Pim Poppe: What it is to be an asset-owner-owned asset manager?

Pim Poppe: What it is to be an asset-owner-owned asset manager?

Risicomanagement Vermogensbeheer
Pim Poppe.JPG

Door Pim Poppe, Managing Partner at Probability & Partners

Many asset owners like insurance companies, pension funds, family offices, own asset managers. The question is, do you need to own an asset manager to manage your assets? The answer is of course no. But then, why do they do so?

Why do asset owners sell their asset managers nowadays?

Captive asset managers are being sold. For example, NN sold NNIP to Goldman Sachs, and Athora Netherlands sold Actiam to Cardano. Does a push drive these transactions, or is it a pull factor? It seems the initiative of the transactions originates from the seller. What is the rationale behind these transactions?

Most financial institutions no longer manage the restaurant and cleaning themselves, and these activities are now usually provided by a third party. The idea is that financial institutions can better outsource non-core activities. Is this also applicable for asset management? Likely so.

Reasons often mentioned are scale, expertise, focus, and management attention, and the same goes for large pieces of IT development. The big question is whether the same arguments also apply to asset management, and if so, what is the right time to act and sell the asset manager you own.

Is the real motivation disclosed, or is there still something hidden because it will harm the seller’s power? What could be the unknown driver? Underperformance, high costs, additional capital requirements.

How is asset management value created for an asset owner?

Indeed, having a large balance sheet and a long investment horizon goes with value creation possibilities in asset management. For example, by playing the equity risk premium, the liquidity risk premium, or the complexity premium, a return above a risk-free liability hedging is achievable in the long run.

Furthermore, having an in-house owned asset manager would facilitate proper client orientation and understanding of the core business of a pension fund or insurance company. On both arguments, I tend to agree.

So, not too long-ago, insurance companies assumed that the better part of the value creation originated from asset management and not the client business. Is this opportunity gone, or did the insurance companies not manage to grab this opportunity with their captive asset managers? Can the asset owner get this value creation opportunity if they set the asset manager apart?

Is it wise to sell your captive asset manager?

Of course, I don't know either. Time will tell. The answer, of course, varies from case to case. I know that the freedom to choose the most suitable asset manager for every mandate and to negotiate hard on costs without worrying about the profitability of the asset managers you own is worth a lot.

It is unlikely that the asset manager you own can consistently deliver the best product for the best price, so asset owners should value the freedom to choose and negotiate.

Furthermore, a critical underlying development is that pension funds and insurers believe less in active management and bet more on indexing. You don't need relatively expensive asset management capabilities to do it yourself.

The business case for the divesture of your asset managers is increasing due to index tracking. Moreover, regulations and sustainability (ESG) are evolving rapidly, and it isn't easy for a small asset manager to comply with ever-increasing regulatory pressure.

On the other hand, mutual trust, understanding, and customization is also a great asset. It is, therefore, a story of addition and subtraction. The smaller the asset manager, the greater the benefits of economies while selling and thus the more substantial the incentive to sell.

The greater the interrelationship with the product conditions on the obligations side, the greater the motivation to keep the asset manager with you. Unique non-copyable skills in the asset manager increase your value of owning the asset manager.

However, the same holds for the potential new owner because it can increase the assets under management. You would probably sell faster with unique skills. After all, the new owners can easily convert the unique skills into value, given greater franchise power.

Obviously, it is difficult to predict what wisdom is in this. So, I stay away from that. However, I dare to expect that asset manager divestments, regroupings, and consolidations will make headlines for a while.

Probability & Partners is een Risk Advisory Firm die geïntegreerde risicomanagement en kwantitatieve modelleringsoplossingen biedt aan de financiële sector en aan data-gedreven ondernemingen.