Platinum merger no cure for active managers' challenges

A merger between Platinum Asset Management and L1 Capital may deliver scale, but it won't resolve the deeper structural issues dogging traditional active managers, including fee pressure and market share loss to passive investment vehicles like ETFs, according to Morningstar.

Last week, Platinum announced it was in discussions to merge with L1 Capital, possibly creating an $18 billion fund manager.

Morningstar equity analyst Sean Ler noted that, despite consolidating funds and restructuring its investment team, Platinum's performance "remains weak" and "redemptions continue."

However, against that backdrop, "the proposed merger could unlock some value," principally through the elimination of duplicate costs, he said.

He also flagged potential cross-selling benefits from a larger combined distribution network, though this is "difficult to quantify" given potential product overlaps and Platinum's underperformance.

"L1 Capital and Platinum are broadly similar, both operating as active Australian managers offering international equity strategies. However, they differ subtly in strategy and product mix. We don't expect meaningful upside from cross selling opportunities," Ler said.

He noted that L1 Capital has a more diversified client base and questioned whether Platinum's underperforming products would resonate with those clients.

Moreover, Platinum's own distribution is heavily concentrated among retail and advised investors, a highly competitive segment where clients are already spoilt for choice, he said.

Despite concerns about their strategic fit, he said L1's stronger performance record should underpin earnings growth and bolster the combined entity's financial position.

"L1 appears to offer a broader product range, including hedge funds (applying long/short strategies), activist funds, and real estate investments. Platinum's offering is more narrowly focused on international equites, although it also employs long/short strategies and maintains an absolute-return focus like a hedge fund," he said.

Data from Morningstar Direct shows that roughly 40% of L1's retail and wholesale funds under management (FUM) have grown between 20% and 70% annually over the past three years - an outcome unlikely for an underperforming manager.

In contrast, Platinum has seen its FUM consistently decline over the same period.

Morningstar maintains a fair value estimate of $0.50 per share for Platinum, which it classifies as a "no-moat" business.

Ler noted that L1 hasn't yet been included in Morningstar's projections, as the merger discussions remain preliminary, and its financials aren't publicly available.

If the deal goes ahead, Platinum's shares on issue would rise from approximately $582 million to $2.3 billion, based on current terms where L1 shareholders would own 75% of the merged entity.

At a price of $0.57 per share, the transaction would imply a combined valuation of roughly $1.3 billion.