All the recent activity has been on the distribution side – Quilter and Cheviot; Brooks Macdonald and Spearpoint; Bellpenny; AFH Financial etc – and this is set to continue with the proposed acquisition of Newton Investment Management’s private client business by Standard Life.
Needless to say, neither company is saying anything at all so something is definitely afoot and it is likely that the Daily Telegraph has some very good sources to write last week that Standard Life is now in exclusive talks with Newton IM over the deal.
So what? What would the combined business change – under a Standard Life banner the way the deal is expected to be structured – and, more importantly, how would investors benefit?
There is at least one fairly obvious strategic fit between the two businesses.
Similarities
Newton IM has changed its private client business notably over the past few years, deliberately targeting higher net worth individuals from 2010 by raising the minimum they had to invest to £500,000 for any pooled investment, and to £1m for a bespoke portfolio.
At the same time, Standard Life Wealth changed its new business proposition to compete directly with Newton by halving the minimum investment amount for an individual client to £500,000. Standard Life already runs the MyFolio product range under Bambos Hambi for clients with less than £100,000 to invest.
The differences come in what the combined business could offer clients as an investment proposition.
Differences
Talking with Stephen McMahon, managing director at ARC’s Jersey office, Standard Life Wealth’s private client proposition is similar to its multi-billion pound GARS fund though it uses third-party funds rather than in-house funds.
Newton, on the other hand, follows its investment house parent’s global thematic equity stock-picking approach.
“This has not necessarily been rewarded the way it should have been,” McMahon commented, “as equity markets have gone up and down in the past few years. If equity markets normalise – which it looks like they are doing – then it should be far better placed.”
The new outfit could again combine the two to offer an equity-based approach to ultra high net worth clients, leaving the more multi-asset, absolute return fund-focussed proposition to those with considerably less than £500,000.
The two firms currently have very different distribution mechanisms with Standard Life relying mainly on accessing the market through IFAs while Newton, while not unknown to IFAs, more typically deals through professional service firms (accountants, lawyers, trustees) as well as existing client referrals.
Who is best off?
From a City point of view, Newton IM’s private client business manages £3.5bn and is currently valued at £90m. According to Bernstein Research, this represents around 17x earnings.
It describes Standard Life as having “a small wealth business” with assets under administration of around £1bn. Its 2011 investor presentation showed Standard Life Wealth as its highest margin investment solution, at 125 basis points.
The scale that this acquisition would bring to Standard Life would also benefit new and existing clients as total assets under administration of pushing £5bn onto Standard Life’s platform would surely bring economies of scale and lower costs.
Edward Houghton, senior analyst at Bernstein Research describes this as “essential at the reported sale price, which implies a P/E multiple of 17x, higher than the 13.5x earnings at which Standard Life currently trades”.
All in, the deal will create a well-positioned portfolio management business, for clients across the wealth scale, with bases in Edinburgh, Leeds and London yet already known across the UK and internationally.
It is not quite in the league of a GARS/Real Return tie-up but it’s not far off…
