Takeovers Alone Can't Fix Active Fund Industry

(Bloomberg Opinion) -- Jupiter Fund Management Plc is getting something of a bargain in its purchase of Merian Global Investors, based on the post-announcement pop in the acquiring firm’s share price. Odd, then, that the deal has a clause that could see a dramatic drop in the takeout price if the target firm stumbles in the next two years.

Jupiter is paying 370 million pounds ($482 million) for Merian, which is owned by TA Associates Management. The Boston-based private equity firm agreed to pay 600 million pounds for Merian a bit more than three years ago, backing its managers in a buyout from Old Mutual Ltd. So it’s taking a hit on its initial investment.

Moreover, Jupiter has secured what it calls “downside protection” if Merian’s assets under management decline by the end of 2021. The purchase price falls by 20 million pounds if assets decline by 15%, by 40 million pounds if the drop is 25%, and the full 100 million pounds if Merian manages 40% less money. Reductions between those levels will be applied proportionately, while Merian’s management can earn an additional 20 million pounds by increasing revenue.

It’s a smart hedge for Jupiter, given the inability of many active fund managers to stop money from walking out of the door. Jupiter itself has had seven consecutive quarters of net outflows, and saw customers withdraw 4.5 billion pounds last year, so the value of its assets under management was only defended by rising global market values.

And Merian had 25.7 billion pounds under management at the time of its buyout in December 2017; based on Monday’s offer documents, it’s down to a bit more than 22 billion pounds now.

Once the deal is completed, TA Associates will end up with about 16% of Jupiter, while Merian’s management will own about 1% of the firm. It’s a case of back to the future for the buyout firm. In 2007, TA Associates backed Jupiter’s managers and took a 22% stake in the London-based firm when it was spun off from Commerzbank AG. It maintained a stake in Jupiter until 2014, when it offloaded its final 10.6% holding. So the private equity outfit still has skin in the U.K. active management game, which is a vote of confidence of sorts.

The deal will mean Jupiter has more than 65 billion pounds of assets under management, an boost of more than 50% from the 43 billion pounds it currently has. The transaction offers “substantial cost efficiencies,” which Jupiter says will eventually allow Merian to deliver an operating margin of at least 50%, handily outstripping the 43% margin Jupiter generated in 2019.

Jupiter’s shares jumped as much as 10.4% in the wake of the deal’s announcement, driving them to their highest since July 2018. But it’s hard to shake the suspicion that the insurance clause Jupiter has included in the transaction — and which the vendor has accepted — suggests that takeovers alone can’t fix what ails the active fund management industry. What’s needed is a solid period of outperformance against benchmarks. Otherwise investors will continue to vote in favor of low-cost passive products, and will be right to do so.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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."

©2020 Bloomberg L.P.

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