International equities has been the thing that has long eluded blueblood Sydney fund manager Perpetual, and now chief executive Rob Adams is walking a few city blocks to try to secure it.
With two smaller-scale acquisitions under his belt, Adams is in a hurry to find his transformational play. And he has looked to Perpetual’s cross town rival Pendal to get him there to build a $245bn funds giant.
On Friday night Pendal chairman Deborah Page received the phone call about Perpetual’s plan to combine the two fund houses under a $2.4bn buyout.
This prompted a Pendal board hook-up over the weekend where it was decided to take the offer seriously enough to leave the door open – although it came with a caution: the current market volatility is hurting the values of all asset managers.
The key is, does the internationally focused Pendal need Perpetual?
And while there have been recent fund outflows, what sort of control premium would be needed to move ahead with Perpetual?
Pendal investors on Monday liked the idea of a merger enough to push up the fund manager more than 20 per cent higher to trade as much as $5.56 a share – although this is a slight discount to the $6.23 a share implied valuation of the Perpetual offer.
The heavy share-based component of the proposed share and cash buyout also makes it a different proposition for Pendal’s board to consider on behalf of their 26,000 shareholders. They will now essentially have to push ahead with reverse due diligence to see if the merged business is a good fit to shareholders.
Perpetual, which would have a 52 per cent stake in the new business, will also need to win over Pendal’s staff which have a sizeable stake in the business.
This puts the $1.8bn market capped Perpetual in the uncomfortable position of bidding for the bigger ($2.1bn) Pendal.
However, by using its higher-priced shares – Perpetual trades on a multiple of more than 17-times earnings, compared to Pendal which is on just a little above 10 times – Perpetual will get an immediate earnings uplift from any deal.
The proposed buyout also gave AMP a slight jump, gaining more than 3 per cent as it put a higher valuation on its in-house funds business while the beaten-down Magellan, which is in the middle of a deep strategic funk with co-founder Hamish Douglass on personal leave, surged as much as 10 per cent.
Among the broader fund disruption, Phil King’s Regal Funds is in the process of buying out Rob Luciano’s VGI Partners while Geoff Wilson’s Wilson Asset Management remains on the hunt for undervalued funds.
In going after Pendal, Perpetual’s Adams is playing the scale game.
He sees highly complementary investment businesses with Pendal which has $137bn in funds under management, including $36bn in Australia. He is also after the well-regarded European and emerging Asian markets funds management platform which will fill the gaps in his business.
The combination of the two also offers significant cost savings, with a single corporate structure and combination of distribution and sales. It would also mean eliminating Pendal’s Chifley Tower offices and silver service catering, which is a hangover from the glory days of funds management.
Evolution
Pendal has evolved from the old 1990s top-of-the-town funds giant BT Funds. In the decade and a half following the 1987 stock market crash Sydney funds management was dominated by BT and Perpetual. And with cultures based around big rewards and bigger egos, the rivalry was intense.
Former Westpac boss David Morgan saw value in the BT Funds franchise in 1999 amid the global carve-up of Bankers Trust following its acquisition by Deutsche Bank but walked after initially floating a hefty price of $2.2bn.
Morgan’s aim was to combine the people managing the funds with the distribution, a move he saw as crucial for growth. However he was aware of the cultural incompatibility of BT’s entrepreneurial funds business – including its bonus structure – under a conservative retail banking environment. He had a second chance at picking up the business just three years later for a much more discounted $900m and combined it with the Rothschild wealth business he picked up earlier.
It soon became apparent that a partial listing of the funds management business was needed to offer an equity-based payment structure for employees. In 2007 Westpac launched a partial ASX listing of BT Funds, which also gave it the base to begin diversifying its business away from Australian equities. Over the following decade Westpac sold down its stake and no longer has any ownership ties to the funds manager; also there is some $12bn in Westpac’s BT Wealth funds under management.
Under the then chief Emilio Gonzalez (himself a former Perpetual chief investment officer), BT Funds supercharged its move into global equities in 2011 with the acquisition of London-based funds firm JO Hambro Capital for a little over $300m.
While Perpetual has long eyed its international-focused rival, it has struck at an opportunistic time. Pendal last year saw the retirement of the highly regarded Gonzalez after more than a decade with new chief executive Nick Good, a former State Street executive, who is based in Boston. At the same time Page took charge as chairman just two months ago, replacing the long-serving James Evans.
Return to confidence
Pendal shares suffered a bruising in January when it revealed it had suffered more than $6bn in outflows during the December quarter, including more than $5bn by two key UK clients. Pendal said it was a result of the clients restructuring their portfolios.
The move also signals a return to confidence for Perpetual, which before Adams taking charge had years of drifting funds performance and a series of missed management bets on international equities. The well-timed move on Boston-based ESG investor Trillium Asset Management helped Perpetual capture the global wave of green funds looking for a home. It has exploited this to capture new fund inflows, while the ESG focus has helped it attract a share price premium. Perpetual also has diversified its income strongly away from asset management including recovering corporate trust and a private wealth business.
Adams two years ago paid $465m for 75 per cent of Dallas-based global fund manager Barrow Handley, giving it capability in US equities and funds under management of more than $60bn across key equities.
The challenge for Adams if any future deal moves ahead is Pendal itself has grown through a series of acquisitions which makes integration harder to pull off. And while Perpetual is debt free he would have to borrow to fund the $650m cash component of the deal.
The planned merger comes at a time when asset managers are deeply unloved, trading on most measures at a more than 40 per cent discount to the broader market. According to Credit Suisse numbers, this is among the lowest levels in more than 15 years as the bull market in shares of recent years cools.
Perpetual has long seen global equities as providing the competitive edge in the intensely competitive Australian market. Domestic pure play fund managers have been doing it tough particularly as industry super funds have been building up their own in-house management teams. At the same time ETFs and boutique funds have been chipping away at funds under management.
In recent days Regal Funds founder Phil King said he remained a believer in the listed funds management model with the ability for a fund manager to have listed equity “a great opportunity to incentivise, retain and attract staff”.
King said he had been thinking about listing his business for more than a decade, and now the right opportunity had come up through a merger with the listed VGI.
johnstone@theaustralian.com.au
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