Don’t expect asset management firm Ninety One to be merging with any other company soon.
The group, which was separated from Investec in March last year and whose staff collectively own 22% of it, has made it clear that merging with another player in the finance sector is not on its agenda.
There is currently a wave of mergers and acquisitions (M&A) among corporates – such as Morgan Stanley’s $7 billion takeover of asset manager Eaton Vance in October and Franklin Templeton buying Legg Mason for $6.5 billion in February.
US based Piper Sandler also noted in its Asset Management: A Constant Evolution report (published in November 2020) that: “Across the size and spectrum, firms are looking at ways to reduce and manage cost in the face of revenue pressure. All these trends are driving consolidation.”
With all this happening, it’s understandable that Ninety One’s senior executives were asked about future merger plans during a conference call on its half-year results to end September.
The way Ninety One CEO and founder Hendrik du Toit sees it, many banks are trying to get their asset management operations up to scale to match their banking operations.
By using M&As the banks are trying to get around the cost-heavy structure of asset management. By merging their asset management operations, the belief is that they will be able to scale up their operations.
Such a strategy, however, can actually work against their interests.
“They are spending vast amounts of goodwill on that. And that leads to pretty low returns on equity,” says du Toit.
He says Ninety One’s business model does not favour joining up with another firm. It generates a high return on equity, which in turn means it has no debt and generates cash, which gives it “balance sheet flexibility.”
All this means it has the ability to “tolerate a portfolio of very risky strategies, or risk that we sell our clients. And (we are) therefore able to go through a bear market with our flexible cost structure without having vast amounts of goodwill to service outstanding debt.”
Staff seeing themselves as owners
As its staff are its largest shareholders, this strategy of generating a high return also ties into its strategy of retaining staff. “Over time our people don’t see it as a place of employment, but as a place they own, which over the long-term aligns them with clients and shareholders,” says Du Toit.
Where he sees he can gain from the M&A trend is hiring people who have been let go from firms looking to cut cost after a merger.
From what he has seen, most M&As have not worked out and instead have “added confusion, not scale.”
Those that have worked out were as a result of a small number of individuals who still retained control and focused on building the business.
“For us, the rewards of pursuing that kind of strategy and growing organically over time is so much more attractive than creating a low-return-on-equity giant, which ultimately becomes mired in M&A inward-looking politics, and forgets about the clients,” Du Toit explains.
Even so, it does not mean that the group will not be rational if an attractive M&A is brought to it. “But these will have to be really attractive opportunities, not the kind of stuff investment bankers trade around town, and bring to you every other name every second day.”
“We don’t need to grow fast. A business that has a very high return on equity does not need third-party capital, (and…) in a low-yield or low-return world, can afford to grow systematically but does not have to grow fast.”
With this kind of internal setup, du Toit quotes JP Morgan in saying it has focused on: “Doing high-quality business, in a high-quality way.”