Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
GBST carve-out on the table in FNZ ‘win’
FNZ has wrung out some relief from the UK Competition and Markets Authority (CMA) despite losing on most counts in the latest – and almost last – round of its bid to prevent a forced sale of GBST.
In a provisional report handed down mid-April, the CMA upheld its November 2020 finding that a merger of FNZ and GBST would create a “substantial lessening of competition (SLC)” in the UK retail investment platform market.
However, the CMA conceded some ground to FNZ, leaving the door open for the Edinburgh-headquartered investment platform business to sell GBST with rights to buy-back the Australian firm’s capital markets operations.
Under the original CMA decision FNZ would have had to divest the entire GBST business, reversing its audacious A$260 million takeover of the-then ASX-listed firm in July 2019.
Just five months after completing the deal, FNZ struck trouble when the UK competition regulator halted a full-scale merger with GBST pending a market share enquiry. In both the provisional and final reports released in 2020, the CMA ruled a merged FNZ and GBST would stymie competition in the UK retail investment platform market, listing a “full divesture” as the only remedy.
FNZ won a last-ditch right to appeal the decision last December after the CMA admitted some market share calculation errors during the original process. The CMA ‘remittal’ tribunal stood by most of the previous findings that suggested a joint FNZ/GBST would suffocate the UK retail platform market.
“Overall, the evidence the CMA considered, which included additional and updated evidence submitted during the remittal, shows that FNZ and GBST are close competitors, and few other significant suppliers offer effective and competitive alternatives,” the April 2021 provisional report says.
Martin Coleman, chair of the CMA inquiry panel, said in a release: “The reduction of competition in the market could lead to higher prices or poorer service for retail platforms to the ultimate detriment of UK consumers who hold pensions or other investments that are managed by these platforms.”
In the face of objections from GBST, however, the CMA ruled FNZ could retain most of the group’s capital markets assets with a ‘reverse carve-out’ arrangement. The CMA proposed remedy would allow FNZ to sell the entire GBST business with the right to buy-back the capital markets arm.
GBST opposed any partial sale, citing competitive and business disruption risks. Other third-parties, including the ASX, also pushed-back against the capital markets separation plan.
“Approximately half of the participants in the Australian equity market connect to the ASX’s equity clearing and settlement system using GBST’s systems,” the CMA report says. “The ASX told us that it would have concerns, in the short term, that there would be a delivery risk to the implementation of CHESS that would likely result from a divestment.”
As it stands, though, FNZ would have a window of about six months once the CMA decision is finalised to find a suitable buyer willing to exercise a GBST capital markets carve-out clause: failing that, the regulator would likely enforce the full-sale option.
The GBST capital markets unit “provides software to stockbroking firms to enable the settlement and clearing of trades in listed securities and margin lending”, according to the CMA report.
A sale with buy-back option would be “less onerous” for FNZ than offloading GBST entire, the UK regulator says, while still addressing the core retail investment platform competitive issue.
“While we have provisionally found that a divestiture with the right to buy back certain assets is an effective and proportionate remedy to the SLC and its resulting adverse effects, we are actively considering whether there are any remaining risks associated with this remedy and, if so, whether and how these risks can potentially be managed through additional safeguards,” the report says.
Submissions on the provisional CMA remittal report were due last week (April 30) with a final, final decision slated for late May.
Founded in Wellington almost 20 years ago by incumbent chief, Adrian Durham, FNZ has built a global investment administration empire with a presence in Europe, Asia, US as well as its original home base. In October 2018, a consortium comprising the large Canadian pension scheme Caisse de Depot et Placement du Quebec and the Al Gore-founded Generation Investment Management, stumped up $2.3 billion to buy two-thirds of FNZ from previous private equity owners.
