According to the 2018 BEE.conomics Transformation in South African Asset Management Survey conducted by 27four Investment Managers, there are 48 black-owned asset management firms in the country. Of those, 23 are less than five years old.
In addition, only 14 of these firms have assets under management (AUM) of more than R5 billion. In other words, the vast majority of them could be classified as emerging managers.
“Many of these firms don’t yet have a three-year year track record, are still founder-managed, have small teams of two or three people, and offer a single product,” says Tshepo Pule, manager of emerging managers at Peo Risk Management. “And there are a number of issues these companies tend to face.”
Single client risk
Primary among these is that many of them rely on a limited client base. The BEE.conomics survey found that for 46% of black-owned firms their single largest client accounts for more than 40% of their assets under management. For 50% of these firms, their five largest clients make up over 80% of their AUM.
This represents significant business risk. If one or two of those large clients were to withdraw their money, that would have a huge impact on their sustainability.
Part of the challenge is that black-owned asset managers remain primarily focused on sourcing money from institutional clients such as pension funds. The survey found that 96% of assets come from these institutional investors.
Their exposure to the retail market, or individual investors, is almost non-existent. Of the more than R2 trillion in collective investment schemes – unit trusts, hedge funds and exchange-traded funds – black-owned firms manage just R17.75 billion, or 0.81%.
Competing against the big players
Diversifying a client base is not, however, easy. It requires marketing and distribution capabilities, which demand a larger team. These managers are also competing against the large incumbents who have strong track records, powerful brands and extensive marketing budgets.
To truly compete in this environment, they, therefore, need scale of their own.
Thus far, however, the support for transformation in the industry has resulted mostly in a proliferation of new managers, rather than the establishment of meaningful industry players. Of the 48 black-owned firms in South Africa, only one – Taquanta – has AUM of over R100 billion, and only one more – Aluwani – has AUM of more than R50 billion.
By way of comparison, Coronation’s latest reported AUM is R587 billion.
There is no reasonable way that all of the emerging managers in South Africa will reach sustainable scale. Some have already been lost to attrition. This means that, sensibly, managers have to start discussing how they will build meaningful businesses in this sector, and an obvious way of doing that is through consolidation.
“It must happen,” says Fatima Vawda, the MD of 27four. “As a result of the weak economy member contribution rates have decreased, the pool has shrunk and we have an overcrowded market. There are too many asset managers chasing a limited pool of assets.”
This is something that is already being seen in other areas of financial services. For example, it has been a busy year for consolidation in the stockbroking industry, and African Rainbow Capital has also been very actively pulling together a range of different businesses.
There has also been an increase in other kinds of corporate action in the asset management space. RMI Investment Managers and its sister company Royal Investment Managers have together bought stakes in 11 boutique firms, and Royal recently announced an agreement to take a stake in one more.
“This is something new,” says Vawda. “These kinds of deals never existed before.”
If consolidation is not only necessary but inevitable, those who act first are going to be at a material advantage. Asset managers should therefore already be giving serious thought to how this could be done.
How it might happen
“Something that might work is that firms offering different investment styles can come together and offer something that is more diverse,” says Pule. “If individual companies can come together as different franchises they don’t need to be combined in such a way that they are one entity, but can form an institution of different franchises.”
This offers a potential way to build scale without anyone having to compromise on their autonomy. The actual management of the assets would remain the prerogative of the different managers, but they could support a more robust business operation.
Diversifying the offering would also make the different businesses more sustainable.
“If you are an equity house that only runs a particular style you are putting yourself in a very difficult position,” says Pule. “Should your style not be favoured during a particular market cycle, that could be a challenge because clients are not patient when it comes to these things. Once you underperform, clients start pulling out money and that affects the business. If you only have a limited amount of assets, how much can you stomach if you start losing clients?”
For Vawda, it is also vital that business owners realise the importance of bringing in their employees as shareholders in any kind of deal.
“What the smaller enterprises have to realise is that in order to build scale you have to attract the right people and they need to be incentivised through equity,” she says. “To be able to attract really good people, maintain consistency in investment performance and grow your business you should rather want to own 5% of something substantial than 100% of nothing.”