Aware’s executive consultant, corporate development Michael Dundon’s time these days is taken up with mergers past, present and future.
And it looks like that job is going to keep him busy for a while.
He is the former CEO of VicSuper and after the recent merger with Aware, stayed on at the fund to progress the merger strategy for Aware more broadly.
Mergers landscape here to stay
According to Dundon mergers in the industry are going to continue for the foreseeable future amid the new regulatory environment which is pressuring performance, the obvious advantages scale can afford and a broader demographic shift.
“We’ve seen, significant regulatory reform, particularly in the last year or so, where you’ve got APRA and their heat maps and annual performance assessments challenging some boards and giving them things to think about in respect of the performance of individual products or the fund itself,” he said.
“You’ve also got aspects like the early release plans in place, and also a… demographic where you’ve got more people shifting into the pension phase.”
It’s becoming more about flows
And it’s this demographic shift which is bringing flows to the forefront of the debate.
“Some… funds have long-term negative cash flow positions. So, all of those factors suggest that mergers are something that a board should be considering,” he said.
“And I think having seen a number of mergers happen, including ours, a number of boards are now saying, well, no, we don’t want to be the last one left on the dance floor. We need to start engaging and assessing whether it’s actually makes sense for us to merge.”
What makes a good merger?
But then not all mergers are created equal and the question needs to be asked: What makes a good merger?
“If you’ve got really clear alignment around the culture, the values and the strategy between two funds, that makes the conversations around the more difficult issues like senior leadership positions, board composition, administration platforms, investment models, they are easier,” Dundon said.
“At aware we have a profiling tool that we use to look at all the various funds as possible candidates and that includes things like, what is their approach to investing, what’s their approach to responsible investments, what’s their approach to administration and to the provision of advice,” he added.
“And ideally, we’d be looking for alignment on all those key elements, because they are things that we, as a firm, believe make for very successful retirement outcomes for our members.”
Dundon said that at Aware they had a scorecard system which ranked various merger candidates using a quantitative and qualitative process to identify where there might be strong synergies or cultural alignment.
“And then we start the initial conversation, which is very much about just getting to know the other fund and to find out whether there’s any interest in pursuing a merger conversation, reasonably informally still at this point in time. And that phase can go on for several months as you work between boards and chairs,” he said.
“Then we look at discussions around a memorandum of understanding and the idea [of that] is really to document all the non-negotiables from both sides and get clear agreement on those before you start investing money in bringing external experts in for due diligence or looking at legal aspects of structuring the merger.”
But Dundon said that such was the intensity of interest in mergers at the moment that some funds are actually going to market or to a select group of funds looking for a request for proposal.
“And so you might see half a dozen funds, submit requests of interest or expressions of interest for a merger with a particular fund,” he said. “And that fund then assesses those against their own merger criteria, and maybe shortlists two and has more discussions with them.”
With all the merger activity, Dundon believes there will probably be around “half a dozen $250 billion-plus” funds in the next few years. Added to this will be a number of funds in the $100 billion-plus range and then a “pretty big gap”
“So it’s that group in the sort of $15 to $20 billion to $100 billion who I think are probably going to be challenged, because they’re not going to be niche and they’re not going to be necessarily as cost effective,” he said.
Dundon doesn’t see an end to the merger trend and, as such, the landscape will continue to evolve.
“The large funds will get better and better at what they do and there’ll be potentially new entrants into the industry from time to time as well,” he said.
“And as members become more familiar with their superannuation, entitlements, their demand for additional service, advice, guidance, digital offers, all of that will continue to grow.”