The well-publicised departure of UBS Asset Management head of Australian equities Paul Fiani has turned the spotlight on the pressures placed on fund managers when a private equity consortium bids for a company in their portfolio.
Although a UBS Asset Management spokesperson told Investor Weekly at the time there was nothing deep or dark about Fiani's departure, media reports have linked Fiani's exit to the unsuccessful $11 billion takeover of national icon Qantas.
UBS Asset Management held 4 per cent of Qantas and Fiani was against the private equity offer of $5.45 a share. At the same time, UBS' corporate finance business was advising the airline during the deal and stood to earn up to $100 million in fees if it succeeded. The deal failed and Fiani left.
It is a story that resonated with Lazard Asset Management portfolio manager Phillippe Tison.
Speaking in Sydney last month, Tison highlighted the pressure Lazard faced when it was approached by private equity managers to buy its stake in travel business Flightcentre.
In 2005, a private equity consortium offered to buy the company for $17 a share. Lazard did not sell, believing the company was worth more. Subsequently the company's stock market increased to $20 a share.
"After we knocked back the offer there was a lot of negative rumour directed towards us. In the end it proved how important it was for a fund manager to maintain its strong views on valuing the business," Tison said.
For Platypus chief investment officer Don Williams it is simple. "We would never be forced into buying a stock from a private equity manager. Our view is that we simply buy at low valuations and sell at high valuations. We will always hold this view," Williams said. Morningstar analyst Sallyanne Cook said fund managers tended to take a longer-term view about the value of a company.
"When valuing a company, managers typically focus on price-to-earnings ratios, earnings growth and the general outlook for the company going forward, whereas private equity firms are often only interested in the break up value of a company's assets," Cook said.
Fund managers come under great pressure when a private equity consortium makes a bid for a stock it has a large stake in. It is a question of having the guts to stick to their guns. For many this has been a successful strategy, for example, the failed Qantas bid, but for others it can be a potentially hazardous strategy.
It is a theme picked up by a research report from Russell Investment Group.
The research paper found fund managers overweight in the stocks Coles and Qantas delivered higher returns to their investors.
The two companies were targets of leveraged buyouts by private equity consortiums and as such the price increase reflected a possible takeover. The paper found portfolios with a greater weighting to those companies outperformed.
But this kind of performance was not really about skill, just luck, Russell director of alternative assets and strategies Andrew Goddard said.
"Takeovers are low probability events that can cut across the grain of an otherwise sound investment process," Goddard said.
Cook predicted there would be one-off windfall gains as managers, rightly or wrongly, held stocks that were subject to takeover speculation.
Williams and Tison agreed stock prices should reflect the long-term view of the company. If the company is subject to takeover, such prices must also include the premium value of the deal.
"What has happened over the last six months is that a lot of private equity deals have failed. A lot of fund managers have stood firm on what they believe the company is worth. In the long term they will be proven right," Williams said.
