The graveyard of asset management mergers is vast and populated with once, great managers.
This occurs because mergers are normally initiated in board rooms and forced upon two or more investment teams without cultural, philosophical or process considerations. In addition, the corporate merit behind mergers is to create cost synergies, and being a people business, this implies role reduction. The cascading effect of all the above is that the teams form silos, rancid cultures develop and two good businesses collapse.
To avoid this, First Avenue’s Hlelo Giyose and Northstar’s Adrian Clayton chose to approach the idea from a completely different angle – bottom up – allowing the investment teams to decide on the merits of collaborating on research and if that worked, moving ever closer to full integration across all business units.
Our pragmatic view on the industry at the time of discussions, was this. It has too many participants (investment firms), supplier concentration is rising (DFM’s and multi-managers), savings rates are under pressure due to a weak economy and adjustments to pension fund regulations are facilitating higher global exposure. All these factors are conspiring to pressure the pricing power of investment managers.
Against this, a unique opportunity existed for Northstar and First Avenue to work together to create a truly South African firm; there were so many points of opportunity – we could increase the depth and breadth of our research coverage (an enlarged investment team of 15) and without increasing costs for either firm, this larger team spanned all levels of experience – senior, middle and junior, thus filling previous gaps and with regards to client or market opportunities, the two businesses have never competed – Northstar has predominantly been focused on the retail market, whereas First Avenue specializes in the institutional space. In addition, product and skill overlap was limited, the combined offering meant that both companies could offer product to their respective markets that was not possible in the past – most notably fixed income and multi-asset solutions.
Success relies on four factors, three internal and one external. Lack of ego – the typical asset manager perspective is that I will not share, and I cannot collaborate because ‘’we are smarter than you’’ – there is no place for this within our culture. Our two teams fully appreciated the skills and competence within the other business. This created the foundation for merging teams to create a single research franchise. The second is philosophy – it is only possible to agree on an investment process if the investment teams believe in the same philosophy – Northstar is Quality at a reasonable price and First Avenue is best described as Quality-Growth. The point is that both businesses focus on identifying and owning quality businesses and the valuation approaches were almost identical. This allowed for an easy transition. The final controllable factor is that we had to get the economics right and we created a novel approach to ensure fairness and care in this regard.
With regards to the most important exogenous driver of success, well for this to work, we need support from fund allocators, and we are happy to report that our collaboration has received an overwhelming degree of interest from the largest asset aggregators. The combined Northstar/First Avenue franchise is receiving support that would not have occurred had we continued down the path as separate businesses.
In conclusion, we are 18 months into this project, it has exceeded our expectations in terms of its efficacy. Not only have the research teams fully integrated into one team and all sit together in one office, but so too have the distribution and operations components of the businesses integrated. Despite both brands remaining in the marketplace, and we have decided to maintain that approach considering the separate markets in which they operate, in every other regard, First Avenue Investment Management and Northstar Asset Management is one business and an incredibly happy one at that!