The two sides of the Pendal/Perpetual deal

The acquisition of Pendal by Perpetual will bring client and staff attrition risk, according to research house IBISWorld, but the benefits should outweigh any downside.

The deal was agreed in August to create a $201 billion fund manager and Perpetual would own 53% of shares and board seats in the combined business.

Led by Perpetual chief executive Rob Adams, the transaction was expected to be completed in late 2022 or early 2023, subject to regulatory approval.

The newly-combined firm was then expected to continue running boutiques and providing specialised services to specific market segments while benefitting from cost savings accrued from its large scale. This would allow the brands to remain separate and investment teams to maintain their autonomy.

IBISWorld said advantages of the takeover were:

• The boutique manager would get the financial stability it was lacking from being part of a larger firm;
• Retaining boutique functionalities would likely moderate the key drawback of a larger firm, that it is often driven by product over personality;
• The deal was expected to result in $60 million of annual pre-tax cost synergies within the first two years, which amounts to 8% of the cost base of the combined business;
• Pendal, which had three boutiques at present, would obtain a stronger distribution platform to leverage the investments it has already made;
• The combined sales and distribution team could offer clients a broader spectrum of products with over 100 strategies across Pendal and Perpetual – another scale benefit; and
• The multi-boutique model would allow fund management teams to operate with autonomy while benefitting from the operation scale and increased sales support to win new business and deliver robust returns.

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However, IBISWorld noted the acquisition was occurring during challenging economic conditions and assets under management were already declining at both firms with investors withdrawing $8 billion from the two firms during the June quarter.

This meant the acquisition incurred significant risks in:

• Loss of key staff;
• Increased debt as Perpetual was financing Pendal’s cash component with a new debt facility;
• Declining valuation if the business mix shifted to lower margin offshore asset management;
• Additional risks in cultural merging as the recently-acquired firm TSW would experience its second ownership switch in 12 months; and
• While Pendal and Perpetual may mitigate the risks of Australian clients attrition by handling their funds autonomously, global clients might move their investments.

However, IBISWorld concluded that the fact executives from both firms had discussed leadership, ownership, autonomy and functioning of the combined firm was a positive indicator.

“Although executives from both companies have full confidence in the deal, the effects of the takeover could go north or south depending on external economic factors and how the acquisition is handled.

“As the executives from both Pendal and Perpetual have discussed the leadership, ownership, autonomy and functioning of the combined firm, if executed diligently, the benefits associated with this deal may well outweigh the drawbacks.”