Opinion  

Jury is still out on the merits of vertical integration

Dan Jones

Aberdeen’s dealmaking king Hugh Little stepped down in June after 28 years overseeing the fund group’s acquisitions strategy. You wouldn’t know it to look at the firm since then.

Its surprise deal for Parmenion earlier this month wasn’t even the company’s first of the quarter, given it came hot on the heels of the purchase of $8bn US hedge fund group Arden Asset Management.

It’s clear that Aberdeen’s very public desire to diversify its business in light of its emerging markets struggles has discredited the idea that CEO Martin Gilbert had put his M&A years behind him. But unlike bolt-on acquisitions such as Arden, buying Parmenion looks very much like the firm is expanding down, not across.

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The relevant terminology is ‘vertical integration’, wherein a product provider buys another link in the intermediary chain – typically a firm capable of distributing those products.

The model has been prevalent in the advice space for some time now. In the absence of the banks St James’s Place is the enduring example, to which we can now add recent acquisitions made by Standard Life, Old Mutual and others.

Inevitably, vertical integration is also now making itself felt in discretionary investment. Joining Aberdeen’s takeover is Old Mutual’s acquisition of Quilter Cheviot last year and SJP’s purchase of Rowan Dartington last month.

I don’t think it will take many more of these acquisitions before some serious concerns about market structure begin to emerge. That said, these deals provide obvious benefits to DFMs, ranging from the possibility of greater investment, to the increased clout they get when negotiating fund prices.

Parmenion also has particular strengths for a firm like Aberdeen, which has always had an eye on tech improvements. The former’s platform and digital capabilities were highlighted by Mr Gilbert when announcing the deal last week.

But there is also another ambition at work in these transactions, typically talked up more bluntly to shareholders and analysts than to customers.

Every one of these deals will have factored in the prospect of greater collaboration between the product provider arms and the distributors.

The recent combination of Old Mutual Global Investors and Quilter into a single investment division is a prime example of the need to demonstrate the benefits of integration to shareholders.

The problem is that there’s no escaping the tension between providers’ focus on this collaboration and their subsidiaries’ firm commitment to independent fund selection.

How long, I wonder, before the prevalence of vertical integration M&A leads to greater scrutiny to this dynamic. Can product providers and discretionaries function entirely separately under one roof? I’d say the jury is still out, and advisers should keep a close eye.

Dan Jones is editor of Investment Adviser