The unresolved European crisis may have markets reeling but it is creating an opportunity for South African investment managers to bulk up on cheap assets in developed markets.

In the last few months major South African investment managers have announced new acquisitions. In September Investec bought Evolution Group, a UK stockbroking and asset management group for £233 million; in the last two months Sanlam announced its acquisition of London- based Merchants Securities and Geneva-based Summit Trust International a fiduciary and tax business; and last week investment management group Prescient announced its acquisition of the asset management arm of Allied Irish Bank.

Johan van der Merwe, head of Sanlam Investments says that while Sanlam Investments has had an offshore acquisition strategy since 2005 the company could not find value in the over-priced markets. Businesses were either not for sale or those that were came at a price.

“We wanted the opportunity to own our own asset managers but price tags were too high. But now they are phoning us up and want to talk,” says van der Merwe who adds that before the crisis asset managers walked on water and it was difficult to negotiate with boutiques or to head hunt individual as they came with hefty golden handcuffs. “People are more sensible now, boutiques now realize that they need to have a ‘big daddy behind’ them” says van der Merwe.

In many cases Sanlam has paid out relatively small amounts for the business but provides working capital as well as credibility. In this market even the best fund managers can fail if investors are concerned about credibility and sustainability.

Sanlam Investments started to acquire businesses at the end of 2008 and has made eight acquisitions across the US, Europe, India, Asia and Australia. Van der Merwe is quick to point out however that the money involved has been negligible as their strategy has been to buy small boutique companies with skills and a client base allowing the team to retain a substantial management stake in the business. The group has spent a total of around $50 million on their acquisitions. The group has spent $30 million on their India acquisitions which van der Merwe describes as a “call option”. “It is very hard to make money in India. It is a growing market but it is not well penetrated. It offers blue sky potential but so far this has failed to materialise. You have to make sure you don’t pay too much for the business”.

Herman Steyn, executive chairman of Prescient which has had operations in Dublin since 1996 says businesses are for sale at very attractive prices.  Prescient bought Allied Irish Bank Investment Managers when Allied Irish Bank was forced to sell its asset management arm. This was part of the Irish government  bailout agreement which requires the bank to sell all non-core assets. Although Prescient has not disclosed the amount they paid for the business, which has €8.5 billion of assets under management, Steyn says based on income they expect to recoup their investment within two years.

“The opportunity came when AIB were forced to sell non-core assets making them a forced seller. You can now buy asset managers in Europe between half and a quarter of what you would have paid four years ago”.

Ursuala Nobrega, global head of Investec investor relations says given the Eurozones crisis there has definitely been a drop in the price of quality businesses and we are likely to see more businesses that were not for sale becoming available. “As far as Investec is concerned we are always looking for opportunities to leverage our platforms. We have recently completed the acquisition of Rensburg Sheppards and we are awaiting finalization of the Evolution acquisitions so those our immediate priorities during this period of renewed instability”.

While the crisis has created buying opportunities time will tell whether the deals were worth making. Steve Meintjies of Imara SP Reid says investors may be a bit jaded by South African financial companies going abroad after the Old Mutual debacle and Discovery which had its own set of issues in the US. “Tha said Sanlam does have some credibility by staying out of the overseas market in the 2000’s and should have the benefit of the doubt”.  Meintjies also makes the point that if South African investment managers are shopping around for cheap assets, the weaker rand will have reduced some of that opportunity.

Meintjies point about the offshore track record is an important one. “Old Mutual also went on expansion streak and bought at top of cycle at expense multiples. Now that market is depressed they are getting out,” says Asheen Rabilar, analyst at Avior Research

Rabilar says Old Mutual now wants to sell their stake in Nedbank as well as exist their US fund manager through a listing but with the markets the way they are that is unlikely to happen says Rabilar. “This is a classic case of buying at the top and selling at the bottom”. Old Mutual’s decision to divest from non-core assets is a very similar strategy to the distressed banks across the US and Europe which is ironically creating the buying opportunity for other South African investment managers.

Sanlam on the other hand has followed a far more cautious strategy compared to Old Mutual’s “over-ambitious international strategy”. The results are in the share price. Since demutualization Sanlam’s share price has outperformed the market whilst Old Mutual’s share price has remained flat, significantly underperforming the market.

But astute investors invest when an asset is at its most distressed. Rabilar says with Sanlam trading at its embedded value, Old Mutual which trading at a significant discount to embedded value and taking steps to rectify the business, may offer better return potential.

This article by Maya Fisher-French was first published in the Mail&Guardian