M&G Prudential spends £27m preparing for Brexit ahead of demerger

Prudential’s life and asset management business eyes opportunity in private markets

M&G Prudential spent £27m on Brexit-related costs in the latest financial year as it shifts funds to Luxembourg, hitting operating profits within Prudential’s asset management business which is currently in the process of spinning out from its parent company.

Prudential’s full-year results for 2018 revealed its UK and European asset management businesses’ operating profits fell 5% to £477m in 2018. M&G funds under management increased marginally from an average level of £275.9bn in 2017 to £276.6bn in the latest results with revenue margin increasing to 40 basis points over that period from 37 basis points.

Total net flows within the group’s global asset management businesses were £11.5bn.

Within M&G Prudential, the majority of outflows, which totalled £9.9bn, were accounted for by the redemption of a single £6.5bn institutional mandate, which the results described as low margin. A difficult market backdrop for both equities and fixed income accounted for the remaining outflows, the results said.

Performance fees, which had been abnormally high in 2017, also contributed to the fall in profits within asset management. In 2018, performance fees contributed £15m, a normal level according to the results, compared to £53m the previous financial year.

The Brexit bill was attributed to staff costs and the cost of migrating fund assets to the Sicav platform so European clients can continue to access the asset manager’s products following the UK’s exit from the European Union. M&G announced it was transferring £34bn worth of assets to Luxembourg in May 2018.

An M&G spokesperson told Portfolio Adviser the shift of assets provides opportunities for the business beyond Brexit. She said: “Our enhanced Sicav fund range and Mifid distribution platform mean we can go deeper into Europe and offer a greater breadth of investment opportunities to clients globally, including traditional and alternative, public and private investment capabilities. As well, it brings our product range in line with our client’s investment vehicle preferences.”

M&G Prudential demerger

Overall, operating profits were up 19% at M&G Prudential, hitting £1.6bn in 2018 compared to £1.4bn the previous year.

Group chief executive Mike Wells says the UK and European life and asset management businesses are on track for its demerger from the global business. The holding company for the new business has been established and the group has raised £1.6bn in subordinated debt to support the capital rebalancing of the two businesses.

The High Court has also granted the first stage of approval for the transfer of part of the M&G Prudential annuity book to Rothesay.

Wells said M&G Prudential was consolidating its position as one of the leading businesses in the UK & European savings and investment markets.

“The intended demerger of M&G Prudential from Prudential plc will further enhance the strategic focus of both businesses. I am confident that, given the extent of our opportunities and our proven ability to execute and innovate, we are well positioned to continue to grow profitably.”

M&G eyes opportunity in private markets

Private markets were singled out in the results as an area of opportunity for M&G Prudential.

Currently, the business has £59bn in private assets under management and is one of the largest private credit investors in the world.

It is looking to expand its capabilities across new geographies and asset classes. “M&G Prudential, which already has established international distribution, a clear focus on customer solutions and a broad-ranging investment capability, is transforming itself to meet this opportunity,” the results said.

The UK’s pension freedoms were also highlighted as an opportunity as were the total value of cash deposits in European Union households, which currently sits at €10trn.

A new partnership with Tata Consultancy Services signed in 2018 would enhance service for UK and Europe savings and retirement customers, the results said.

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