Sanne acquisition: A bidding frenzy between hedge funds and private equity?
By Robert Quartly-Janeiro – Not long ago the debate of active vs passive was a guaranteed topic at industry events where portfolio managers could battle it out with a machine – sorry, I mean quants.
Then, as time elapsed and the hedge fund industry accepted there was – and is – a place for both investment types, the debate shifted. Hedge funds and private equity firms meanwhile peacocked for the largest allocations as institutional investors put PE front-and-centre of allocations strategies.
The global pandemic then arrived and inflation turned up. Hedge funds become more prescient to investors seeking hedging and a desire for liquid returns, even if inflows still lagged PE fund raises.
But things have gotten messy. PE firms are playing in PIPE investments and hedge funds in illiquids, diluting what their respective industries are meant to do and blurring the lines between them.
It is ironic then, that one of the alternative industry’s plumbers, Sanne Group PLC, which is making money rain or shine, is being targeted by private equity investors. Talk about parking a tank on a metaphorical hedge fund lawn!
It may not be quite as cut and dried as that, but at a GBP1.5 billion (USD2.06 billion) valuation, Sanne is cheap given what it does, for whom, and its scalability.
Sanne has GBP460 billion (USD633 billion) of assets under administration, of which is GBP160 billion is PE, across 500 managers, and GBP30 billion hedge funds (230 managers). The share price today is 923p, above the then premiums offered by PE firm Cinven (875p) and fellow fund services firm Apex (920p).
The Sanne deal, another take private of a FTSE 250 firm, is quietly moving forward just as many of Europe’s and America’s fund managers are on a beach unbothered by it. Perhaps the lack of je ne sais quoi or sexiness of Sanne, unlike Meggitt-Parker Hannifin and Cobham-Ultra (take that ESG!), means its sale has moved steadily forward little noticed, for now at least.
From a bolt-on perspective the company should be of interest to private banks looking at new revenue streams, further administrators eyeing market share, law firms with a desire to bring in more clients, and prime brokers sensing upselling and diversification – the list of suiters grows.
Then there are hedge funds.
It is surprising that more hedge funds are not interested in the deal. For those looking for an event driven play the company seems undervalued, and the likelihood of other private equity firms hungry for UK deals entering the bidding seems more than realistic. The shares are +290.5 per cent YTD and +490 per cent over the past five years; revenues and net profits have increased every year since 2017 (but who’s counting?)
For the long/short funds of this world, Sanne represents a buy and hold position; for the activist a chance to cannibalise the market, roll out its ESG offering to industry contacts and listed firms alike, and push it to new levels. Sanne’s real asset business at GBP85 billion assets under administration is miniscule when considered against the assets held by global REIT funds, infrastructure investors, and real asset portfolios.
With the growth of private equity, new fund launches, and an ever-diversifying product range, matched with more money both in the economy and chasing allocations, Sanne’s business model seems robust in the medium term – it is also the type of accounting firm that UK regulators want to grow as a wave of antitrust poking hits the Big Four. Any would-be private equity buyer will surely raise costs for the end client, or clients will see cuts in service levels as costs are stripped out of the business to meet IRR targets.
In some ways Sanne is a case in point for hedge funds to group together and control a business they have more direct knowledge of than most. Let’s be honest, at a GBP1.5 billion valuation it would not take many funds to take that approach. Perhaps the more interesting part is what Sanne reflects: the health of the alternatives industry, its developing needs, and internal power struggles.
Sanne’s acquisition from a financial and commercial perspective makes for an understandable play, but it goes deeper than that. It is also a contest of private equity-vs-hedge funds manifested in a firm who supports both sides of the aisle – an act of domination, characterised by a PLC that does not need to become private because it is a healthy and growing.
It is one instance where the interests of equity hedge funds who need firms like Sanne in their portfolios come up against de-listings. With the ink yet to be penned on any deal there is some way to go before Sanne theoretically disappears from Bloomberg terminals. Yet this particular acquisition does not feel like everyone has quite yet turned up to the party and it is all to play for as potential bidders dry off their swimming gear and fly home with their minds recharged and tans topped up.
A bidding war could yet arise.
Robert Quartly-Janeiro is Visiting Fellow at the Hellenic Observatory, London School of Economics