Will Liontrust's £96mn acquisition of Gam work?

The trajectory since then has been mostly upwards, with a recent trading update from the company showing assets of £31.4bn, representing an increase of more than 3,000 per cent in those 13 years. 

But despite the trading update stating that it expects profits to be in line with expectations, Liontrust’s share price fell by 14 per cent in the five days to April 21, as investors began to ponder whether the company’s growth, which has to a large extent been driven by acquisitions, can continue amid rising outflows and the unhealthy state of markets. 

Additionally, many market participants are wary about the company embarking on yet another acquisition - in this case of Gam, which was announced today.

AUM growth via acquisitions

Much of that AUM growth was bought in through the acquisitions of the open-ended funds business of Alliance Trust and subsequently the UK DFM operations of Architas, and then the Neptune fund house in 2019 and Majedie in 2021.

The aforementioned wealth manager says: “I think John Ions deserves a lot of credit for what he has done there. Liontrust was in danger of slipping into irrelevance and John has fixed that.

“But as an investor, I would be looking at all of the acquisitions so far and asking for proof of concept — do they know how to make those work, is there a strategy behind them — before seeing Liontrust do another acquisition.”

The trading update, which covers the year to the end of March 2023, shows that financial advisers, investment managers and retail clients pulled a total of £3.18bn from Liontrust’s funds during the period, a figure which equates to around £60mn a week.

The total outflows for the period were pushed above £4bn by the £693mn withdrawn from the company by institutional investors in the period and the loss of a £100mn investment trust mandate. 

I think John Ions deserves a lot of credit for what he has done there. Liontrust was in danger of slipping into irrelevance and John has fixed thatWealth manager

One of the ironies of the acquisition spree is that, despite all the new teams brought in, just under one-third of the AUM, £11.2bn, is managed by one team within the sustainable investment division, a team that came originally with the Alliance Trust acquisition. 

The wealth manager notes that Ions began his career at Aberdeen, and that Liontrust’s present approach seems to echo that of the early years of Aberdeen in being heavily focused on acquisitions. They add: “While being a big player in sustainable investing is something that many businesses are trying to achieve, having quite so much there is tricky because, as we have seen over the past year, ESG can be a bumpy road.”

But Chelsea Financial Services managing director Darius McDermott detects a strategic element to the deals done by Liontrust. He says the company’s best-known product range outside of sustainable investing is the UK equity team run by the long-serving Anthony Cross.

That team manages £8bn of Liontrust’s assets, so around 25 per cent of the total. McDermott says one thing the Neptune and Majedie purchases did was to create a UK equity exposure that was more value-oriented, relative to the growth and macro-focused approach of Cross.

The sustainable investing team and existing UK equity team combined run more than half of the company’s assets. 

Evelyn Partners managing director for corporate affairs Jason Hollands is generally a fan of Liontrust, but says the outflows are probably the result of investors no longer being keen on UK equities as an asset class, rather than any dissatisfaction with the company. 

Moving into the investment trust space

The acquisition of Majedie brought around £5bn of assets, including taking Liontrust into the investment trust space via the £1bn Edinburgh investment trust.

The Majedie deal also expanded the company’s institutional investment division, bringing in a net £2.3bn, though the gains from that were somewhat offset by the multi-asset team losing a £608mn investment mandate it ran for an insurance company.

Majedie contributed £12mn in performance fees to Liontrust’s revenues during the year, from a total of £18mn earned by the company. 

McDermott believes that in addition to what he sees as the strategic rationale for the acquisitions made so far, he notes that they were mostly acquired cheaply, with the exception of Majedie.

The Liontrust update indicates that not all of the performance targets that were part of the purchase price have been met, reducing the level of future payments it has to make.  

The big issue for Liontrust as a company has always been that they have had to pay [the high-performing fund managers] a lot, so profitability has never been as good as it should be given the funds they have raised Wealth manager

Fairview Consulting investment director Ben Yearsley says the issue has not so much been that the companies being acquired have been the wrong ones, but more that the integrations of those businesses have not worked. 

He says a key reason for one asset manager to buy another is to merge and close underperforming funds, so as to end up with a smaller number of larger products and achieve economies of scale. 

Yearsley believes this culling of funds in order to create scale has not really happened yet at Liontrust, which calls into question how much value for money those acquisitions have generated for shareholders. 

Cost of acquisition

One veteran wealth manager, who did not wish to be named, praised Ions as a “wily” chief executive and says the company has many good fund managers. They add that profitability has not grown in line with the growth in assets in recent years, because the reliance on a small number of high-performing managers means that “the big issue for Liontrust as a company has always been that they have had to pay them a lot, so profitability has never been as good as it should be given the funds they have raised”.

The wealth manager believes that outflows have picked up recently because performance for some of the funds has worsened, but in general they do not own many Liontrust funds as they feel there is a lack of a distinctive investment process, with the company choosing instead to rely on the individual talents of the fund managers. 

Another wealth manager says that while Liontrust retains many good funds, they believe the product range has been made more “complex” as a result of the acquisitions, while they feel that clients who own a Liontrust fund bear the risk that funds could be merged, and as a result they are invested in a different fund to the one they intended.

The next step 

Despite this, Liontrust today announced it it will be buying Gam. McDermott notes that Gam's AUM for its fund management unit are around £25bn, which is comparable in size with Liontrust.

He believes Liontrust buying Gam for a price of under £100mn would represent a good deal as it would mean almost doubling in size at a price that may be around 25 per cent of Liontrust’s current market capitalisation - and indeed the deal announced today valued Gam at £96mn.

McDermott says Gam's speciality is currently bonds and this is an area where Liontrust has few assets, with the most recent strategic update showing only £361mn managed by its global fixed income team. 

This is despite having poached the well-known Phil Milburn from Kames Capital in 2017 to run this team.

But one of the aforementioned wealth managers compared Liontrust and Gam with “two drunks propping themselves up at the bar”, as they feel that “Gam is a shadow of its former self”.

Ions acknowledged on a call with analysts this morning that Gam needed "total restructuring" and the first step of that was the decision of Liontrust to not acquire the loss-making fund administration business which will be hived off into a separate business.

He says the bulk of Gam's assets are in Europe, whereas Liontrust is very focused on the UK, and this is "complementary."

Ions says as part of the rationale for the deal is to be able to acquire the Gam distribution network around the world. 

Numis equity analyst David McCann says that when Liontrust was done paying for the restructuring costs and injecting capital into the Gam business, the total cost is likely to be around £195mn, but he values Gam's asset management operation at just £116mn. 

With this in mind, McCann says of Liontrust’s management and shareholders: “We wish them luck, they are going to need it.”

In the Liontrust trading update, Ions says: “The strength of a business and the robustness of its strategy is best demonstrated when it is tested in difficult times. Liontrust has shown that the business as a whole is operating well and we will continue to broaden our products and distribution channels, while the adherence to process, focus in distribution and strong brand ensure we will emerge well positioned for future expansion.” 

Liontrust has been one of the companies often cited as an example of a business that has defied the problems faced by its peers, but that invulnerability may be coming to an end.

David Thorpe is investment editor at FTAdviser