TA Associates, a private equity manager with a penchant for funds management firms, has notched up about US$8 billion in the space following its purchase of the Australian-domiciled business of Goldman Sachs. Why?
Coincidentally, Goldmans Australia has about A$8 billion in FUM, over fixed income and Aussie equities. The fixed income strategy is their main game but partner Phil Moffitt, the head of fixed income for the region, is not going with the business. He’s staying at Goldmans. Good luck hanging on to those fixed income clients.
TA Associates was the majority buyer of Russell Investments this year for a reported US$1.1 billion. But the firm had invested in funds management businesses consistently since the global financial crisis. In the scuttlebutt around the traps, this is the theory behind their thinking. It’s a classic value, or maybe even distressed, play.
Funds management is not what it used to be. Fee pressure is unprecedented around the globe, not only, although especially, in Australia. Plus, there’s been a massive shift to passive and semi-passive strategies. Even the regulators are getting in on the act, through such questionable Australian schemes as MySuper.
Goldman Sachs is, well, Goldman Sachs. You’d think they would be at the forefront of most investment trends. With the sale of the Australian funds management business they probably are.
But why would TA Associates buy it? Designated spokespeople for neither TA Associates nor Goldman Sachs returned phone calls last week. Ed Sippel, TA Associates’ head of Asia Pacific, based in Hong Kong, apparently, is the man behind the mission.
The word is that TA Associates paid very little for the Goldmans business, nevertheless it will be expensive to run in a hostile climate for fund managers. And, one theory is that, unshackled from the Goldmans investment banking arm, with all its connotations, the firm could become revitalised.
But what is the funds management play? Another theory is that private equity managers, who used to be considered the smartest guys in the room, are now becoming mere providers of liquidity in the unlisted arena. It’s a kind-of smart beta for unlisted companies.
Funds management was never considered a good investment, except for those who work in the business. Funds managers listed primarily to provide their employees with liquid shares – not for the benefit of external investors. Big banks have been the main buyers of funds management firms, up until about 2008 when they became sellers. They did this for strategic reasons rather than fundamental investment reasons.
Meanwhile, what’s likely to happen at Goldmans Australia is that they will lose about half of their FUM over the next year or two but, with luck, they will turn the operation into an alpha-generating boutique.
Dion Hershan, who is their head of equities, is leading the leveraged buyout. Roy Keenan is the head of fixed income, which will be the biggest challenge for the new firm.
As a related aside, boutique equities manager Morphic Asset Management this month disclosed that it had shorted Platinum Asset Management. It did so not because of any concern for Platinum’s management, which it regards highly, but because of the state of the funds management industry. Things have to change. Here’s the Morphic view:
And, by the way, ex-Goldmans people have a very good track record when they strike out on their own. Just ask Cliff Asness, David Kabiller and John Liew at AQR Capital.
* Greg Bright is publisher of Investor Strategy News (Australia)