Public versus private: Do asset management ownership structures matter?
Asset management, in recent decades, has been a story of extraordinary growth — but also of increasing competition and concentration, as active managers contend with the rise of passively-run exchange traded funds and new ideas about shareholder capitalism.
But views on the asset manager owner ownership structure that is best placed to meet these challenges varies widely. Managers are still sharply divided over the benefits of remaining private, to shield investors from quarterly targets, versus the business growth they can achieve by listing shares as a public company.
“Never has it been more important to be owned by an owner . . . who has a long-term outlook and an ability to offer support throughout the market cycle,” says David Hunt, chief executive of PGIM, a top-10 asset manager.
Three US firms — BlackRock, Vanguard and State Street — have grown to dominate not only a fifth of the $100tn in assets managed by the industry globally, but also 80 per cent of the passive fund market in the US, according to research by Common Wealth.
This has created huge pressure on other businesses to differentiate themselves and cope with the pressure on their margins, as they are forced to cut fees to compete with passively-managed fund rivals.
For PGIM’s Hunt, being part of insurer parent Prudential is key to aligning the firm with longer term thinking. “Stable long-term insurance assets are wonderful backers to long-term investment managers,” he says. “We’ve kept our culture of an investment house not an asset gatherer because of the alignment of interests with our owner.”
Not everyone takes the same view, though. Many experts argue that insurer-owned managers need to separate from their parent company, and from their focus on managing the insurer’s assets, in order to thrive in a highly competitive market.
While many asset managers are publicly listed — from giants like BlackRock and Amundi to smaller specialist boutiques — some believe that staying private can shield fund managers from short-term shareholder demands and the vagaries of market cycles.
“Investment management starts with extraordinarily long fiduciary commitments,” says Hamish Forsyth, president of Europe and Asia at US-based Capital Group, which has over $2.6tn in assets under management. “When you launch a mutual fund, you should expect to be running that mutual fund 10, 50 or 100 years from now. There’s also the reality that ours is an industry where you have very little control over your revenues in the short run.”
The firm, which was founded in Los Angeles in 1931, has responded to these opposing challenges by developing an employee ownership model that has allowed the organisation to remain private while favouring a conservative, long-term investment style.
The company is privately owned by around 400 or so of the firm’s most senior employees, while a team of fund managers look after portfolios instead of one individual.
“I think the employee ownership model is a very good way of getting that rather conservative long-term thinking baked into your decision-making. If you have a third-party owner, do they really feel that way during the good times, or do they just say, ‘Well, where’s my dividend?’” Forsyth says.
Some smaller firms have also found it an advantage to stay private. Active equity specialist Redwheel, which has $22.6bn under management, believes that remaining private while maintaining a multi-boutique structure allows the company more flexibility to ride out downturns.
“The fact that we are a private business that is majority controlled by the people in the business means that we can be patient [and] we can make long-term decisions in a market,” says chief executive Tord Stallvik.
He does not believe this is necessarily the case at some peers, where under-pressure management teams have started to have conversations about what expenses to start to cut as revenues fall in more challenging markets. “For smaller firms that are specialist investors, I find it very difficult to see how [being public] doesn’t somehow influence the way you run the business in a way that is counter to being long term,” Stallvik says.
For others, however, being public companies has been essential to growth.
Australia-based Pinnacle Investment Management, which has $93.6bn under management, across an array of investment styles and philosophies, decided to list six years ago. Its original owners and managers had been wary of the influence of public markets, but decided there was more to be gained.
“The listing was a big decision,” says founder and managing director Ian Macoun. “We had been wanting to stay private to avoid short-term pressure from shareholders. But we convinced ourselves that the benefit of access to capital outweighed those concerns — and, if [shareholders] do put that kind of short-term pressure on us, we tell them to get stuffed.”
“Staying private can limit you; we wanted to grow,” he says.