Handelsblatt Interview

Buy or be bought

112793660 Nicolas Moreau Deutsche AM Bernd Roselieb HB
Deutsche Asset Management chief Nicolas Moreau will soon be striking out on his own. Source: Bernd Roselieb for Handelsblatt

Nicolas Moreau remembers the days when he would get calls asking if his company was for sale. Now, he’s sending a clear message to rivals: Deutsche Asset Management isn’t going to be shy about throwing its weight around once it splits from Germany’s largest bank.

That split should happen sooner rather than later, he said. Deutsche Bank, which has been sapped of cash amid a series of legal scandals and restructuring rounds in the past few years, announced in March that it planned to list about 25 percent of its asset management arm within two years. That move will make Deutsche Asset Management the first publicly-listed investment firm on Frankfurt’s stock exchange, and raise about €2 billion for Deutsche Bank in the process.

Deutsche Bank initially thought it could list as early as the end of 2017. That now seems unlikely. In an interview with Handelsblatt, Mr. Moreau, who heads Deutsche Asset Management, says a listing in 2018 is possible. The subsidiary expects to have fully separated its operations from Deutsche Bank at some point in the autumn months. But exactly when the IPO actually takes place will then depend mostly on capital market conditions.

What happens after that point? Mr. Moreau says investors should expect his company to look for growth opportunities and be aggressive buyers on the open market, even if he won’t necessarily be swallowing one of the industry’s biggest players.

“A series of small to medium-sized acquisitions probably would be better for us than one major transaction. That doesn’t rule out the possibility of us at least considering bigger opportunities, though,” he said. “But a successful IPO is our first priority, and then we’ll be able to turn our attention to such topics.”

There’s a logic to that way of thinking. Size matters in the super-competitive global asset management business, mainly because it allows companies to reduce fees for customers. And Deutsche Asset Management doesn’t have it. A ranking of global asset managers by Scorpio Partnership this year saw the German firm slip five places to 16th globally in assets under management. Even in Europe, players like Switzerland’s UBS and Credit Suisse loom large.

It’s a reality that Mr. Moreau acknowledged. He warned the challenge will be to set Deutsche Asset Management up as a viable global company – “the leading European asset manager” – with a broad business base that can stand on its own two feet. If it fails, it may be gobbled up by someone else.

Read a full transcript of our interview with Mr. Moreau below.

If we weren’t as globally positioned as we are now, we’d eventually run into difficulties in the consolidating market.

Deutsche Asset Management is supposed to go public soon. How far advanced is the spinoff from Deutsche Bank?

We are making very good progress, and will be standing on our own two feet from an organizational point of view this autumn. We have just completed the carve-out process in the United Kingdom. We’ve also transferred key central functions such as IT, finance and human resources, the operating functions, into Deutsche Asset Management. And we’ve agreed with Deutsche Bank on which risk, legal, and compliance functions we’ll be taking over.

How far along are you in other countries?

The new holding company, Deutsche Asset Management Holding SE, which will go public, is in place. In Switzerland, we’ve already completed the carve-out. Asia is very far along in the process, and we are working on the approval in the United States. In continental Europe, we will be putting everything under the umbrella of our Luxembourg unit, including branch offices in multiple countries.

Will you be heading up either the management board or the supervisory board?

I will be on the management board.

Will you remain on the management board of Deutsche Bank at the same time?

That question is not a priority for me right now, we will answer it at the appropriate time. But it will remain important for us to cooperate closely with Deutsche Bank in the future, as they will keep a significant majority stake.

Do you expect any resistance from the regulatory authorities?

We will be the first publicly listed asset managers in Frankfurt. That is seen quite positively.

When might the IPO take place?

We will take the company public as quickly as possible once we’ve completed the process of forming a distinct operating company, the capital markets are performing well, and our own performance stays as good as it is at the moment.

That would be sometime next year, correct?

It could be, but to us the only important timeline is the one we announced this March: that we would do the IPO within 24 months. Ideally, we would have the full year results for 2017, when we are listed.

One of the arguments in favor of the IPO was that employees could be remunerated in shares. Is there a Plan B in case the IPO has to be postponed?

Since we’re making such quick progress with the carve-out, the team can be very optimistic that the IPO will happen quickly. Of course, the cancelled bonus for 2016 had an impact. But there is no intention to repeat that again.

The investment fund sector is facing consolidation. Why should investors buy shares in Deutsche AM at all?

We are one of the most global and the most diverse European asset managers, and we’re also very profitable. There might be others who are bigger when we’re talking about assets under management. But our profitability places us among Europe’s biggest players. Also, we are back on track in net inflows. So far in 2017 we have taken in substantially more assets than any of our competitors in Germany.

Are you positioning Deutsche AM as more of a growth stock or a dividend stock?

We will still decide this in detail, but as a house, we definitely have growth potential.

And where do you expect the growth to come from?

Our product offering is broad and diverse, as are the areas of growth in the market. Passive investment products such as exchange-traded funds are one of the biggest topics. Additionally, we are also ideally positioned with our actively managed products and want to continue to grow this business, for example in European retail and in Asia. And when financial advisory firms will be opening up to a limited number of partnerships due to the MiFID financial markets directive, we are optimistic that we will be able to benefit. Moreover, we see great demand for alternative investments – another area we plan to expand on and already have strong capabilities in infrastructure and real estate investing.

How do you view the merger and acquisition sector?

We see ourselves as a consolidator. And the IPO will give us the option of financing transactions with our own shares. Some insurers and banks who only operate on a medium scale in asset management cannot and don’t want to compete with the major providers. They want to either merge or exit. That’s going to present us with some opportunities.

Are you also considering major takeovers, like the acquisition of Pioneer by Amundi, or are you thinking on more of a medium scale?

We have an excellent investment platform that is functioning very well. We won’t risk that. So a series of small to medium-sized acquisitions probably would be better for us than one major transaction. That doesn’t rule out the possibility of us at least considering bigger opportunities, though. But a successful IPO is our first priority, and then we’ll be able to turn our attention to such topics.

There is enormous pressure in your sector to reduce fees. Isn’t this putting a damper on your equity story?

There are regions where fees are in fact under scrutiny. This applies to mutual funds in the U.S., for example. We’re also seeing declining fees in the UK. That doesn’t apply to continental Europe, however. Overall, we’ll likely be able to maintain our solid margin on assets managed.

Won’t growing competitive pressure, such as from exchange-traded funds, change that?

The long-term trend for globally active asset managers is toward decreasing fees. That’s another reason why it’s so important to keep expanding our managed assets organically and through transactions, when they fit.

You’ve begun speaking quite frequently about passive investment products. But that’s exactly the type of business you sold during your time as an executive at France’s Axa. Where does the change of heart come from?

We are starting from an entirely different set of circumstances at Deutsche AM. We’re the second-largest provider in this space in Europe and thus well positioned for future growth. And we want to reinforce that position by hiring additional salespeople.

Do you even have the critical mass to generate the necessary economies of scale?

In Europe we do. Our U.S. business is still young, meaning we’ll have to invest more in order to grow. And if there are opportunities for consolidation, we will surely look into them.

What role will your lending business play in the future?

We are proud of our active business and want to grow it. To me, the discussion that active and passive asset management stand in opposition, is totally misguided. They complement each other. It makes us unique that we are able to stand on both legs. For instance, we’re investing in emerging market products. We’ll need to invest in the U.S., too, but more selectively. There we want to be a specialist rather than a generalist.

That sounds like the U.S. business is not especially profitable.

The degree of profitability in the U.S. is a question of growth. The turnaround we’ve achieved there is impressive in any case. Last year, we had outflows of €30 billion, but we’ve stopped that trend. We will have to specialize, play to our strengths, and keep our costs in check.

Do you have any regrets about the planned sale of the U.S. business some years ago being called off?

No, not at all. Our goal is to position Deutsche Asset Management globally as the leading European asset manager. If we weren’t as globally positioned as we are now, we’d eventually run into difficulties in the consolidating market. We’d be a predominantly German business and the perfect addition for others.

So you expect Deutsche Bank to exit the asset management business entirely at some point in the near future?

We plan long-term with Deutsche Bank as our most important shareholder. But too small an asset management business would be problematic.

What would be so bad about that?

In a consolidating market, size plays an important role for future success. Just as market perception does: when I started in October 2016, I regularly got calls from bankers and consultants asking whether we wanted to sell parts of our business. Today, the same callers ask whether we want to buy other businesses. We can be very proud of this turnaround.

You plan to internationalize the business. On which regions will you be focusing?

Since the beginning of the year, we’ve been investing in Spain and Italy where we are an established brand. We’re also expanding in Asia. We already have a 30% stake in Harvest, the eighth-largest Chinese investment fund company. But we’re still expanding our business in Hong Kong and Japan too.

Is the Asia business already showing a profit?

Yes, but we always want to do better.

Deutsche AM has developed a digital asset manager. Will this “robo advisor” soon make your asset managers entirely dispensable?

No, our active fund managers will continue to do their important work. We use the technology as an add-on, as an automated advisory tool, that we offer not to end clients. Instead, we make it available to other financial advisors, who embed it into their advisory process. Both active and passive funds can be included, whether from us or from other providers, and the tool gives objective recommendations. Especially with regards to regulatory requirements in investment advisory we see great potential for our solution.

Can you also imagine offering automated asset management to your own investors?

Not currently, no. That’s not our primary strength. I prefer to support our partners by offering a technology platform that helps them.

The robo advisors already existing don’t make you nervous?

With the exception of the United Kingdom, we’re talking about a very, very small market here. Most people want to be able to see their advisor face-to-face. Just look at how digital securities brokers such as Schwab or E*Trade have fared. They ended up opening traditional branches after a while.

So you’re saying that robo advisors will be opening up their own branch offices in the future?

Yes, that’s certainly a possibility. But so far, most robo advisors are competing on price. That’s not sustainable – neither for customers nor for companies.

Starting from the beginning of next year, investment fund companies will have to pay money for research studies. Will you be passing on the costs to your clients, or shouldering the burden yourself?

As active fund managers, we require a great deal of research, which is why we want to further build out our own in the future. I am convinced that the market is headed towards more in-house research. We already have a strong investment process and have tools available to use for company analysis, which we can use more. And we’ll also be using Big Data. But this build-out will take some time.

And who will be paying for the external research in the meantime?

We are still discussing that currently. But we’ll be making a decision soon.

One year ago, U.S. Justice Department investigations into the mortgage scandal threw Deutsche Bank into a deep crisis. That left visible marks on you too, with many investors having withdrawn their funds. How long will it take for you to make up for that?

Some of those clients we did in fact lose. We will fight for them to come back and to add new clients. Some have brought their money back to us already, as you can see in our numbers. Some of the major Asian pension funds even reopened their accounts with us on the same day our settlement in the U.S. was announced.

The bank’s share price has fallen back to around €13 per share. That certainly worries you, doesn’t it?

I’ve been on the board for close to a year. What we have achieved in clean-up work since is remarkable. Of course, we have to win back investor confidence. We have come some way, but it will require more time. But the good thing is that we now are looking towards the future again.

Are you concerned that Deutsche Bank could become an acquisition target?

We have a stable business and will improve on the earnings-side again. Especially when interest rates go back up one day, it will be noticeable.

Those are all arguments in favor of taking over Deutsche Bank.

We have a global business and are very big. We are one of the most important financial institutions in Europe and globally; you don’t just take that over.

Yasmin Osman and Daniel Schäfer conducted the interview for Handelsblatt. Christopher Cermak adapted this story for Handelsblatt Global. To contact the authors: osman@handelsblatt.com, dschaefer@handelsblatt.com and cermak@handelsblatt.com

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