Three years after Somerset Capital Management rejected an offer of up to £90million, it is in sales talks again at a questionable valuation a fraction of what Artemis Investment Management had offered.
The fall illustrates the challenges facing smaller fund managers, who are grappling with rising costs, and, for emerging markets specialist Somerset, an investor sell-off that has helped halve its assets under management from a high of $10 billion in 2018.
While many specialist fund managers managing a few billion dollars operate largely under the radar, Somerset’s high-level political connections means that he does not enjoy such luxury.
The company was founded 15 years ago by Eurosceptic business secretary Jacob Rees-Mogg; Dominic Johnson, former Vice-Chairman of the Conservative Party; and fund manager Edward Robertson. The three had worked together at Lloyd George Management, an emerging markets fund manager in Hong Kong and London.
Somerset is now at a critical juncture. Rees-Mogg left in 2019 and this week Johnson announced to clients that he was stepping down as chief executive, to be replaced by chief executive Robert Diggle. The change means around half of the company’s capital will be held by retired partners who are not involved in the day-to-day running of the business, leaving Somerset struggling with how to incentivize the next generation.
“It’s been a terrible time for emerging markets and every fund manager in this space has suffered,” said Crispin Odey, founder of Odey Asset Management. “Somerset’s unique asset has been Dominic at the helm.”
The company is currently in talks with potential buyers, including emerging markets boutique Emso Asset Management. A management buy-out is also envisaged.
“Why is it [Emso] sue Somerset? Because they are also in a bad situation and the small houses want to consolidate, ”said a close to Somerset.
The sales talks and management changes come as Somerset finds itself at the crossroads of two negative trends. Emerging market assets are deeply out of favor with investors, and rivals in the space, such as Ashmore, Abrn and Genesis Investment Management, are also struggling.
Of the five Somerset funds for which data is publicly available, four are down more than 15% on average this year and significantly below their benchmarks. They also underperform on a three- and five-year basis.
Second, smaller investment companies, especially those with poor investment performance, have come under particular pressure as they struggle to compete.
To add to Somerset’s struggles, a push in China failed to gain momentum, while the company was seen as lagging behind on environmental, social and governance investments, a crucial growth area for the industry. of asset management. He lost his head of sustainable investing to Redwheel in March after two years in the role.
Customers realize this. Wealth manager St James Place awarded Somerset a £930m mandate in 2020 and a share in a multi-manager allocation this year, but has now placed the firm on a watch list for poor performance. “They got the warrant not long ago and now they are expected to lose it. It’s quite embarrassing,” said a person with knowledge of the situation.
Sweden’s national pension fund AP1 had been a client for the better part of a decade, but said it no longer had investments with Somerset after renewing those mandates late last year.
Others, however, seem ready to stay the course. Omnis Investments gave Somerset an emerging markets equity mandate of £322m in mid-2021.
Some predict that Johnson’s departure could pave the way for him to go deeper into politics, after years of involvement in the upper ranks of the Conservative Party as an administrator and donor. He was appointed to the Board of Directors of the Department of International Trade in November 2020.
A senior Tory close to Johnson said: ‘He has incredible connections in the UK and emerging markets, but he has drifted away from the business over time. He’s really stuck in his role at the Department of International Trade. The person added that “it is entirely reasonable for him to pull back” given the state of emerging markets.
Meanwhile, in Somerset, the spotlight is on fund manager Robertson, the only remaining co-founder, who will be the crucial figure in deciding the company’s future. He must weigh whether to go ahead with a sale to Emso, initiate a management buyout or resurrect talks with Artemis – or even partner with another rival.
But while a sale or merger might make financial sense and relieve some pressure on Somerset’s cost base, it’s not a guaranteed lifesaver. In practice, fund management mergers are notoriously difficult to complete without alienating clients or staff. A person close to Somerset said that regardless of the type of deal, “they have to retain their customers and their talent…but that’s not necessarily guaranteed”.