The acquisition of Pendal by Perpetual, which is set to create a $201 billion global asset management business, involves significant risks, new analysis has suggested.
In August, the two firms announced they had entered into a scheme implementation deed under which Perpetual is due to acquire 100 per cent of Pendal in a scrip and cash deal.
“It is no secret that this acquisition deal is occurring during challenging economic conditions for fund managers, as persistent inflation and geopolitical tensions are leading to falling markets and reduced confidence,” said IBISWorld industry analyst, Disha Jeswanth.
“In the June quarter, investors withdrew over $8 billion worth of funds from Pendal and Perpetual combined. The question remains, how will two undersized fund managers that have recorded declines in assets under management in 2021–22 combine to form a stronger business?”
On the potential risks associated with the deal, Ms Jeswanth highlighted a view held by some financial analysts that fund managers who handle funds ranging from $100 billion to $1 trillion usually experience diseconomies of scale in their operating margins due to increased complexity.
As a result, she suggested that Perpetual’s acquisition of Pendal involves significant risks.
“In the past, asset manager mergers and acquisitions activity that banked on scale alone have lost revenue,” Ms Jeswanth stated.
“Even after Perpetual and Pendal acquired US fund managers Barrow Hanley and Thompson, Siegel & Walmsley respectively, clients withdrew approximately 15 per cent and 8 per cent of funds.”
Other risks, she said, include the loss of key staff, increased debt, declining valuation if a shift to lower margin offshore asset management takes place, and the challenges associated with integrating cultures.
Ms Jeswanth also warned that while the two firms may mitigate the risks of Australian client attrition by handling their funds autonomously, global clients may move their investments.
“Although executives from both companies have full confidence in the deal, the effects of the takeover could go north or south depending on external economic factors and how the acquisition is handled,” she said.
Ms Jeswanth did, however, pinpoint some advantages, including a reduction in costs assigned to duplicate service functions which a consolidation of this type typically yielded. Another motivation behind this particular deal, she said, is to reap the benefits of boutique funds management.
“The consolidated firm is anticipated to continue running boutiques, providing specialised services to specific market segments, while benefiting from cost savings accrued from its large scale,” said Ms Jeswanth.
“In essence, the aim of the deal is to keep Pendal and Perpetual’s brands separate and allow the investment teams to maintain their autonomy and individuality,” said Ms Jeswanth.
Overall, the deal is expected to deliver an increase in scale, an improved global distribution team, superior product capabilities, expertise and diversity, and global ESG leadership.
“As the executives from both Pendal and Perpetual have discussed the leadership, ownership, autonomy and functioning of the combined firm, if executed diligently, the benefits associated with this deal may well outweigh the drawbacks,” she said.
The acquisition is currently expected to close later this year or early in 2023 following the satisfaction of conditions, including Pendal shareholder, regulatory and other approvals.
