After amassing $143 billion (over R2.1trn) in assets within the belly of Investec [JSE:INL], the money manager's founding Chief Executive Hendrik du Toit can now plot his own course as it splits from the banking group.
For Investec Chief Executive Officer Stephen Koseff, it is a bittersweet moment. He’s preparing to leave the company next month, after 40 years of helping to grow a local Johannesburg financier of doctors and lawyers into a giant with more than 10 000 employees and offices from New York to Sydney.
Investec is spinning off the asset-management unit after a review found there is not much synergy with its banking and wealth and investment divisions.
“I’ll relate it to when my daughter left home and got married,” Koseff, 67, said on a conference call.
“At first, it was very hard. Now I have three grandchildren. She was also allowed to go on and develop as an individual. We have been building Investec Asset Management together with Hendrik and his team for 28 years. It’s like letting one of our children go, but we’re giving it its own wings to fly.”
Du Toit, 56, who holds a Master’s Degree from the University of Cambridge, and his Investec Asset Management are being released at a time when size matters in an industry facing pressure on fees and intensifying competition. It also comes as mergers and acquisitions are being used as a quicker route to add assets in a business where it can take years to build a client following.
“In terms of M&A - asset management would be a relatively tempting target,” Nicholas Hyett, equity analyst at Hargreaves Lansdown, said in email comments.
“Scale is increasingly important in the asset management sector. Investec is big, but not a giant, it could also provide an interesting stepping stone geographically for an acquirer.”
It was never the intention to sell Investec Asset Management, Koseff said in a Bloomberg TV interview, adding that the rationale behind the spinoff is to give Investec investors a direct stake in the money manager.
“A separate listing will give them an opportunity to play a role as a consolidator if they believe that is appropriate for them,” Koseff said. “Up to now that business has been built organically and achieved scale.”
For Du Toit, it closes the loop on a plan he considered as early as 2010 to operate independently from Investec. It also follows the sale of a 15% stake in the asset-management unit, which uses active trading strategies rather than passive investing, to the executive team in 2013.
Standing alone will allow Investec Asset Management, which accounts for about a third of Investec’s operating profit, to invest more of its capital into growing the business, said Harry Botha, an analyst at Avior Capital Markets. “At the moment a lot of the earnings in the form of the dividends goes to shareholders.”
It will also sharpen focus for the remaining specialist banking and wealth and investment units, Botha said. “It will force the bank and wealth manager to take tougher decisions about profitability. It can’t just hide behind the high return on equity profile the asset manager gave them.”
Choice for investors
The separation will allow “investors to choose whether they want to invest in the asset management or the wealth and specialist bank,” said Nolwandle Mthombeni, an analyst at Mergence Investment Managers in Cape Town. “The asset management business is very strong and performing well.”
Shares in Investec jumped as much as 13%, the biggest increase since March 2009, to 547.60 pence; and were trading 7.7% up at 522 pence by 13:00 in London. That pared losses this year to 2.2% and values the company at 5.2 billion pounds.
The lender has for years been struggling to unwind assets picked up in the UK before the onset of the global financial crisis that provided very low or negative margins, which has dragged on earnings, Mthombeni said. While that book is being rolled off, “there are still some structural issues in that part of the business. And that is why investors are positive because now they can at least see that they will be able to get some value out of the asset management side.”
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