Platinum/L1 merger to ‘inject new life’ to asset manager

Morningstar has outlined that the prospective merger between Platinum Asset Management and L1 Capital is likely to help stabilise funds under management (FUM) and improve Platinum’s earnings.

In an ASX statement on 7 July, Platinum announced it had entered into a binding agreement to merge with global long/short fund manager L1 Capital.

In its statement, the asset manager said the Platinum board had unanimously recommended voting in favour of merging with L1 Capital to create a “market-leading provider of listed and alternative investment strategies” with FUM of $16.5 billion.

Commenting on the announcement of a binding agreement, Morningstar equity analyst Shaun Ler said the combined entity will have greater asset class and client diversity, which would facilitate cross-selling and customer retention.

“The merger injects new life into Platinum, helping to arrest the organic decline of its business by merging with another asset manager that has better-performing products experiencing inflows. It also potentially unlocks value by eliminating duplicate costs.

“This should help stabilise funds under management and improve earnings, mainly from cross-selling L1’s product set to Platinum clients,” said Ler.

Overall, Ler said Platinum’s merger with L1 should be “value-accretive” as the investment styles of two firms are broadly aligned and there is minimal product overlap.

“L1 has a much more diversified client base and manages a select few niche strategies – such as long/short and catalyst-driven funds – that are less replicable by passive options.”

Morningstar warned that the merger was unlikely to improve flows into Platinum’s suite of funds which have fallen by $5 billion during FY25 but, at the same time, the merger was unlikely to result in sizeable redemptions either.

Fee pressures and market share loss would remain an issue, however, affecting the combined entity’s market position against passive players and larger active peers who have better scale advantages.

“L1’s – and Platinum’s – management fees remain above peer averages, already a disadvantage for fee-conscious investors. This places its fortunes on performance, which can vary significantly year-on-year,” Ler said.

“Notably, unlike traditional active managers, L1’s business is heavily dependent on performance fees. Performance fees have accounted for roughly 60 per cent of revenue over the last three years, presenting significant earnings and margin volatility.

“Platinum shareholders are guaranteed a share of performance fees from L1’s long/short funds and mandates, based on the first 3.5 per cent of annual absolute returns (after performance fees). This helps Platinum shareholders receive a more stable income stream from these performance fees rather than being exposed to the full ups and downs of fund performance.”

However, Ler said the merger did offer the potential to reduce cost which would involve consolidating technologies and processes, further removal of mainly non-investment staff, and additional adjustments to remuneration for the investment team.

“However, this would entail another round of corporate transition following the range of recent corporate changes,” said Ler.

These have included portfolio manager departures – including co-chief investment officers of Andrew Clifford and Clay Smolinski stepping into different roles –  workforce downsizing, the closure of various UCITS and Cayman funds, and remuneration adjustments.