The dispatch
Some takeovers of U.K. companies arouse little attention. Others, like the £11.5-billion takeover of Cadbury by Kraft in 2010, stir emotions even many years later.
To judge from the initial response, it feels as if the £9.9-billion acquisition of the asset manager Schroders
by Nuveen, announced last week, will be one of the latter. City types of a certain age have been dismayed at the loss of one of the Square Mile’s bastions.
As Marc Rubinstein, a former employee, posted on LinkedIn: “Some institutions you assume will outlast you. Schroders was one of them.” Although most now know it as an asset manager, Schroders was first and foremost a merchant bank, the activity for which it was founded in 1804 by the German-born financier Johann Schröder.
Merchant banks were very different from the investment banks that dominate Wall Street and the City of London today. While some did eventually expand their repertoire, they tended to focus on pure corporate advisory work, as opposed to the integrated model under which modern investment banks offer a full range of services combining advice, debt or equity underwriting and, on the other side of a so-called ‘Chinese Wall,’ making a market in a client’s shares.
They were, as the former Schroders banker Philip Augar wrote in his excellent book “The Death of Gentlemanly Capitalism,” at the “top of the hierarchy of firms in the City.” They sat on the Accepting Houses Committee — a peculiarly British institution which, at times of financial stress, allowed for policy co-ordination between the lenders, the U.K. Treasury and the Bank of England.
These banks were led by the ‘old money’ products of fee-paying schools, frequently Eton, with a culture to match.
As Augar puts it: “Clients visiting merchant banks were received like visitors to a country house…waitresses dressed in black and white outfits or traditionally clad butlers presided over panelled dining rooms hung with classic hunting scenes.
“Client lunches were preceded by sherry or gin and tonic, accompanied by French wine and followed with port and cigars.”
When I began working in the City, there were numerous such banks, all British-owned, British-managed and in several cases — like Schroders — family-controlled. One by one, with the exceptions of NM Rothschild and Lazard, they have disappeared.
Morgan Grenfell was bought by Deutsche Bank , SG Warburg by Swiss Banking Corporation (now part of UBS
), Barings by ING , Kleinwort Benson by Dresdner Bank (itself later acquired by Commerzbank ) and Hambros by Société Générale . In April 2000 came the show-stopper. Robert Fleming & Co, an institution one-third owned by the Fleming family — whose dynasty had included the James Bond author Ian Fleming — and which was famous in the City for having a Scots Guards Pipe Major playing the bagpipes in its offices three times a week, agreed to a $7-billion takeover by the old Chase Manhattan Bank. Months earlier, Schroders had sold its merchant banking arm to Citi
for £1.35 billion to focus on asset management, although its influence lived on in Britain’s boardrooms.
Remarkably, at the beginning of 2014, no fewer than six FTSE-100
companies were being chaired by alumni of the old Schroders merchant bank: Win Bischoff at Lloyds Banking Group ; Richard Broadbent at Tesco ; Robert Swannell at Marks & Spencer ; Nick Ferguson at BSkyB; Alison Carnwath at Land Securities and Gerry Grimstone at Standard Life. Yet the exit from merchant banking probably came at the right time, and the sale of the asset management business looks no less shrewdly timed.
Start of a new era?
Profit margins have been contracting for asset managers for years as an increasing chunk of client money has switched from active to passive management. In a bid to build revenues from other activities, asset managers have diversified into private markets, but that has been a costly endeavor with mixed results, and has ultimately driven consolidation as scale has become increasingly important.
Richard Buxton, one of the City’s best-known fund managers and a Schroders employee for 12 years, wrote in an article for Citywire that he had long expected Schroders to sell to a larger player due to its family ownership.
He wrote: “Unless the family had been happy to see the company issue shares to acquire complementary asset management businesses, thereby diluting their shareholding but ultimately owning a smaller stake in a larger company, acquisitions through equity issuance were off the table.
“The balance sheet could have been used to buy businesses, but no asset manager wants to have lots of leverage. Clients don’t like it: it is a consideration in new business pitches.
“Moreover, an industry where markets could plunge and decimate your revenues overnight is not one supportive of gearing the balance sheet.”
Buxton predicts the emergence of more small boutique asset managers, owned by the employees, offering only a handful of products and able to invest in the long term with “no expensive bureaucracy to support and no competing for the attention of the sales and marketing teams against a plethora of products managed by colleagues.”
Ironically, that is precisely what happened to merchant banking in the years after Schroders sold out to Citi, with the emergence of specialist advisory boutiques like Gleacher Shacklock, Ondra Partners and Robey Warshaw (which sold itself in July last year to Evercore Partners for $196 million). It would be no surprise to see some former Schroders employees eventually resurface at small boutique asset managers.
Some fret what this means for the City – just as they did when, in 1987, the old merchant banks were starting to be acquired. It was then that Martin Jacomb, a former chairman of Prudential, first referred to the ‘Wimbledonisation’ of the City: we stage the tournament but most of the prizes are won by foreigners.
The Schroders takeover has to be seen in that light. And, just as the Square Mile survived the loss of its merchant banks, it is a fair bet it will survive the loss of its biggest independent fund manager.
Ian King
