by Greg Bright*
There aren’t too many things you could buy in the investment world, be they businesses or hard assets, that will fall in value by nearly three-quarters over a period of more than 20 years. But NAB’s sale of MLC to IOOF reflects one. With some related transactions, such as buying the AVIVA platform and insurance business and selling MLC Insurance, the end result is not quite as bad as it looks by the standards of big banks and their acquisitions, but still very bad.
It’s fair to say MLC didn’t deliver on what NAB was hoping for. NAB itself, though, plus its Australian competitors, have possibly lost more in offshore banking expansion moves in the US and UK. It’s also fair to say that none of the banks did well out of funds management and wealth except, maybe, Commonwealth Bank through its Colonial First State purchase, but the asset management arm of that subsidiary has also recently been divested. Was $4.56 billion too much to pay Lend Lease for MLC in April 2000? Sure. The $1.44 billion which IOOF is now paying is probably closer to the mark, on a P:E basis, representing 17.3 x the $83 million in recent annual cash earnings.
But, if you were in the industry in April 2000, when the original deal was announced, you will recall that that was the start of ‘tech wreck’ which gathered pace over Easter of that year. While tech stock prices were falling fast, funds management companies and others which had real earnings were not. In fact, during early 2000, the highest P:E multiple on the ASX – nearly 100 x – was being afforded to one of Australia’s pioneer multi-affiliate managers, then known as Treasury Group (now Pacific Current) which had recently floated.
Here’s a recent timeline, bearing in mind MLC dates back to 1886 as the former Citizens’ Assurance Company Ltd and IOOF back to 1846 as the former Independent Order of Odd Fellows:
Lend Lease, MLC, NAB, JANA, IOOF timelines
- 1982: Lend Lease acquires 50 per cent of life insurer MLC
- 1985: Lend Lease acquires remaining 50 per cent of MLC
- 1986: MLC expands in funds management using multi-manager model; brings Frank Russell Co. to Australia as, arguably, the first asset consultancy in the region
- 2000: Lend Lease sells MLC to NAB for $4.56 billion
- 2000: NAB buys JANA for unspecified amount (rumoured to be around $20 million)
- 2002: JANA establishes implemented consulting business
- 2009: NAB pays $825 million for Aviva platform and insurance
- 2016: Nippon Life pays $1.4 billion for 80 per cent of MLC Insurance
- 2017: NAB sells 55 per cent of JANA to staff
- 2020: IOOF pays $1.44 billion for MLC (with NAB assuming RC liabilities).
A similarly recent timeline specific to IOOF is also interesting. The success of its acquisition policy, which started in 2003 and was accelerated by Chris Kelaher, the former chief executive, is remarkable. It was to transform IOOF into a modern company leading in several aspects of wealth management – not just in numbers of financial planners but also in assets under management in managed accounts, following the purchase of Shadforths. After the recruitment of Steve Merlicek in 2009 it also climbed to the top of the investment returns stakes. He stepped down from executive functions in 2017 but remained on the investment committee. His replacement was Dan Farmer, with who had been with IOOF for about seven years prior to his CIO role.
But a smell developed about IOOF during the Royal Commission. After allegations from APRA of breaches of the SIS laws, Kelaher and chairman George Vernados fell on their swords and left the firm in 2019. The IOOF timeline is:
- -2003: Just before listing IOOF purchased the struggling AM Corporation with $3 billion in implemented consulting
- 2010: IOOF purchased AWM which owned United Funds Management with $8.5 billion in implemented consulting
- 2017: IOOF had approximately $20 billion in implemented consulting when the firm announced plans to purchase ANZ’s wealth business which had $24 billion in implemented consulting.
- 2020: The ANZ Wealth takeover settles after delays due to Royal Commission fallout
- 2020: IOOF will now be taking over MLC’s $156 billion in implemented consulting.
A couple of years after selling JANA Investment Advisers to NAB to concentrate on his funds management company, Warakirri Asset Management, John Nolan remarked that he was very pleased that both JANA and Warakirri had grown their funds under management and/or advice under their new oversight. JANA became the largest asset consulting firm in Australasia, which it remains. Warakirri, from which Nolan has now withdrawn, was a pioneer fund-of-funds operation for JANA which allowed clients – Nolan insisted everyone called them “funds that we work for” – to access boutique managers and new asset classes such as agriculture. JANA funds that they worked for did not have to pay Warakirri any fees, to avoid a conflict of interest. It was part of the service. One wonders whether a bank would have been so honourable.
Jim Lamborn, JANA’s chief executive, said last week (on September 2): “The long and the short of it is we really don’t know much about the deal (apart of publicly available info) so I don’t have a lot to say. My key points at this stage are that:
- “Since the JANA management buyout in 2017, the JANA business has run completely separate from NAB / MLC
- The original deal documentation contemplated the sale of an equity interest. Nothing will materially change pre-or-post this proposed transaction
- MLC has been a great minority stakeholder (they have two board seats)
- The combined IOOF / MLC entity looks very impressive on paper. If the business is well managed, with a strong culture, they will be a force to be reckoned with, and
- The proposed transaction is consistent with a well-established market theme of the big funds getting bigger. End beneficiaries should benefit from this.”
Lamborn said: “JANA is excited about those prospects. JANA has continued to grow strongly post the MBO – on many metrics about 50 per cent bigger – and we continue to invest strongly in both the depth and breadth of our research.” Two of the key metrics are funds under advice and staff numbers.
MLC is the responsible entity for the $10 billion-odd in funds under management through its implementation services, internationally referred to as “outsourced CIO”. Lamborn says that while this is not the most profitable part of the JANA business, it does represent about 15 per cent of overall business. “We will obviously talk to IOOF regarding the RE side of things,” he said. “It is worth noting that JANA also has a relationship with another RE provider: Channel for the JANA Alternatives Trust.”
A lot has been published about this already since the announcement of the proposed deal last Monday (August 31). In a nutshell, IOOF. When consummated, IOOF will double its number of clients to about 2.2 million, making it the largest financial institution in terms of consumer reach, interestingly only just pipping industry funds AustralianSuper and REST. It will have funds under advice an administration of over $300 billion, making it the largest in that category, and funds under management of about $157 billion, third only to AustralianSuper and the Future Fund.
It will also be number one in terms of the number of advisors, with an estimate 1,884, beating AMP’s depleted number by at least 200. But advisors are not rusted on. There has already been talk of defections under the new ownership. Revelations in the Royal Commission about IOOF management’s behaviour, which many industry participants consider scandalous, are in recent memories. While none of the big commercial wealth management firms nor their bank owners – plus AMP and IOOF – escaped unscathed from the Royal Commission, a lot of advisors are looking for a new start under a new regulatory regime, according to the financial planning trade publications, such as Professional Planner and Money Management. Independent dealer groups are reporting a record level of inquiries from planners looking for a new partner.
For NAB’s part
One thing that the Royal Commission reinforced is that banks and insurance companies are not good at running funds management and investment advisory firms – something which was widely recognised within the funds management industry for years. However, NAB was possibly the best in its treatment of both MLC and JANA, allowing a high degree of autonomy for senior management and resisting the temptation to do what banks have long done, which is rip the available cash out and move on to the next deal.
For instance, it took NAB several years to persuade MLC to review its custodian relationship with long-time partner State Street and have a look at replacing this with a new partner, namely NAB Asset Servicing. This would give the bank a handy new revenue source in cash and FX management. MLC resisted but eventually gave way. State Street boasts about holding on to a competitor bank’s business for so long. With JANA, the bank seemed to allow even more independence, taking on only some backoffice functions, such as RE for the funds. Then it, when confronted with management requests, relinquished control, just as Westpac did with the investment arm of subsidiary BT, now known as Pendal Group. The extraction of Pendal from BT was actually a lot more difficult. So, the banks understand that different cultures are required for the different functions of banking and funds management and advice. Perhaps they were a little slow to the realisation.
Ironically, NAB Asset Servicing old-timers point out that they had built for NAB’s funds management arm a master trust in the late 1990s which topped the inflows for that growing segment of the market, which transformed into the current platform businesses of today. The new master trust was so successful the top brass at the bank thought it could be accentuated by buying the biggest master trust available – that of MLC – they say.
*Additional reporting by James Savage CFA, who is also a former senior executive of MLC.