Hello and welcome back to the Fides Weekly Update. This week we’re discussing KWM’s troubles and what we learned from the FCA’s Asset Management Review. Don’t forget to scroll down and take a look at our Movers & Shakers of the week.
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1. Integration gone wrong: European partners fail to back KWM recapitalisation plan
Global giant King & Wood Mallesons has dominated the legal press this week as news emerged that European partners failed to commit to the firm’s recapitalisation plan, rejecting to secure additional funding from the Asia-Pacific business.
Only 21 of KWM European partners agreed to commit to the plan, which was far below the 70 partners (60%) required to raise £14m in extra funding to secure the bailout from China, which also tied partners to a 12 month lock-in.
This was despite European partners being warned at the start of the week that they might have to pay back two years’ worth of profit contributions should the bailout deal not go ahead.
Initially paused in October due to a raft of senior partner exits, the recapitalisation plan would have guaranteed that equity partners received at least £11,000 per equity point in remuneration, despite the financial difficulties in Europe. This would have equated to an additional £220,000 to £660,000 dependant on a partners position in the firms’ 20-60 point lockstep.
Had the recapitalisation gone ahead, the combined funds would have been used to pay down some of the partnership’s debt, to provide working capital and to guarantee European partner earnings at a minimum level.
With partners within the European arm initially agreeing to a £14m recapitalisation in the summer, commentators suggest that it was the provision that partners could not leave the firm for 12 months that ultimately led the majority of European partners to reject the plan.
As a result, this has put the future of the firms’ European arm into question, with KWM’s management team scrambling to find alternative solutions, including mergers.
Despite this, many in the market believe that finding a suitable merger partner will be difficult to achieve, given the level of debt (understood to be around £35m) and stark lack of buy in from partners.
The failed recapitalisation plan raises serious questions about the global KWM project, and what to do next following the reputational damage to the firm.
European partners have sent a strong message to Asian management in rejecting plans to recapitalise the firm, forcing them to find other solutions. On the other hand, it is questionable to how well the firm’s Asian-based corporate and finance practices could operate without a solid base in London.
Where this leaves KWM in Europe is clear, and how the firm chooses to redevelop and build is yet to seen. However, without a merger partner for the European business, rival firms will continue pick at their failing partnership until KWM Europe is either no longer or certainly no longer in the news
Pre-merger SJ Berwin, we’re once a hugely well regarded firm in the City, who unfortunately by chasing growth through merger have been left exposed and subsequently depleted.
The potential lesson for other UK firms is to look at all options regarding growth rather than focussing on mergers alone as KWM are not the only firm who have hit difficulties following rapid expansion through merger.
2. 4 key points from the FCA’s Asset Management Review
It’s been a stressful week for fund managers as they begin to prepare themselves for the aftermath of the FCA’s Asset Management Review.
In a critical review of the industry, the regulator expressed their dissatisfaction with how investors are treated, hinting that there may be an overhaul of fee structures being introduced that will make it fairer and simpler for customers to invest.
Here are some of the key points outlined in the review:
Active funds under scrutiny
Actively managed funds have been hit the hardest by the interim report, as it declares that active funds often don’t outperform their benchmark, but continue to charge high fees and secure large profits. The FT has listed those who specialise in active funds and could be most affected by upcoming changes include Jupiter, Henderson, Schroders, Aberdeen and Ashmore.
Changes to charging structures
Achieving transparency of costings for customers is the key objective, says the FCA. They aim to make costs easier to compare between fund houses, allowing more investors to individually seek better value for money. The regulator plans to address this, as “investors are not given information on transaction costs in advance, meaning that they cannot take the full cost of investing into account when they make their initial investment decision.”
Under new conditions, asset managers could be required to consider formulating alternative fee-structures, and reevaluating current fees incurred by investors, which not only includes transaction costs, but also ‘box profits’.
The “all-in fee”
The review also references to the potential introduction of an “all-in fee”. It offers multiple ways that this new structure could be implemented, one of which is to package up both the transaction costs and fixed fees that fund houses charge. It would benefit customers by giving them a clear upfront image of the cost of investing, whilst also ensuring that fund managers absorb any extra costs incurred.
Shift away from “dinosaur investment products”
Increasing competition will be another focus for the FCA. The review claims there is “weak price competition in a number of areas of the asset management industry” and not enough incentive for investors to switch between funds and asset managers to get better value for money.
Hargreaves Lansdown senior analyst Laith Khalaf argues that there are billions of pounds invested in “dinosaur investment products” and individuals should be encouraged to review their investments. These products have been criticised over the last year for failing to produce sufficient returns and for being ill-suited to the modern investment marketplace. The regulator is hoping to provide tools to allow investors to more easily search for alternatives investment opportunities.
Many are speculating that the outcome of this interim report will be damaging to asset manager profits. Those most disadvantaged will be managers in the active funds space, who will be anticipating an overhaul of their fee structures and should ready themselves for the “all-in fee” which, depending on how it’s implemented, could significantly impact their revenue. However, Daniel Godfrey, former chair of the Investment Association, believes the incoming changes may prove beneficial to some: “This won’t be good for everyone — the weak asset management companies will die. But if margins come down and the overall pool of assets gets bigger, profits can be higher.” Whether or not this is case, it’s fairly likely that the FCA could shake-up the industry, bringing about a more transparent and competitive investment environment.
Movers & Shakers of the week
New York Times gain new GC
The New York Time Company will promote their deputy general counsel Diane Brayton to the role of GC in January next year
Freshfields PE head promoted to lead sector group
Adrain Maguire will leave his role as head of private equity as Freshfields Bruckhaus Deringer to become the new head of their global financial investors (GFI) sector group
Dechert expands Middle East capability
King & Wood Mallesons corporate and M&A partner Hamish Walton has exited their Dubai office to join Dechert, leaving KWM with only five partners in their local office
Freshfields M&A heavyweight moves to US firm
M&A partner Ben Spiers leaves Freshfields Bruckhaus Deringer for Simpson Thacher & Bartlett in London
Office Openings & Closings