Listed fund manager mergers tipped as competition soars and fees squeezed

Listed fund management businesses face significant decisions about consolidation in the year ahead, say bankers and analysts.

Platinum Asset Management’s Andrew Clifford. Picture: Adam Yip

Listed fund management businesses will be at an inflection point in 2024, as they face fund-specific challenges and industry-wide headwinds priming them for scrip-based mergers and acquisitions, bankers and analysts say.

From the rising competition of both the exchange-traded fund sector and super funds – once clients, now rivals – to rising costs, high interest rates and leadership transitions that create internal volatility, the industry faces a relentless squeeze on fees and stability, they say.

Then there are the name-specific factors: Platinum Asset Management, Magellan Financial Group, and Perpetual are all going through their own local dramas.

Consolidators like Regal Group, the Sydney-based investment manager formed in 2022 through the merger of Regal Funds Management and VGI Partners, have shown their pursuit of scale.

“Listed funds management businesses are at really interesting inflection points,” Jarden investment banker Mitchell Schauer said.

“Should these businesses be listed? Can they consolidate through scrip-based combinations to drive scale, relevance, operational efficiencies and synergies?

“Is that something they can undertake and successfully execute? Can they harness private capital as clients to drive the credit growth in a listed format or are they better off unlisted?

“Some of these questions will be sought to be answered over the course of 2024 through M&A.”

Net investment inflows into ETFs managed by big offshore names such as Vanguard, State Street and Blackrock, as well as growing local managers such as Betashares, grew 36-fold to yearly inflows of about $13bn in the two decades since 2001, according to Morningstar data compiled by Betashares.

This was even when net inflows fell 7 per cent in 2023 from $14bn in 2022, as investors moved away from risky assets and into cash or bonds earning the highest rates in years at a time of heightened uncertainty.

By comparison, over the same 22-year time frame, yearly net inflows into open-ended managed funds rose from $30bn in 2001 to redemptions totalling $37bn in the 11 months to November, the data shows. This was a 63 per cent increase in net outflows from the $22bn that exited the industry in 2022.

“The cyclical headwinds will unwind but the structural headwinds will stay,” Morningstar equity analysts Shaun Ler said.

“Competition from cheaper passive options like Vanguard will not go away, and neither will cheaper options from new technological-orientated quant funds that can replicate human efforts or the institutional investors that are in-housing investment management.”

Betashares chief executive Alex Vynokur expected investors to keep replacing higher-cost funds with ETFs and calculated that the industry would hit a record of more than $180bn in funds under management in the coming year – up from about $150bn at the end of July.

BetaShares chief executive Alex Vynokur.

Amid an expectation of lower or more stable rates, investors have started to move back into riskier asset classes, which was likely to benefit active funds that want to capture the gains. The intense levels of competition, however, would continue.

“That pressure will still be there but it has eased a little (in recent months),” DNR Capital co-founder and chief investment officer Jamie Nicol said.

“If you are performing well then that’s not going to be a headwind. If you are not performing well, then passive is an option (for clients). It will depend on performance.”

High inflation, particularly around labour costs, was another problem facing the industry. At the same time as fees are being squeezed, operating costs are rising, which inevitably impacts profitability.

“Asset management is a human capital-intensive business, and at companies that can’t adjust their cost base as quickly, then their earnings will fall”, Mr Ler said.

DNR Capital chief investment officer Jamie Nicol.

“One example of this is Platinum. Their funds under management have continuously compressed, but because of wage inflation and because they are expanding their team, costs go up and revenues go down. And therefore earnings will contract.”

Outflows have hurt Platinum hard, with its shares falling by about three-quarters over the past five years. Last month, the company appointed a new chief executive in former management consultant Jeff Peters. Mr Peters will have to turn around the business, turn Platinum’s outflows into inflows, and oversee a successful management and investment team transition. He replaces industry veteran Andrew Clifford, who had acted as both CIO and CEO since 2018.

“More and more people are realising the importance of having proper succession planning,” Mr Ler said.

“Everybody will tell you they have good succession planning but how do you know? Signs emerge in how visible other team members are and how often they speak.”

Platinum’s circumstances have made it a takeover target, and Regal Partners is considered a suitor after building in 2022 a substantial shareholding in the company.

Regal ceased to be a substantial shareholder in Platinum in August 2023, but it has also targeted companies such as Magellan, the former market darling that in the past three years has undergone a very public and tumultuous leadership transition.

Sydney-based Regal last year bought alternative listed manager PM Capital – which was also facing a transition from an investment team led by founder, chairman and chief investment officer Paul Moore, and analysts expect it to keep adding to its stable. Its appetite is likely to be for add-on acquisitions rather than a big-bang deal, they said.

“I expect further consolidation in the market,” Mr Ler said. “Particularly, I’m expecting some of the more commoditised portfolio managers to either be weeded out or be bought by another portfolio manager.”

Consolidation could achieve benefits of scale, lower costs and provide an opportunity to pass those cost savings on to clients in the form of lower fees in order to compete with ETFs. It could also add diversity to groups and boost product distribution capabilities.

But consolidations are notoriously difficult, and bankers point to Perpetual’s recent acquisition of Pendal Group as an example of how easily they can go wrong.

“It hasn’t gone great, right? The market hated it,” said one banker who declined to be named. “It’s not always easy to do these mergers. When you put two managers of Australian equities there can be capacity issues where you end up managing too much capital in the asset class to outperform.”

Since Perpetual’s cash-and-stock acquisition was agreed to in 2022, the company’s shares have gone sideways and Perpetual found itself targeted by Washington H. Soul Pattinson last month.

Soul Patts proposed to buy Perpetual’s wealth and trust units for $2bn and spin out of the funds management arm, but the offer was rejected.

Perpetual, which said it would pursue the split of its divisions itself, has in the past received interest from private equity investors. But bankers in the sector say PE buyers are not particularly interested in that industry at the moment.

“Other than Apollo and TA Associates, there are not many private equity firms interested in fund management businesses,” one banker said, referring to Apollo’s ongoing interest and product partnership with Challenger, and private equity firm TA Associates’ ownership of Yarra Capital.