The UK insurer is “exploring opportunities” regarding its majority stake in F&C, which runs £104bn (€136bn) for institutional, wholesale and retail clients. Friends announced its asset management presence in 1998, with the purchase of Edinburgh’s Ivory & Sime, and was to compete with a raft of other insurers – including Standard Life, Scottish Equitable and Scottish Widows – all advised to boost earnings by embracing fund management.
A Keystone Cops-style, comic scramble ensued, as insurers raced to spin off new units to boost credibility among asset consultants. In the same vein as its competitors, Friends Ivory & Sime discarded the unpopular ‘life’ tag by renaming itself Isis Asset Management.
Isis acquired the funds arm of Royal Sun Alliance in 2002, before merging with Netherlands-owned SRI pioneer F&C in 2004. The new company, F&C Asset Management, entered the market as one of Europe’s top five fund houses, with a strong historic footprint in both UK and Dutch institutional markets.
Early announcements boasted about the company’s size, running £118bn at the time of listing, but Resolution Life, which appears to have been the source of much soul-searching at the Friends Group, withdrew £25bn in 2006 after merging with Britannic. Indeed F&C still struggles to hold onto pension fund mandates, as Dutch schemes restructure and farm out members’ money to be managed on a fiduciary basis.
After last year’s planned merger of Friends with Resolution Life failed to materialise, and an injection of new managed assets of around £60bn was scrapped, the sale/review announcement was made at the beginning of February.
Friends can raise £850m from selling F&C and up to £1bn for offloading Lombard, its high-margin wealth manager, running £10bn. Yet failure to achieve significant scale does not mean F&C has a poor business proposition. On the contrary, profits are rising despite marginally falling assets. Battle plans targeting year on year asset growth to satisfy rampant egos are all too common in this industry. But F&C’s successful, cross-border peer-group managers such as Schroders and Julius Baer have watched unprofitable assets leave their house, and analysts have applauded their pragmatism.
The latest three-year growth plan from F&C’s chief executive Alain Grisay, which is being instituted by global distribution head Cristobal Mendez de Vigo, also shows a new maturity has arrived at the company’s headquarters, tucked behind London’s Liverpool Street railway station.
Rather than targeting bulk institutional business in a limited number of markets, the focus has switched to setting up strategic partnerships with cross-border banks and “national champions” in Europe, the Middle East and Asia. The target is to increase earnings per share by 50 per cent by the end of 2009. “At the end of the day, we need to provide excellent products and generate revenue, not AUM,” admits Mr Mendez de Vigo.
While institutional consultants will wait for ownership issues to be resolved before assigning mandates, any buyer is assured of steady fee income, as £33bn of F&C’s assets are managed for Friends Provident, under contracts of up to seven years. Friends believes it no longer needs a captive manager in-house, with the development of open architecture. It has enjoyed good profits from its ownership of F&C. But under increased pressure to increase shareholder value, it has decided to concentrate on its skills in administration, distribution and protection.
Those are also the core interests of Trevor Matthews, who has just been recruited from Standard Life, where he ran the life and pensions business, as chief executive of Friends Provident, with a July starting date.
Mr Matthews’ track record includes managing the Standard Life business from crisis to profitability, including administering huge job cuts and acting as one of the front-men for an internally unpopular £4.7bn demutualisation and public share offer.
“There are three things I am concerned about,” Mr Matthews once said: “Distribution, distribution and distribution.” Acquiring asset management businesses was never on his agenda. When Standard Life made its own bid – also unsuccessful – for Resolution, unlike other board members, Mr Matthews did not appear to favour the merger.
But while it appears that Friends’ ten-year adventure in fund management is drawing to a close, the outcome is far from certain. Potential buyers are circling the Friends camp to bid for not just the funds arm, but what is now seen as a vulnerable insurance company, with its anointed leader yet to join. The Friends board has commited itself to carefully considering any “firm offer”.
Can the distant promise of an eventual restructure from Mr Matthews keep the barbarians away from the gates? And what if another life company, one more committed to asset management, decides to make a bid for Friends, and its attractive funds business?
