Active fund management isn't dead just yet

IT IS quite easy to do bad deals in asset management. Option one, overpay for a private capital business in the aggressive dash for growth. Option two, defensively merge your existing fund manager with a regional peer and botch the integration as you try to make savings.

Against that backdrop, Nomura Holdings’ decision to acquire a cheap US public-markets manager with minimal overlap stands as an oddity. Maybe there is some logic in buying what everyone else is trying to sell.

The investment industry’s well-known problem is that active fund management is trapped between low-fee passive funds and high-charging alternative strategies promising juicy returns, like hedge funds and private equity. This “barbell”, as Oliver Wyman’s Huw van Steenis named the phenomenon, is not easy to deal with if you are already a big active player.

Lately, it has spawned acquisitions of private capital firms. BlackRock agreed to pay US$13 billion for infrastructure investors Global Infrastructure Partners and US$12 billion for private credit manager HPS Investment Partners last year – high prices relative to the near-term fee income obtained.

Meanwhile, the existing private equity firms have been looking to diversify into infrastructure and private credit, too. It has been a fantastic time for founders of such alternative investment firms to cash in.

Conventional asset management tie-ups and joint ventures have also picked up – witness transactions involving insurer Assicurazioni Generali, Natixis Investment Managers, AXA and BNP Paribas.

Scale brings efficiency. The risks are culture clashes, client withdrawals and distraction. In the US, Invesco’s 2019 acquisition of OppenheimerFunds has not delivered for shareholders. In Europe, the merged Standard Life and Aberdeen Asset Management destroyed 80 per cent of its market value.

Nomura’s agreement this week to pay US$1.8 billion for the US and European asset management arm of Macquarie Group has a lot to do with what is happening in private equity.

The Australian seller built the business through multiple acquisitions starting in 2010. But the fact is that Macquarie is synonymous with infrastructure. When BlackRock as well as Blackstone and KKR & Co are coming for your core business, it makes sense to focus on that fight. Macquarie’s only remaining public market activities will be in its home market, where its name is a clear advantage.

The puzzle is why a Japanese bank is the buyer here. Sure, the deal grows Nomura’s managed assets around 30 per cent to US$770 billion. But the acquired business is overwhelmingly American; Nomura has no significant cost-saving opportunity. And active fund management is not a powerful growth engine.

Regulation is a nudge. Japan has wasted no time embracing the higher capital requirements for banks now being imposed, following the 2008 to 2009 global financial crisis. That is an incentive for the likes of Nomura to expand into “capital-light” asset management.

In parallel, Japan is attempting to modernise its capital markets and investment industry, which has a bias towards domestic investment. The environment is conducive to Japanese financial firms importing investment expertise from abroad via mergers and acquisitions. Do not be surprised if there is more to follow.

If buying a foreign asset manager has logic, where and what? The US market’s size and homogeneity make it an attractive destination for acquiring investment clients, even if asset allocation is now shifting to Europe from the US. The remaining choice is whether to join the bidding frenzy in private assets or double down in public fund management, a buyer’s market.

BlackRock chief executive officer Larry Fink can – probably – get away with high prices for private asset managers because his existing platform offers opportunities to grow his acquisitions. Chris Willcox, the former JPMorgan Chase exec who runs Nomura’s wholesale and asset management unit, does not have that luxury. Bargain hunting for a conventional asset manager is therefore the less risky course.

Indeed, the Nomura-Macquarie deal underscores one compensating attraction of the active space despite the lack of growth: its profitability. Nomura said the business acquired has a “high operating margin”.

Giants like BlackRock enjoy margins of 40 per cent, while London-listed Schroders’ are around 20 per cent, according to Bloomberg data. Being based in Philadelphia rather than New York may help lower costs. While profits were not disclosed, the price, at 1 per cent of managed assets, does not seem excessive. Bloomberg Intelligence reckons it is cheap.

So this seems to be a low-risk and not hugely strategic purchase, whose main problem is growth rather than a messy integration. Nomura is reaching firmly for the shaft of the barbell. Much will depend on cross-selling the enlarged unit’s products between the expanded customer base. Good luck with that.

The next temptation will be to use this as a platform for the kind of pricey private capital deal Nomura sensibly chose not to do on this occasion. Coincidentally, HPS was part of Willcox’s empire when he ran JPMorgan’s asset manager before it was carved out. The valuations of private capital firms may well have peaked. Still, Willcox would be well advised to prove the success of this acquisition before trying a radical encore. BLOOMBERG