Do mega mergers make sense in SA’s dwindling domestic market?
The consolidation wave reshaping South Africa’s financial services sector is not confined to financial and risk advice practices; it is equally evident across the asset management industry. Based on recent news flows, you could argue that scale-related efficiencies are part and parcel of the fund management game with more deal making likely in the months and years ahead.
But are these deals net good for consumers? From an independent financial adviser (IFA) perspective, the focus remains on how the consolidation trend impacts the fund choices available to their clients. Taking a more philosophical approach, the concern may centre on whether mega managers make sense given the dwindling opportunity set in the South African listed markets. By now, you are probably wandering what your writer is warbling on about … so, let’s dive straight in.
The distribution and product windfall
FAnews readers should, by now, have picked up on the broad brushstrokes of a proposed transaction between Sanlam and Ninety One, announced 20 November. In a joint media release, Sanlam said it intended using Ninety One as its primary active manager for single-managed assets. This shift would strengthen its South African and offshore product offering. The quid pro quo will see Ninety One getting preferred access to Sanlam’s vast distribution network, enhancing its position in the domestic market.
Unpacking the transaction further, Ninety One will take ownership of Sanlam’s active asset manager, Sanlam Investment Management (SIM) in addition to being appointed as the investment manager for Sanlam Investments UK, taking over that business’ third-party assets, balance sheet assets and the relevant investment professionals who manage those assets. “A total pool of assets of approximately ZAR400 billion (as of 30 September 2024) is expected to transfer to Ninety One, with around 80% of this total managed in South Africa.
There are many more moving parts to the deal. Sanlam has indicted it will become an anchor investor in Ninety One’s private and specialist credit strategies while Ninety One proposes to issue shares to Sanlam, giving Sanlam an approximate stake of 12.3% of Ninety One’s share capital. “Ninety One will remain an independent investment manager with staff as its largest shareholder,” the media release states. And quite predictably, the commentary issued by representatives for the respective brands is upbeat.
Awaiting the necessary approvals
They noted that they had reached agreement on the key principles and the process to finalise the transaction agreements; but that a final agreement was still subject to relevant shareholder and regulatory approvals. “We are looking forward to a long and fruitful relationship with Sanlam, a business with a powerful brand and significant scale in South Africa; our experience and expertise are complementary,” said Hendrik du Toit, Ninety One Founder and CEO.
Paul Hanratty, Sanlam Group CEO shared similar sentiments, saying: “Sanlam is pleased to partner with a like-minded business with a shared South African heritage, proven global expertise and a reputable brand; by leveraging our complementary competencies, Sanlam Investments will be strengthening its South African and global position as a multi-skilled asset manager.” He added that the transaction would unlock value for clients, the distribution force and shareholders thanks to Sanlam Investments’ market-leading expertise in passive and alternative asset classes (and multi-managed solutions).
The mainstream media was less sure, with Business Times warning of “reduced competition and marginalisation of black-owned asset managers”. The media outlet, which put a R5 billion price tag to the transaction, wrote: “Market watchers have cited fears of reduced competition out of Ninety One’s proposed acquisition of SIM, while the two companies described it as a win-win for the industry and a vote of confidence in South Africa as an investment destination,” wrote Dineo Faku, a senior reporter at the publication.
How much consolidation with the CC allow?
The subject to regulatory approval is not usually an issue for this type of deal; but given some of its recent decisions, your writer wonders how the Competition Commission (CC) will respond. Case in point, the recent ‘blocking’ of a proposed R13.2 billion acquisition by Vodacom of a stake in Remgro’s fibre businesses. This matter has caused so much unhappiness that the Minister of Trade, Industry and Competition is seeking to have the CC’s decision overturned. Although the industries are unrelated, the CC has been consistent in its attempts to prevent too much consolidation in sectors.
Regulators will not have to look far to determine the respective sizes of the brands involved in this proposed deal. In its 2023 Manger Watch ™, Alexforbes confirmed Ninety One as the top ranked domestic asset manager by Assets Under Management (AUM), weighing in at R823 billion. And SIM appeared fifth on the list with just over R494 billion. For context, the 20th largest brand on the list was Ashburton, with around R120 billion in AUM. These numbers reflect AUM reported to Alexforbes for June 2023, and represent assets managed on behalf of SA clients only.
Returning to the latest asset management deal, we found some interesting comment by finance writer, Michael Mthembu, posted on LinkedIn. He used phrases like “mutually beneficial empire” and “strategic power move” to describe the likely post-deal landscape, hinting at an already concentrated industry. His punchy conclusion: “It is a win-win, unless you are one of their competitors” was followed by an outright warning: “Smaller firms, or even some mid-tier players, might have no choice but to merge or collaborate to survive.”
Strong case for the ‘merge’
The respective brands have made strong cases for the transaction. According to Sanlam, it gets a powerful partnership that aligns with its objectives and enhances its competitive positioning. They pointed out that active asset management is a core building block, and that bolstering this capability will enhance its total offering across South African and offshore markets. “Clients are set to benefit from a broader product suite, backed by Ninety One’s strong reputation and track record of providing competitive investment outcomes in South Africa and globally,” they wrote.
And Ninety One affirmed its successful history of partnerships with some of South Africa’s most respected financial institutions. “With this agreement, Ninety One gains preferred access to the country’s largest network for the distribution of insurance, savings and investments solutions; the agreement enables Ninety One to bolster its South African market leadership and reinforces its ability to deliver outcomes that benefit clients over the long term,” they wrote.
We conclude with Hendrik du Toit’s press statement comment. “This agreement will give us the opportunity, as leaders in our respective markets, to create additional value for our stakeholders; we are making a substantial investment in the future of South Africa,” he said. Your writer’s parting thought: who better to comment on the lasting value to shareholders than one of the business founders.
Writer’s thoughts:
Deals such as Sanlam and Ninety One point to further consolidation in the asset management space. While such deals promise benefits for the brands and their shareholders, what do they really mean for the clients you are advising? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
