2008, underperforming their benchmark by 13 percentage points, according to the firm. The U.S. Core Plus portfolios, which invest in credit and interest rate relative-value strategies, with $9.1 billion in assets, underperformed their benchmark Barclays Capital U.S. aggregate bond index by 19.31 percentage points for the same period.
That performance has led some investors to decamp, and Aberdeen risks further outflows. The £1.3 billion-in-assets Suffolk County Council Pension Fund is reviewing Aberdeens £80 million mandate after it underperformed Suffolks composite benchmark by 2.9 percentage points in 2008. "Aberdeen underperformed quite significantly," says Peter Edwards, corporate finance manager at the fund. "We are disappointed."
Gilbert responded by shaking up the bond team in February. He tapped Paul Griffiths, global head of fixed income at Credit Suisse Asset Management, to take over as Aberdeens global head when the Credit Suisse deal closes. Griffiths, 42, will replace Gary Bartlett, a former Deutsche manager who ran the Aberdeen fixed-income group from Philadelphia. A former head of global fixed income at AXA Investment Managers, part of the AXA insurance group, Griffiths says he hopes to bring over to Aberdeen some members of his Credit Suisse team as well as some of the banks sector analysis.
The Credit Suisse deal also provides Aberdeen with money market and convertible bond funds, which it did not have before. Of the Sf75 billion in assets being transferred, roughly 40 percent are in money market funds, 39 percent in fixed income, 20 percent in equities and 1 percent in multiasset funds. Credit Suisses boutique structure, which includes both growth and value investing, will likely disappear. "There is only one way at Aberdeen in the equities business," says Gilbert. Thats Youngs way, a bottom-up investing style that stresses the importance of on-the-ground research.
Youngs investing has a strong track record. In 2008, the Asia-Pacific ex-Japan equity portfolios, which have $12.1 billion in assets, outperformed their benchmark, the MSCI AC Asia-Pacific ex Japan index, by 7.15 percentage points, although they still fell a massive 44.48 percent. Over the past five years, the funds had an annualized return of 7.87 percent, beating their benchmark by 2.22 percentage points.
The $6 billion-in-assets global equity funds have a strong long-term performance too, beating the MSCI world index by 6.19 percentage points over five years and 3.06 percentage points in 2008.
Gilbert is betting his acquisitions will help Aberdeen weather global stock market storms. "Financial strength in these markets is an important attribute," he says. "Aberdeen is now in the big league as far as asset managers are concerned."
Over the next couple of years, there will likely be plenty of other buying opportunities, as stressed banks like Credit Suisse shed poorly performing divisions. Credit Suisses Withers says his bank lost patience with its traditional, non-Swiss asset management business after it had to buy about $1.3 billion of troubled securities from its money market funds in 2007 and 2008. (Those funds werent included in the Aberdeen deal.) The bank is retreating to its Swiss business and its alternatives division, which together manage Sf411.5 billion in assets. "This looks like a long downturn, and you have to shape your business to that," Withers notes.
For sellers like Credit Suisse, Aberdeens Gilbert is only too happy to oblige.