Hermes, including its stewardship business Eos, will become a subsidiary of Federated Investors and keep its London headquarters, with the combined group managing approximately $442.2bn.
The BT Pension Scheme will retain a 29.5% stake in Hermes, which initially operated as its in-house fund manager, but has since become a multi-client business with £33bn assets under management. Management will hold the remaining 10.5% of the company.
Hermes Investment Management has 16 strategies across equities, credit and private markets, including real estate, infrastructure and private equity. Hermes Eos advises on stewardship and ESG on a further £336.1bn assets.
Under the radar
“Strategically it looks like a very nice fit,” said AJ Bell head of funds Ryan Hughes, noting the lack of overlap in the core capabilities of each fund house.
Hughes said Federated will be new to most UK investors. It currently only offers money market funds, Federated Short-Term Sterling Prime and Sterling Cash Plus, in the UK’s Investment Association sectors.
“It’s another classic case of an enormous US investment house that isn’t really known at all in the UK,” he said.
Federated Investors managed $397.6bn in assets, as of the end of December 2017, across 108 funds and a number of separately managed accounts.
The deal signals business as usual for Hermes, Hughes said.
“For now the BT Pension Scheme stake provides an element of continuity and shows it’s not a business BT wanted to sell out of completely,” he told Portfolio Adviser. “It’s more a case of them realising the value on the asset, where they would have made very good money for the pension scheme over their period of ownership.”
Federated will be able to purchase additional shares of Hermes from the BT Pension Scheme over the next three to six years pursuant to certain put/call provisions.
Distribution
Federated’s chief executive J. Christopher Donahue said Hermes’ range of investment strategies complement its existing strategies in equity, fixed income and cash management.
Donahue said the deal brings Federated Investors distribution opportunities in the UK, Europe and Asia Pacific and he also touted Hermes’ expertise in ESG.
Hermes chief executive Saker Nusseibeh said stewardship has been an intrinsic part of the business since it launched 35 years ago.
Nusseibeh said the same investment and stewardship teams would remain, while Hermes would gain greater exposure in the US through the 8,500 intermediaries and institutions that do business with Federated Investors already.
Gordon J Ceresino is president and chief executive officer of Federated Investors’ existing UK business, which offers two money market funds within the Investment Association sectors.
Ceresino said they will work with Hermes to evaluate business opportunities and develop new strategies.
Hughes said AJ Bell is always interested to look at new US equity strategies because there is limited choice in the UK for high-quality managers.
However, Hughes said Hermes’ greatest areas of strength, in emerging market and Asian equities, is already capacity constrained. Its Asian equities strategy is soft closed and its global emerging markets fund, headed by Gary Greenberg, manages its capacity carefully.
The broader Hermes product stable could experience inflows from US distribution channels, Hughes said.
Federated’s lead adviser was Citigroup Global Markets, with additional representation from Barclays Capital, while BTPS was represented by PwC and Allen and Overy, and Hermes was represented by Fenchurch Advisory Partners.
