For years, investment bankers have whispered about the prospect of major offshore investors stepping in to pick on the bones of the carcasses left by the Hayne royal commission. Early indications are 2025 could be the year that the predictions come to fruition, Colonial First State (CFS) and Insignia Financial both understood to be targets of rich foreign suitors.
The private equity (PE) ownership of retail super has already begun, most notably with the blockbuster deal in December 2021 that saw mammoth New York investor KKR take the controlling stake in CFS from the Commonwealth Bank.
But that transaction was really only a teaser for a more meaningful takeover of household-name retail super institutions by foreign owners, especially given the bank still held 45 per cent and KKR was widely expected to offload the stake after a maximum of seven years. The traditional seven-year PE shot-clock may be reduced further in this case, with an unconfirmed report in The Australian’s Data Room column suggesting a majority stake in CFS could be up for sale sooner rather than later.
Multiple well-placed sources tell Investment Magazine that investment industry giant Mercer – owned by NYSE-listed consulting firm Marsh McLennan – is the most likely buyer of KKR’s stake in CFS, with some suggesting handshakes have already taken place.
It is not clear whether the nation’s largest bank also wants out of its minority stake, although some sources suggest that is more likely than not. The bank under CEO Matt Comyn has cleverly hedged its bets on CFS.
At the time of the transaction, CommBank and its big four rivals were facing noisy demands from Canberra and consumer activists to exit the wealth industry. Comyn appeased them by handing KKR the keys to CFS, while giving himself the option of re-entering the market as a dominant player and only needing to purchase another 6 per cent of the company to do so. Of course, in reality, the bank never really left.
If Mercer emerges as the eventual owner of CFS, it would be a significant doubling down on the local market by the company, which already picked up Westpac’s unwanted BT Super business for a steal in April last year. It would also signal Mercer’s entry into the wealth platform sector, which is widely seen to be the most lucrative part of the value chain in the local market, but would be a new strategy (albeit not entirely foreign, given Mercer is already active the booming Australian managed portfolios market).
Bain of my lifeline
To be clear, the Mercer-CFS transaction is pure market speculation, and both firms declined to comment on that basis. Seemingly more concrete (or at least more public) is the Bain Capital bid for Insignia Financial.
Insignia – born out of the mega-mergers of IOOF, MLC and ANZ OnePath – confirmed to the ASX on Friday morning there was a non-binding $2.7 billion offer received after the market closed on 12 December. The offer of $4 a share offers a premium compared to Thursday’s closing price of $3.09.
Like KKR and Marsh McLennan, Bain Capital is a storied player in US business. It was spun off from blue-chip Boston management consultancy Bain & Company in 1984 by its then-CEO Mitt Romney, who later became Massachusetts Governor and then made a run at the White House as Republican nominee, defeated by President Barack Obama at the 2012 election.
It came to prominence in Australia in recent years as the white knight purchaser of airline Virgin Australia, which it acquired for $3.5 billion in 2020 after it fell into voluntary administration during the Covid-19 pandemic. That deal has proven shrewd, with Bain reportedly having earned more than $1 billion in gains since it rescued the troubled carrier.
But whether its pending Insignia deal – which the company made clear is still being considered – would bear the same kind of fruit is far from certain.
The 11.5 per cent-plus growth rate effectively emanating from the superannuation guarantee may look attractive on paper. And there is plenty of fat to cut for a seasoned PE scalpel-wielder. Insignia CEO Scott Hartley has already begun the process of cleaning house, appointing a new external administrator in SS&C, and jettisoning about 1300 staff in the process.
But increasing regulatory scrutiny of the super sector, and volatile investment markets, make the landscape uncertain. Few if any have turned super into a profitable enterprise in its own right in the post-Hayne era.
Oaktree acorns
The always-thorny issue of financial advice makes Insignia slightly more complicated than CFS, which does not operate an advice licence. Insignia offloaded the bulk of its financial advice and licensing operations as part of the Rhombus Advisory transaction, but retains a significant footprint in the market via the salaried Bridges and Shadforth franchises, as well as a minority holding in Rhombus.
The advice market – especially in the high-net-worth end of the spectrum where Shadforth plays – is now very attractive to capital investors, with a supply-and-demand dynamic seen almost nowhere else in the economy. Another famed US investor, Oaktree, has indicated its interest specifically in this once-troubled corner of Aussie financial services, with its investment in the AZ NGA network of professional advice firms.
In making that acquisition, Oaktree faces the temptation of trying to distribute its hedge funds and investment products via the AZ NGA network. And Bain would face a similar dilemma.
Tasked with growing Insignia’s retail super, asset management and platform businesses, surely a vertically integrated model via the group’s advice channels might prove tempting. Indeed, many suspect the much-maligned wealth model of vertical in wealth originated on some management consultant’s PowerPoint deck, meaning it may come naturally to Bain.
Of course, trying to ram in-house products through an increasingly independent and professionalised advice channel is unlikely to be a recipe for success. But these offshore investors could certainly waste a lot of time and financial and human resources trying.
They would be well advised to read the royal commission’s final report cover to cover, and study why these assets became stranded in the first place.
Additional reporting by Chris Dastoor and Darcy Song.
