Should Platinum proceed with Regal merger?

A potential acquisition of Platinum Asset Management by Regal Partners will benefit the “challenged” fund manager, believes Morningstar, but it has warned fund management mergers don’t always run smoothly.

Earlier this week, Platinum Asset Management confirmed that it has received an unsolicited confidential, non-binding, indicative proposal from Regal to acquire all of the shares in Platinum it does not already own via a scheme of arrangement.

Responding, Platinum said it is “considering the merits” of the proposal and the assessment of its value given the firm’s ongoing turnaround strategy and planned future growth initiatives.

“The Platinum board is considering the merits of the Regal proposal having regard to its assessment of the standalone inherent value of Platinum in a change of control context, including with reference to Platinum’s current turnaround strategy, outlook, and planned future growth initiatives.

“The Platinum board will also have regard to the absolute and relative value of the Regal share consideration being proposed, the potential business costs and benefits of any combination, as well as Platinum’s own capital management plans and alternative strategic options.”

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In an investor note on the proposed deal, Morningstar noted Platinum “remains challenged” by lagging performance and high fees, as well as by being slower than its rivals to make product enhancements.

“On the surface, being part of a more diversified asset manager like Regal could allow Platinum to leverage Regal’s broader distribution network, reach a wider audience, and mitigate outflows via cross-selling. 

“Additionally, Regal may need to improve operating efficiencies through improved economies of scale and to eliminate duplicated back-office functions. However, not all fund manager consolidations have gone smoothly, with Perpetual’s acquisition of Pendal being a case in point.”

Perpetual acquired Pendal at the start of 2023, but the firm has been beset by outflows from its asset management division as well as costs associated with the Pendal acquisition and integration. In its FY24 results, it said Pendal was impacted by small institutional client losses and a superannuation fund client merger.

GQG Partners chief executive Tim Carver also spoke in the past how M&A is difficult to achieve in the fund management space after it unsuccessfully bid for Pacific Current Group. The other bidder for Pacific Current Group was Regal Partners who eventually withdrew their bid.

“We are always open-minded on finding ways to grow the business to bring our clients’ innovative investment strategies, but we don’t have an objective to grow through acquisitions. I’m fairly sceptical of M&A activity in this industry as it is very, very hard to pull off,” Carver said in February.

Turnaround strategy

At the start of the year, Platinum chief executive Jeff Peters announced the firm is undergoing an “urgent” two-part growth and reset strategy. This has already included a review of the product range, closure of the Platinum Global Transition Fund, merger of two listed investment companies, termination of its Irish UCITS platform, and the closure of its Cayman funds and London office.

However, Morningstar said it is too early to determine whether this is having a positive impact on its business yet.

In its FY24 results, it saw a drop in statutory net profit after tax from $80.9 million in FY23 to $45 million, while funds under management were $13 billion, a decrease of 25 per cent from a year ago, and said it saw net fund outflows of $4.9 billion.

Shares in the company are down by 18.7 per cent since the start of 2024 versus gains of 6.7 per cent by the ASX 200 as of 18 September.

Planned measures over the next three years, according to Peters, include partnering with global institutional managers to build a portfolio of sub-advisory opportunities, adding an absolute return global equity hedge fund and a portfolio of new investment products.

Morningstar said: “Platinum is currently executing its turnaround strategy, but quantifying its upside potential remains difficult as it remains in the early stages. Planned new product rollouts, such as a quantitative hedge fund, will take time to attract new assets and will unlikely offset the larger-scale redemptions it is experiencing. 

“The planned introduction of products in other asset classes managed by external managers – covering both public and private markets – appears to be more of a defensive measure to keep up with competition and is unlikely to garner significant flows.” 

From Regal’s perspective, the purchase of Platinum would be the latest in a series of acquisitions in recent months, although it would be its most high-profile one with Platinum having been founded by Kerr Neilson back in 1994 and being an established brand in the Australian market.

At the end of 2023, Regal acquired PM Capital and later took a 50 per cent stake in Taurus Funds Management, a specialist provider of mining finance and royalties.

In June, Regal announced it would acquire private capital and alternative investment specialist Merricks Capital in a bid to become a leading provider of private credit, then in July it announced it had entered into an agreement to acquire a minority interest in Queensland-based specialist asset manager Argyle Group which has $1.4 billion in funds under management. 

Asked on a shareholder call whether the firm has capacity for any more M&A activity, chief executive Brendan O’Connor said: “The possibility of further acquisitions is very real, we are looking at other possibilities. We take a disciplined approach to executing on those and only so when they are culturally aligned and accretive to Regal shareholders. 

“The investment capability that we have got, the complementary management team, I like to think we are match-fit to look at further acquisitions and to bed down what we currently have.”