Sunday 18 March 2018

KBI Global Investors looks to future as range of backers buy into green strategy

After surviving five changes of ownership, along with a drastic switch in its client base, KBIGI has hit a sweet spot in the specialist space and aims to double assets under management to €20bn within the next four years, writes Gretchen Friemann

KBI Global Investors CEO Sean Hawkshaw (right) and Eoin Fahy Chief Economist outside the asset manager’s offices in Dublin’s IFSC. Photo: Tom Humphreys
KBI Global Investors CEO Sean Hawkshaw (right) and Eoin Fahy Chief Economist outside the asset manager’s offices in Dublin’s IFSC. Photo: Tom Humphreys

Gretchen Friemann

It took Dublin-based asset management firm KBI Global Investors six years to land the equivalent of the holy grail among investors - a mandate from one of the world's biggest pension funds.

Not that there was time to celebrate the hard-won achievement - the firm, housed in the IFSC, was in the midst of another period of upheaval back in December 2015.

Its Brussels-headquartered parent, the Anglo-German banking group, BHF Kleinwort Benson, was caught in the crosshairs of an aggressive suitor; China's sprawling investment conglomerate Fosun International, famous for its ownership of the Club Med chain.

KBIGI's CEO, Sean Hawkshaw, recalls the takeover battle became "messy and hostile", particularly after a competing bid was lobbed in by the eventual victor, the French family-controlled bank, Oddo & Cie.

Hawkshaw and his long-serving directors in the business had hoped Fosun would prevail as the Chinese behemoth had shown a strong interest in the Irish asset manager. The mutual appreciation had even resulted in a meeting in Shanghai between KBIGI's directors and Fosun's top brass.

However, once Oddo took over the reins a parting of the ways became inevitable.

As Hawkshaw outlined to the French company's management at the time, Oddo's business model, with its captive distribution strategy - selling its own products to customers irrespective of performance - was anathema to KBIGI's boutique structure.

Hawkshaw claimed the powerful investment consultants, who determine how the world's largest asset managers invest, dislike captive distribution, and he feared the impact of the merger on KBIGI's business and shareholder value.

KBIGI's divorce proposal met with support from Oddo. By then Korea's National Pension Service fund - the third-largest pension fund in the world after Norway and Japan funds - had agreed to hand over a €1bn-plus mandate which, as Hawkshaw acknowledges, proved "fantastic timing".

While the influential new client represented an "endorsement" - according to Hawkshaw - of KBIGI's "specialist" investment strategy, it also delivered a timely fillip to the firm's valuation.

Large-scale private-equity firms came hunting, as did vast asset-management houses.

On one occasion KBIGI spurned the advance of a big US firm after 65 of its executives combed through the data room. "We only have 62 employees, so it was obvious if that many were in due diligence there was going to be a big difference in culture," says Hawkshaw.

After an exhaustive sales process - run by the Wall Street partnership of Sandler O'Neill + Partners - KBIGI embraced the French Goliath, Amundi Asset Management.

According to Eoin Fahy, KBIGI's chief economist and investment strategist, the union has proved harmonious, with their new owners "unwilling to intervene, but willing to help if asked".

The hands-off approach has led to a partnership model in Asia and Europe, where Amundi has greater knowledge and influence of the markets, while in the UK and US KBIGI continues to plough its own furrow.

The firm now has close to €10bn assets under management and aims to double that figure within four years.

It's a remarkable turnaround for a company that faced an existential crisis in 2012 when AUM had dwindled to just €2.8bn as Irish pensions funds bolted en masse from equities amid a regulatory clampdown that discouraged riskier investments in favour of low-yielding bonds - a move that Fahy and Hawkshaw, virtually in unison, describe as "madness" and "entirely the wrong structure".

KBIGI now sources close to 90pc of its income from overseas investors.

Fahy, who joined the firm in 1988, when it was run by Ulster Bank, warns the decline of Ireland's defined-benefit pension schemes - still decimated by the financial crisis with most in deficit and closed to new members - presents a "big problem" for the Government further down the track. "That's a no-brainer," he said.

But the Irish pension funds' flight from risk forced KBIGI to intensify their fight for new mandates from offshore funds, particularly in the US.

In what has become an increasingly desperate search for yield, pension and endowment funds piled back into equities and raised exposures to alternative investments.

This, in turn, lifted the fortunes of KBIGI with its twin strategy of diversified global equities, which has ballooned to €8.5bn, along with a €1bn-plus natural resources portfolio.

Hawkshaw points out that it pitches against the top firms in the world for its international mandates and attributes KBIGI's growth to a well-hewn, specialised strategy.

Rather than compete against "alpha"-seeking investors, the firm trumpets its consistent, small "beta" returns. Hawkshaw concedes "it's not sexy" but insists it's "designed to do exactly what it says on the tin".

Guided by a traditional investment philosophy that excludes any companies not paying a dividend, KBIGI aims to outpace the benchmark index by dispersing risk throughout a universe of 120 stocks. Typically active managers chasing higher returns confine the portfolio to 40-50 stocks.

Fahy argues KBIGI's cautious, conservative approach fits the diversified requirements of the larger funds. "We deliver downside protection" he says, which is why the firm's worst returns occurred in the spring of 2009, during the dash-to-trash craze - a market swing that resulted in bombed-out stocks rocketing.

He added if KBGI's global equities portfolios suddenly soared during a bull run, their clients' investment management consultants would come knocking, demanding to know why they had departed from their strategy.

The €1bn-plus Korean mandate sits within this core segment of the business, yet Hawkshaw acknowledges the higher fees are drawn from its riskier natural resources portfolio, which centre on innovative environmentally and socially-friendly companies.

Hawkshaw is acutely aware of the headwinds buffeting the investment-management industry as large firms merge, piling further pressure on fees and profit margins amid rising demand for exchange-traded funds.

He argues this is why KBIGI strives to remain in "the specialist space rather than occupy the middle ground".

Over the past year, the industry has been transformed by mega-mergers. Standard Life and Aberdeen Asset Managers, two of the UK's biggest fund managers, are in the final stages of a tie-up, while KBIGI's new parent Amundi is applying the finishing touches to its takeover of Pioneer, which employs over 400 people in Dublin.

Hawkshaw emphasises the motivation behind that deal is very different from its acquisition of KBIGI.

As an "independent" asset manager, long-serving staff were viewed as a key asset. Hawkshaw stresses few firms are helmed by directors that have been in place for over two decades. He joined in 1992 as did Noel O'Halloran, chief investment officer.

Despite shifting between five different owners - KBIGI was established by Ulster Bank in the 1980s, then taken up by RBS and RHAI, an earlier manifestation of BHF Kleinwort Benson, before Oddo held it for just three months - management were unable to snare a stake in the firm.

That changed after the Amundi deal. KBIGI's management now hold a 12.5pc slice, in a deal entirely funded by Oddo and their new owner.

Hawkshaw points out the ownership stake would have been larger - possibly as high as 25pc - if they had opted for a private-equity firm but said this option was shunned because of concerns about accumulating high debt levels "six years into a bull market".

While Hawkshaw declined to clarify the precise agreement on the management stake, the executives are subject to earn-out periods over a five- and seven-year time frame.

And as Amundi beds in its €120m-€140m acquisition, Hawkshaw and Fahy are confident KBIGI has moved into a sweet spot after years of uncertainty and change.

Greater advances in technology, coupled with a wider shift towards a low-carbon economy, have fuelled hopes for the firm's natural resources strategies, which have already won mandates from US funds like LA Fire and Police Pensions.

While the lengthy due diligence demanded to win these mandates means each victory is savoured, Hawkshaw and Fahy seem to take even greater glee in trouncing competitors touting a fossil fuel investment portolio.

In one pitch to a Californian fund, Fahy and Hawkshaw listened to a larger rival flogging an oil and gas portfolio and then pitched their alternative 'green' strategy in renewables.

In California pension funds force investment firms to compete publicly for new mandates.

"After we had pitched we could sit back and listen to the ... debate, and they were discussing exactly what we had argued: 'should we be sitting back and investing in what has delivered for the past 20 years or should we look forward to the next 20 years'," says Hawkshaw.

Hawkshaw and Fahy insist these ESG-friendly strategies are lucrative, pointing out their fund has generated an average 3pc return for the past 15 years.

"That is a lot of outperformance", says Fahy. He claims the firm has carved out a reputation in the space and with brokerage and research still sparse in the sector, "companies now come to us".

Yet ethical principles are not clung to blindly. An investment in oil and gas behemoth, ExxonMobil, numbers among its largest holdings within its global equities portfolio.

Asked how this squares with its alternative strategies, Hawkshaw replies, "it's not a religion".

Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business