Long ReadJul 7 2022

Where did it all go wrong at Jupiter?

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Where did it all go wrong at Jupiter?
(Pablo Garcia Saldana/Unsplash)

The two men at the City restaurant knew each other well, and were veterans of this type of deal. 

It was early 2020, and by the time their business was done the fate of one long-established City company had changed markedly, while another would disappear altogether.  

The two were Edward Bonham-Carter, deputy chairman at Jupiter, who was negotiating with Richard Buxton, a veteran UK equity manager who had led a management buyout in 2019 from Old Mutual, which led to the creation of Merian Global Investors.

The common link between the men, apart from personal acquaintance, was private equity company TA Associates.

Bonham-Carter (descendant of an early 20th century prime minister) had started as a fund manager, and, as chief investment officer, had worked with TA to lead a management buyout of the business Jupiter from Commerzbank.

Buxton had become one of the best-known UK equity managers in the market, and worked with several colleagues at Old Mutual, and with TA, to buy the asset management arm of his employer in late 2017. 

But the latter deal soured quickly amid discord between Buxton and other members of the buyout team.

At this time, the company’s flagship mandate, its Global Equity Absolute Return (GEAR) strategy began to suffer sharp outflows, and had shrunk by around 90 per cent from when the deal was done.

Those factors prompted TA to decide it wanted out of the Merian deal. Some of the Merian staff had borrowed money to buy shares in the company, and were worried about repaying this as the financial performance of Merian seemed to be deteriorating.

So as he met with Bonham-Carter, Buxton was close to being a distressed seller.

But all was not well in Bonham-Carter’s garden either.

Out of fashion

Outflows were starting to mount at his business, particularly in the wake of Alexander Darwall quitting, taking a European investment trust with him, and contributing to about £4bn of net outflows that year, and indeed, every year since.

Jupiter was known as a specialist in the value style of investing, which has been sharply out of favour for most of the past decade.

The eventual deal for Jupiter to acquire Merian was announced in 2020, and very shortly afterwards it was confirmed the Merian brand would disappear. 

The deal created an asset management business with assets of £65bn. Its most recent assets under management update revealed its AUM is now £55bn, a drop of £10bn in about 27 months. 

That prompted Jon Little, a former director of the company and still a significant shareholder, to call for a change in strategy. 

The chief executive Andrew Formica recently announced his exit, for what he called personal reasons and a desire to return to Australia. 

Outflows had been about £4bn a year for each of the past four years. 

Jason Hollands, managing director for business development at Evelyn Partners, says one issue has been that Jupiter’s product range is suffering from being “mature”, that is, long established and with earlier clients now at retirement and withdrawing their capital, with insufficient replacement clients entering the funds.

Hollands adds: “Jupiter has experienced a pattern of net outflows over a number of years. Like other avowed active managers, this hasn’t been helped by the rise of passives or styles being out of fashion, but some of their previous blockbuster funds that garnered significant assets in the past will be seeing natural run off due to the maturity of the investors base.” 

Among Jupiter’s flagship mandates is the Merlin range of multi-manager funds, headed by the company’s former chief investment officer, John Chatfeild-Roberts. 

Hollands says this range was very fashionable at one time as multi-manager funds were in vogue, but in recent years competition from model portfolio providers has dented demand for this type of product. 

Ben Yearsley, investment director at Fairview Investing, says: “[The new chief executive] also needs to consider what Jupiter is about. They should have been having a much better time of things as they always were a more value orientated house. What's happened? Where are the good performing funds? 

"They've been reliant on bonds and Merlin for so long now they seem to have lost the knack of finding good other funds. What's happened to Jupiter's DNA?”

Yearsley says he “can’t remember” the last time Jupiter successfully launched a new fund. 

Hollands adds: “At investors presentations, previous management pointed to new strategies being launched, but there is a mismatch in the pace of assets being raised in these and the areas seeing outflows.”

Cost-centred 

The jargon often associated with fund manager acquisitions is that the combined company can be more efficient and better run. 

There were redundancies shortly after the merger, with several fund managers departing, and subsequently a further 90 of the more than 300 staff left in another bout of redundancies. 

Hollands notes that while Jupiter’s AUM has risen from £26.3bn at the end of 2012 to the aforementioned £55bn today, there has not been a similar rise in profitability and revenue. 

The company's operating margin fell by 10 basis points from 2016 to 2021 as staff numbers rose. 

This is despite, Yearsley says, Jupiter’s fund charges tending to be quite high relative to industry peers. 

All of these issues have led to the departure of Formica as chief executive after just three years, and his replacement with Matthew Beesley, who joined the business as chief investment officer in January 2022. 

Darius McDermott, managing director at Chelsea Financial Services, is slightly more positive on the product range at Jupiter. 

He says: “Jupiter have had a bad run to be sure. Assets have been declining and the share price has followed.

"I understand most of the money leaving has come from bonds, European equities and the Merian mid and small-cap desk. Jupiter are a mid-sized asset management but they are quite well diversified. They have a strong Asian income fund which people often over look."

The Merian problem 

As we approach the three year anniversary of the Merian purchase, one of Beesley’s tasks will be to figure out what to do with the legacy Merian business.

Under the terms of the original deal, the five Merian managers who had owned that business, notably, Richard Buxton, Richard Watts, Amadeo Alentorn, Dan Nickols and Ian Heslop, are due a payout of around £20m, if they are still at Jupiter on the three year anniversary of the acquisition, an event which occurs in early 2023.

Although there have been performance issues with most of the funds managed by those five (indeed, their combined AUM has fallen sharply since the acquisition), they still manage in the region of £6bn – more than 10 per cent of Jupiter’s entire AUM between them.  

A key issue for the new chief executive will be whether the five wish to stay on after their lock-in period ends, and if they do not, who will manage the money.

A Jupiter representative told FTAdviser recently that “succession planning” is under way at the business.

Watts, who is jointly responsible for around 5 per cent of the entire AUM of Jupiter, runs the Chrysalis investment trust, a £1.2bn vehicle that invests in unquoted and mostly early stage companies. 

This trust generated a £50m performance fee for Jupiter as a business, but the fee structure that enabled this has been abolished and will be replaced by something likely to be less generous, denting Jupiter’s revenues further.  

Target practice 

All of the above may make Jupiter vulnerable to a takeover from private equity or a rival. TA now owns around 17 per cent of the business, and bought into it originally very cheaply, and FTAdviser understands it is already deeply in profit on its original investment.

The five original Merian shareholders own about one per cent of the business between them. 

Yearsley says the company “needs to find out what it's for” as investors no longer understand this. 

Hollands says that if profitability is not improved soon, it could act as a deterrent for staff, many of whom are shareholders. 

With all of that in mind, Jupiter is unlikely to be far from the headlines in the months to come. 

david.thorpe@ft.com