Investec: breaking up ain’t hard to do
CEO says the new separated business is all about leadership in its market segment. But will it become a target for acquisition?
Investec’s seminal announcement that its formidable asset management business, IAM, will be carved out of the specialist bank and separately listed was no bolt from the blue.
The question is, will the standalone business (a midsized asset manager by world standards) become a consolidator under its energetic CEO, Hendrik du Toit, or will it ultimately be acquired?
Peter Armitage worked at Investec Wealth & Investment for seven years before leaving to start Anchor Capital in 2012. He thinks the relative underperformance of the specialist banking group was a factor in the split.
"It’s no secret that [Du Toit] has wanted to do this for a long time. Investec hasn’t grown its earnings in pounds for years, and I think he was dissatisfied with that, as, from a share price perspective, he and his staff were not benefiting."
In 2013, in a precursor to last week’s transaction, Investec agreed to sell 15% of IAM’s equity to its management team in a R2.5bn deal with a view to giving them direct exposure to the business and the fruits of their labour.
Du Toit says the decision is about focus and simplicity. "The dual-listed structure [of the Investec Group] is too complex and cumbersome for an asset management business.
"So while we are separating revenue and income streams, we are not separating the cultural linkages of the two businesses."
In the space of 27 years, Du Toit, hired by CEO Stephen Koseff and MD Bernard Kantor to run the fledgling asset management business, has done an outstanding job. On a currency-neutral basis, IAM announced recently that assets under management had increased by 10% for the six months to end-August to £109bn (R2.12-trillion).
"Though IAM is by far the biggest manager of third-party funds with origins in SA, it is a medium-sized manager by global, especially North American, standards," says Du Toit.
So once the dust has settled, where will the separation leave IAM — or the entity it will be rebranded as when it drops its name — as a medium-sized asset manager? It is neither boutique nor behemoth by world standards, and there is already speculation that the company could be the target of a larger investment firm.
Du Toit says being a potential target is par for the course. "All publicly owned businesses are by definition potential targets for acquisition. This also goes for the Investec group as it is constituted today. In future this will be a reality that the remaining group and a demerged IAM will have to contend with."
Du Toit does not cite any constraints to strategy as one of the reasons for the separation. "The strategy does not change," he tells the FM. "This [transaction] simplifies the regulatory environment in which the business will operate, and enhances talent acquisition and retention. It deals with the many questions about conflict of interest from clients, removes the risk of channel conflict and adds significant financial flexibility."
But access to the entire cash flow of the business, as well as the forthcoming primary listing, can provide all the capital Du Toit needs should he want the business to become more acquisitive.
"Size is not the objective. It is all about leadership in chosen market segments."
In a teleconference accompanying the announcement, Du Toit subtly revealed his ambitions to continue growing the business. Asked by the FM why IAM could not stay within a larger banking group in the way Goldman Sachs Asset Management has in its group, he said: "If you want to play in the super leagues you need to be a standalone operator.
"BlackRock was twice held by large banking groups and twice separated from them."
Savings pools in the US, Europe and Asia, where IAM already originates more than 70% of its flows, provide significant runway for growth. IAM is good at obtaining access to institutional investors overseas, so the combination of a primary listing in London could provide the business with additional capital it may require to consolidate through acquisition, if it so chooses.
Du Toit’s statements indicate that the ability to consolidate or acquire asset managers with complementary franchises is not the explicit aim. But where Du Toit sees opportunity, and certainly where the business may be subscale, the intelligent use of those cash flows could come in handy.