Desperately seeking capital

The pressure on boutique funds management firms is mounting, with a number desperately seeking capital injections and equity stakes to avoid breaching the terms of their Australian Financial Services Licences (AFSLs) and, in some cases, collapse.

Like financial planning licensees, fund managers must satisfy certain cash, surplus liquid asset and net tangible asset (NTA) tests to meet the requirements of an AFSL.

Some boutique managers invested their cash surplus in the share market and are now scrambling to top up cash and liquid fund levels and meet minimum NTA requirements. For some boutiques, this means attracting cash injections or equity stakes to avoid being in breach of licence.

The need for some boutiques to find support from external groups is likely to see the ‘incubator’ model becoming popular — and indeed vital — over the coming months, with boutiques looking to larger organisations for working capital, distribution and marketing support. Groups including Challenger, Perennial Investment Partner and Pinnacle Investment Management offer varying forms of the incubator model.

Australian Unity retail general manager Adam Coughlin said the world is changing and there’s no longer the money there once was to support boutiques. As a result, the incubator model may be required to nurse some funds through the hard times.

The chairman of BNY Mellon Asset Management International, Jon Little, told Money Management boutiques that were once happy to go it alone are now finding “being independent has its shortcomings”.

While boutique managers generally have lower base salaries for key staff as a result of the once very attractive equity models offered, they still carry significant operational costs. With now limited inflows and investment returns to support these costs, the survival of some may simply be a question of longevity.

Wingate Asset Management chief investment officer Chad Padowitz said the pressure may be felt most by the newest entrants to the market, which did not have the time to build a sufficient capital base before the market crashed.

Boutique managers by nature have smaller, more specialised teams, but this doesn’t mean key portfolio managers and analysts aren’t leaving for safer pastures, or being cut loose in an effort to reduce costs.

Profusion director Ashton Bilbie said even where there are co-portfolio or fund managers, in some instances one of the two is being let go — a development he said is “quite surprising”. While Bilbie said this activity isn’t rampant, it does show boutique managers aren’t immune to the pressures on the employment market.

Moreover, boutique managers may now be finding it more difficult to attract and retain staff. In a small team, this can have serious ramifications. There are at least six boutique managers currently on the watch list of researchers as a result of key staff departures.

In order to survive the current downturn, many boutique managers will be looking to change their models to adapt. Coughlin said this may be especially true of hedge fund teams, who may now be “giving up on the hedge fund dream” to return to the perceived security of more traditional asset management.

Listed boutique fund manager MMC Contrarian is one that has been forced to change its spots. After posting an after tax loss of around $43 million last year, the group abandoned its strategy of relying on investment earnings for profit and is now attempting to transform the company into a “fully integrated wealth management company”. The group hopes that its new major stakeholder, the Guinness Peat Group, will be able to “revitalise” the company and provide value for shareholders.