A Core Skill Every Fund Manager Needs to Learn
(Bloomberg Opinion) -- DWS Group GmbH is “actively thinking” about a transformational deal, Chief Executive Officer Asoka Woehrmann said last week. Credit Suisse Group AG and UBS Group AG are both debating what to do with their fund management businesses. Schroders Plc spent several months contemplating a bid for M&G Plc this year. Further consolidation in Europe’s asset management industry seems inevitable, but it’s been elusive.
The pressures making economies of scale a must-have include technology spending demands, diminishing fees and the seemingly unremitting drift of clients to low-cost index-tracking products. They’re not going away anytime soon.
As the founder and CEO of boutique M&A advisory firm Fenchurch Advisory Partners Ltd., Malik Karim has been involved in some of the sector’s biggest transactions. His deals include the 2017 merger that created Standard Life Aberdeen Plc and Jupiter Fund Management Plc’s purchase of Merian Global Investors last year. I caught up with Karim by videocall earlier this week. Here’s a lightly edited transcript of our conversation.
MARK GILBERT: Scale seems to matter more than ever in asset management. Is a trillion dollars pretty much the minimum of assets to run a world class all-singing all-dancing fund these days?
MALIK KARIM: There are plenty of successful mid-size firms out there who do a great job for their clients, develop their people, create good returns for their shareholders and grow. But the asset management industry is mature, it’s facing pressures from technology, from regulation, from clients in terms of fees. Thinking about M&A, let alone deciding to do something and executing it, is a core CEO skill now. I don’t know any fund manager that doesn’t have this as a top five issue in terms of how they develop their business. Whilst M&A is not a silver bullet, it can help you fix things.
MG: What are some of the elements of successful deals?
MK: I would broadly categorize M&A as offensive or defensive. In an offensive transaction, you have a strong established business that’s going well, has got its own culture. It absorbs a smaller business, leverages its capabilities, leverages the people and can transform the flows coming into the business and everyone feels good about it. If you can bring on capabilities, which can give you another engine for organic growth, and then you can bring your clients, your distribution, your brand, your umbrella to develop the business. One of the key features is that there’s a very clear buyer in acquisitions and takeovers; mergers are a little bit fuzzier.
MG: Because it’s not clear who’ll be running the show?
MK: When you have big businesses, particularly listed companies, you’re always paranoid about leaks, you’re always paranoid about things becoming public and being accelerated into a transaction without having done the due diligence.
MG: Does that make negotiating and communicating more difficult?
MK: Absolutely. If word gets out that two fund managers are talking to each other, you can rest assured both CEOs will have queues outside their doors of portfolio managers, distribution people, people worried about: What does this mean for me? What does it mean for my team? Am I gonna have to change my brand? Will I have a job?
Secrecy is really important, but that’s even harder in a public markets context because if something leaks out, they have to make an announcement. It can either accelerate things and people rush into a transaction, or it can kill it, because you work out it’s going to be too difficult, there’s too much opposition coming in from different stakeholders.
MG: There’s been a ton of speculation about potential tie-ups. Will we see transformative deals?
MK: This is something that’s been talked about for several years. People are reluctant to monetize their asset management businesses. Unless they’re being pushed in that direction by an activist, they don’t want to divest businesses which are earning good money from which they can support dividends.
What most people are trying to do is what I would describe as contribution deals. You put A’s asset management unit together with B’s. On paper and on pie charts it looks great and complementary, but those transactions are fiendishly complex to structure. We’re not quite at the stage where people see the industrial need overcoming the structural impediments to get some of those deals done. Markets are stable, active is making a bit of a comeback. People are thinking, “This isn’t all the doom and gloom I read about from the consultants just yet, so I’m going to wait until I find the right deal rather than rush into the wrong deal.”
MG: Schroders seems to have decided not to pursue M&G because of worries about culture clashes. Is that a big deterrent to getting some of these bigger deals done?
MK: It’s very hard to do a cultural audit. Working out how you keep the best talent, how you incentivize them, retain them, make them part of a large business is a key thing. M&A in asset management, particularly for the bigger organizations, is hard to execute. You destabilize your clients, you destabilize your people, they’re the heart of your business. You can make a strategic case for a combination, you can make a financial case for a combination, but then there’s the execution. The day after the announcement, how do you keep the businesses together, how do you stop the competition taking your best people and your best clients because there’s instability and uncertainty.
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Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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