Prudential has gained a foothold in Thailand’s mutual fund market by acquiring 65% of TMB Asset Management from TMB Bank, beating off fierce competition from international rivals for a rare, sizeable business in a growing market.
The acquisition by Eastspring Investments, the Asian asset management business of the British insurer, includes a valuable distribution agreement with TMB, Thailand’s seventh-largest bank by assets, Prudential said in a release on Wednesday.
TMB has over 400 branches and six million customers to whom it sells savings products.
The acquisition comes after Thailand’s cabinet approved a plan in February to make both employers and employees pay into a mandatory provident fund, which asset managers expect will give a fillip to their industry.
According to a 2016 World Bank report, a quarter of the Thai population will be aged 65 or more by 2040, making Thailand one of the fastest-ageing nations in Asia.
Against that backdrop, local banks with relatively small asset management units – much like their peers elsewhere in the region – are struggling to keep up with retail client demand for higher-yielding products to meet their retirement needs.
More sophisticated products across a variety of asset classes also mean higher risk-management costs and more expensive investment managers.
NEW REGIONAL APPROACH
Some of these Southeast Asian banks have realised that they don’t have to own an asset manager any more. Instead they can distribute a global suite of products designed by larger, specialist asset management firms.
In one example earlier this year, Malaysia’s CIMB sold 20% of its stake in CIMB-Principal Asset Management to US-headquartered Principal Financial Group. Meanwhile Australia’s Commonwealth Bank is demerging its Colonial First State Global Asset Management arm.
Japan's Nikko Asset Management was a trendsetter back in 2011 when it acquired Singapore's DBS Bank’s asset management arm for S$137 million ($104 million at the time.)
Even within the asset management industry, firms are scaling up to cope with rising costs. In Singapore, Fullerton Fund Management’s appointment to run insurer NTUC Income's public asset portfolio was also driven by rising compliance costs and the brand-wrecking risk of mis-selling. Consolidation means larger players can generally afford a more robust framework.
TMB AM’s portfolio mostly comprises domestic fixed income products, which tend to carry lower fees and lower risk. Thailand’s benchmark interest rate stands at a lowly 1.5%, prompting investors to increasingly ditch bonds and seek out higher-yielding local investments such as real estate investment trusts (Reits) or collateralised loans, as well as overseas assets.
“Eastspring is an ideal partner to meet the growing investment needs of our customers by developing and offering local, regional and global investment solutions through its highly rated product offerings,” Khun Piti Tantakasem, chief executive officer of TMB said, in a separate statement.
Eastspring was named Asia's fund house of the year by AsianInvestor, a sister title to FinanceAsia.
BIG PLAYERS MOVE IN
European insurers are looking to broaden their platform in Asia, where people’s nest eggs are growing rapidly. And Thailand was the largest and fastest growing mutual fund market in the Asean region as of December 2016, according to consultancy Cerulli Associates.
However, finding targets of a worthwhile size has been tough, as most banks have wanted to hold onto their swelling asset management arms since they are capital-light and can generate handsome fees. They have thus tended to hold out for high valuations, said a Singapore-based industry consultant.
Around four asset managers fought over TMB AM, the fifth-largest asset manager in Thailand, including France’s Amundi, according to a person familiar with the matter. An Amundi spokesperson did not immediately respond to a request for comment.
TMB AM has £10 billion ($13.2 billion) of AUM and has grown at a compound annual growth rate of 26% over the last three years.
“[Thailand] was a gap in our footprint,” Guy Strapp, Eastspring’s CEO told FinanceAsia, in an interview, noting how the TMB acquisition expands the firm’s presence to 11 markets in Asia.
Strapp said Eastspring was attracted to Thailand by the long-term growth potential of its mutual funds industry given the country’s expanding middle class, rising affluence and strong savings culture.
Eastspring had already been supporting Prudential’s burgeoning operations in Thailand from afar, but with a physical presence on the ground that collaboration now looks ripe for a step-change.
And if that proves a success, Eastspring has an option to increase its ownership in TMB AM to 100% in the future. The option expires in less than a decade, according to the person familiar with the deal structure.
In the meantime, the two parties will look to integrate the businesses steadily.
Prudential paid $585 million to buy the insurance unit of Thailand’s Thanachart Bank in 2012, bolstering its local presence substantially. As of December 31, the insurer served some 1.5 million customers in Thailand and managed around Bt90 billion ($2.7 billion) of assets on their behalf.
INSURANCE MARKET POTENTIAL
Penetration levels for insurance products remains low across Southeast Asia and as insurers broaden their network across the region, savings products are growing in tandem.
“Asia is the growth engine of Prudential and the acceleration of our asset management business is a key strategic priority,” said Nic Nicandrou, Asia chief executive at Prudential, in a statement about the acquisition late Wednesday (July 25).
A spokeswoman declined to comment on whether Eastspring planned to manage external clients’ assets under the new business or on its growth targets.
Nor have TMB and Eastpring publicly disclosed the sale price. However, asset managers in Asia usually change hands at 1.5% to 5% of their assets under management (AUM). The exact percentage depends on the quality of the underlying portfolio, the level of competition for the asset, as well as its growth prospects and distribution agreements.
Another yardstick is an asset manager’s profitability; in Asia they can trade at earnings multiples in the high teens.
TMB AM was likely valued at around 2% to 3% of AUM, according to FinanceAsia estimates.
The partnership with TMB is the crown jewel of the deal, said the industry consultant. Having a strong distribution network in Thailand provides “an iron-clad guarantee” of making money from a local asset management business, he added.
It also reflects a push by Eastspring to build up direct sales rather than relying on Prudential’s insurance platform for distribution, noted an industry source familiar with the British insurer. This would be in line with the separation of the two businesses in other markets, he added, referring to the plan to de-merge the European and UK investment arm M&G Prudential from parent Prudential PLC.
Eastspring’s distribution tie-up with TMB is not exclusive, but there is a degree of preferential treatment for TMB AM’s products, said the spokeswoman.
Credit Suisse exclusively advised Prudential and Eastspring on the deal, while Bank of America Merrill Lynch and ING Bank advised TMB. ING owns a stake in TMB Bank. Allen & Overy provided legal advice to TMB.
The completion of the transaction is subject to local regulatory approval.
Additional reporting by Joe Marsh