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Betting against acts of God is a great way to make money, but institutional allocations to natural catastrophe reinsurance have stayed relatively static even as some managers are generating double-digit uncorrelated returns.
Aurora deal asks the question of smaller retail managers
(Pictured: Simon Lindsay)
The friendly deal between Aurora Funds and its largest shareholder, Keybridge Capital, opens new opportunities in retail funds management which have proved difficult for the smaller listed company to pursue. But it also reflects a trend away from alpha-seeking boutiques in the retail market.
The arrangement, announced over the New Year’s break, will see Keybridge acquire Aurora’s main subsidiary, Aurora Funds Management, for $4.3 million in cash. Keybridge has just under 20 per cent of the listed Aurora parent company, which intends to make a special dividend payment to its shareholders. All Aurora staff are to be retained and, for the time being at least, the Aurora board remains intact.
Aurora’s ongoing business is a successful, but very small, Significant Investor Visa offer which has offshore clients who have invested at least $5 million each for a minimum of four years, under the Government’s new investor visa scheme. Aurora will honour its SIV commitments.
Simon Lindsay, an Aurora co-founding director and head of distribution, said last week that the main rationale for the sale was for Aurora to have a partner with a larger balance sheet to facilitate growth.
“We need to be a bigger business,” he said. “It’s very hard to start a retail business unless you have $30-50 million in cash on your balance sheet. You need research and a business track record. The research houses have become quite conservative in their recommendations. They are worried about their business risk too. The industry has changed since the GFC. Advisors are much more concerned about risk.”
Lindsay said that Aurora found itself competing with the likes of BlackRock (the world’s largest fund manager) even though its offer did not necessarily correlate on a risk/return basis. He said the company had also been careful to maintain profitability, which had come at the expense of growth. The manager has about $180 million under management.
Aurora, which was formed in 2005, had offered an RE service and also institutional mandates as it built its retail funds business. “We’re now at the point that we are profitable solely with the retail funds business and no longer have to do the other things,” Lindsay said.
For the industry as a whole, the loss of smaller and alternative managers is a concern because of the strong evidence that they tend to outperform their larger and more traditional competitors.
Not that Keybridge is a big company, but it does have about $12 million in cash as of November last. It is a diversified listed investment company, which holds infrastructure, private equity and property assets. The cash makes up about 32 per cent of its assets prior to this deal.
Lindsay predicted that the focus on alternatives would continue under the new arrangement. Australia is yet to see the sort of demand for liquid alternatives that the US has seen over the past few years, but a lot of people are predicting that this trend will eventually unfold. It’s a question as to whether the alternative managers can hold on until it does.
– Greg Bright
