Private equity 'barbarians' rattle Perpetual's gates

With the private equity 'barbarians' rattling Perpetual's gates, Mike Taylor writes that there will be plenty of interest in the future of the company's Private Wealth business.

Notwithstanding the surprise expressed by many commentators at last week’s Kohlberg Kravis Roberts & Co. (KKR) bid for Perpetual, the recent fortunes of the company meant it had been a potential target for at least 18 months.

Indeed, when first AMP and then National Australia Bank (NAB) made their plays for control of AXA Asia Pacific, there was plenty of discussion about whether ANZ might look to match its rivals in the Australian wealth management sector by acquiring Perpetual.

Unsurprisingly, the scuttlebutt around ANZ re-emerged in the immediate aftermath of last week’s KKR bid as the Perpetual board sought to discern whether there were any other viable players in the market.

That speculation appeared to be met with blunt dismissal by ANZ chief executive Mike Smith.

With ANZ apparently out of the way and with all the other major banks clearly feeling constrained by the Australian Competition and Consumer Commission’s recent decision to veto NAB’s bid for AXA Asia Pacific, KKR is almost looking like the only viable game in town for Perpetual.

And there should be no doubting that Perpetual’s size and positioning as one of the most dominant players in the high-net-worth financial advisory market will make its acquisition by a major private equity player a significant factor in the evolution of the financial planning industry over the next 18 months.

This is because while those in the wealth management business might ogle the client base owned by Perpetual Private Clients, it is broadly agreed that KKR’s interest in the company has more to do with its funds management business, led by Perpetual Equities head John Sevior.

Perhaps, too, the KKR bid is founded on a well-researched realisation that any disposal of Perpetual’s wealth management interests would garner keen interest among and rich rewards from companies keen to add premium high-net-worth investors to their client lists.

By almost any measure, Perpetual’s Private Clients division is one of the major jewels in what some have regarded as an increasingly ill-fitting crown, and a number of analysts have suggested that a successful bid would see KKR offloading the Private Wealth and Corporate Trust businesses.

If this were to be the case then not only would this garner significant interest from the major banks, it would also prompt interest among some of the larger non-bank institutions and aspirant financial planning dealer groups.

As little as three years ago, few would have considered Perpetual easy prey to the type of bid being mounted by KKR but, notwithstanding the company’s comparatively strong debt position, it suffered some heavy blows both entering and during the global financial crisis and recovery has been comparatively slow.

It was a measure of those blows that when the company filed its annual results to the Australian Securities Exchange in August it reported a 140 per cent increase in net profit after tax to $90.5 million — largely owed to the improved performance of its actively managed funds.

Within this improved performance Private Wealth Management recorded a 12 per cent increase in profit before tax to $32.6 million — a result that the company said had been helped by the acquisition during the previous 12 months of Grosvenor Financial Services and Fordham Business Advisors.

At the same time as the Perpetual Board mulls over the KKR bid and its next steps, the search for a new chief executive to succeed the retiring David Deverall continues — but those who have been contacted by head-hunters must be wondering about the wisdom of accepting the appointment.

Filling the Perpetual CEO position was never going to be easy given the relative size of the organisation and Australia’s geographic isolation from London and New York. The KKR bid and its fallout will only serve to complicate the issue and quite possibly dissuade some of the better candidates.

In circumstances where investment funds are regarded as only being as good as the teams running them, many commentators have suggested that Sevior’s view of the KKR bid might ultimately prove pivotal.

However, those with long enough memories will recall that Sevior was far from hostile to KKR and private equity bids in general when he was commenting on KKR’s bid with Pacific Equity Partners for big retailer Coles back in 2007.

At that time, Sevior was quoted as saying that his firm did not discriminate between private equity and other deals when it came to major takeovers.

“We are indifferent and we can’t afford not to be dealing with private equity,” he said. “Our duty to our clients is to maximise their returns.”

KKR became famous as a centrepiece of the 1993 movie Barbarians at the Gate, based on the leveraged buy-out of Nabisco. In 2010 the ‘barbarians’ are rattling Perpetual’s gate and there will be plenty of players hoping for a share of any wealth management plunder.