Manager Research

This week, Sanlam announced that it had reached a deal with Absa which will result in Absa Financial Services Limited (AFS) exchanging its investment management business, Absa Investments (AFM), for a shareholding of up to 17.5% in Sanlam Investment Holdings Proprietary Limited (SIH), which is the parent company of Sanlam Investment Management (SIM). As part of the deal, AFS and SIH have also entered into a distribution agreement which will result in SIH being the preferred provider of investment products for distribution through Absa’s distribution channels.

Sanlam’s subsidiary, Glacier Financial Solutions Proprietary Limited will also enter into an agreement to acquire Absa’s market linked investment services platform (LISP) business, Glacier will also likely become the preferred LISP for Absa intermediaries.

It is also important to note that initially, the deal does not include the Absa Prudential Money Market Fund (APMMF). However, the transaction does contain a caveat that will allow Sanlam to purchase this fund at a later date. We suspect that this was negotiated in this way as the APMMF was set up as a new fund following the closing of the old money market fund, which we wrote about here.

To understand the broader rationale behind the deal we need to understand how Sanlam is currently positioned in the South African asset management industry, and how it intends to be positioned in future.

Background

Sanlam Limited was formed in 1918 and is a large, diversified financial services company listed on the JSE providing short and long-term insurance, personal financial services, asset management, stockbroking, risk management, and capital market activities. Sanlam separated out its third-party asset management business from the life business (responsible for managing the life insurance book) back in 2017. The purpose of this move was to enable the third-party business to compete for a broader pool of assets by partnering with a BEE shareholder. Sanlam's third-party investment capability, Sanlam Investment Management (SIM), is housed within Sanlam Investment Holdings (SIH). In 2020 the business announced that African Rainbow Capital (ARC) bought a 25% stake in SIH.

Rationale

Part of the rationale for the deal is to transform Sanlam Investments into one of the largest and most successful BEE managers in the country. In its BEEconomics 2021 survey, 27four Investment Managers recognized Sanlam Investments as the largest BEE asset manager in the country and the first with assets of over R300bn. With the addition of AFM’s assets to its book, Sanlam Investments will likely cement its dominance as the largest BEE manager in the country.

Throughout its history, Sanlam has been involved in many firsts. In fact, it is quite remarkable to consider how many developments in corporate South Africa have been linked to the group. From unbundling the first conglomerate on the JSE in 1993 to conducting South Africa’s first large scale BEE transaction, they were also the first company in the country to offer South African citizens global investment products. Within that ambit, it is not surprising that the company’s investment management arm has partnered with Absa’s investment arm to create a large-scale BEE manager.  

Interestingly, this is not the first corporate action that Sanlam has undertaken to expand its asset management business. Since 2017, various other asset management businesses have been brought into the SIH fold to fill gaps in their product offering. For example - towards the end of 2017, Sanlam Infraworks, the company’s infrastructure development arm, acquired a 50% interest in Climate Fund Managers, to bolster its global infrastructure offering.  In September 2018, SIH acquired a majority stake in Catalyst Fund Managers, which allowed them to start offering a specialist property alternative as part of their product range. In addition, back in 2017, SIH also acquired a 30% stake in the online trading platform, EasyEquities. The rationale behind this transaction was to place Sanlam in a position that benefits from increasing levels of retail investment in South Africa.

It is generally accepted that Sanlam’s goal is to build out its asset management business into the dominant player in the South African market. Generally, if we split up the corporate actions that have been taken, they tend to be rationalized along three distinct lines that are all aimed at developing the company’s investment offering. We highlight these three rationales below.

• Bolstering the value chain – Not only does Sanlam want to offer a broad range of investment products to different investors, they also wants to integrate vertically across their value change. This means that they want to be able to provide investment products to the market that are accessible and cost efficient. The EasyEquities transaction is a good example here. By buying a stake in the company, they were able to register their passive product range, Satrix, on the platform and remove minimum investment limits.


• Building out a competency – The company wants to offer a very broad range of products that cater to different kinds of investors. The Catalyst and Climate Fund Managers transactions fit into this bucket as these investments allowed them to expand into asset classes that they didn’t have a core competency in.


• Acquisitions for scale – The last rationale relates to achieving more scale and this is where the Absa transaction fits in. Through the partnership, SIM is able to add R80bn in assets to its business.

From ABSA’s perspective, they were struggling to establish themselves as a genuine player in managing third party investments.  The tie up with Sanlam will alleviate this challenge and there will also likely be changes to the ABSA team post-deal.

Will it work?

One of the starkest differences between SIM and other asset managers in South Africa, particularly in the boutique space, is that because SIM has significant financial backing, they are able to acquire companies that help fill gaps in their business. For example, a boutique manager that wants to build out a global balanced capability generally doesn’t have the capital to buy an established global balanced manager. Generally, they would need to hire a team to come in and build the capability from the ground up, which takes time and doesn’t always work. At first glance, this may seem like a significant advantage that SIM has over most other asset managers, however, there are some additional factors to consider.

It is generally accepted that most mergers fail because of issues related to cultural fit. In particular, within the asset management space we tend to be very wary of mergers and acquisitions because more often than not they lead to changes in investment philosophies, processes and teams that change the way capital is managed.

In addition, when we form an opinion on an asset management business, we generally need to establish a five to seven year view on the business. With a business that is going through significant corporate actions, we need to ask ourselves what the business will look like in five years’ time? Will the same investment teams still be in place? Will the same philosophies and processes still be in place? When we can’t answer these questions comfortably it is difficult for us to conclude investments will be managed in a certain way over the entirety of the holding period.

In concluding, when we assess SIM and AFM collectively, we tend to see two businesses that have undergone significant changes to their structure that can fundamentally influence the way investments are managed. To that end, we are skeptical of the merger and expect there to be changes to the SIM business as AFM is integrated.  

In addition, there is a difference between what we view as being successful among asset managers versus what Sanlam tends to view as successful. The basis of the SIM and AFM merger is related to scale and this moves SIM closer to its goal of large and diverse asset manager.

However, scale does not necessarily relate into good outcomes for investors. In large businesses that are focused on scale, things like cultural fit, implementing investment-led decisions, longevity in investment teams and other factors that generally foster healthy fund management environments are difficult to achieve. As an indicator, this year alone we have seen some turnover in SIM’s investment team with a few of their top portfolio managers leaving to join Ashburton. Ultimately, the decision to scale an asset management business may produce good outcomes for shareholders but not necessarily investors.