Fund Mergers: Navigating Complexity in Asset Management

One activity that we expect to see a lot of in Asset Management in the coming years is consolidation of funds. We see a number of drivers for this, for example squeezed fees creating tighter margins that make sub-scale funds uneconomic, increasing interest in reducing the discounts on Investment Trusts, and government incentives to consolidate council pension schemes.

Merging collective investment funds can be a complex process with numerous operational challenge, but it’s a fairly well trodden route where experience can help with the creation of requires meticulous plans, rigorous execution, and careful management across multiple teams, both internal and external.

The first consideration lies in harmonizing investment strategies and portfolios. Reconciling differences in investment approach, asset allocation, and risk profile demands is the first step in creating the target portfolio. Both trading to this targe and transferring assets from donor to receiving fund is simple in liquid, freely traded, non-taxed markets. However, complications arise with Stamp Duty in UK, Hong Kong and others; open derivatives contracts (including FX Forwards), and markets where securities cannot be freely transferred between custody accounts. These can all end up incurring significant costs on top of the basic effort and resource costs without a mitigation strategy. Fortunately, there are plenty available.

Technological integration can present another critical operational hurdle when merging funds across different firms or technology platforms, with varying systems for trade execution, portfolio management, reporting, and compliance monitoring. Harmonisation of static data is crucial in advance of any data migration, as well as potential system upgrades to ensure seamless operational continuity. Maintaining uninterrupted service during the transition period is critical.

Regulatory compliance can emerge as a challenge for cross border mergers where each jurisdiction may have different requirements for fund mergers, necessitating careful navigation of regulatory landscapes. This includes obtaining necessary approvals from regulatory bodies, ensuring compliance with disclosure requirements, and managing potential cross-border regulatory complexities. Asset managers must prepare comprehensive documentation, conduct thorough due diligence, and potentially restructure fund vehicles to meet regulatory standards.

Investor communication and management also needs to be built into the plan and (along with regulatory approval) will typically define the critical path. The merger process requires transparent and timely communication with existing investors, addressing potential concerns about changes in investment strategy, fees, performance, and fund governance. This involves developing comprehensive communication strategies, preparing detailed prospectus updates, and potentially conducting investor meetings or roadshows to explain the rationale and benefits of the merger.

Continuity of performance tracking and reporting requires careful consideration. Managers must develop robust methodologies for knitting together the pre and post merged funds, ensuring transparency and maintaining investor confidence. This includes creating comprehensive performance attribution models that account for the merger's impact on historical returns and future investment strategies.

Risk management becomes paramount during fund mergers. Operational risks include potential disruptions to investment management, trading capabilities, and reporting mechanisms. Comprehensive risk assessment and mitigation strategies must be developed to address these potential vulnerabilities and ensure minimal disruption to fund operations.

The complexity of merging collective investment funds underscores the need for meticulous planning, robust technological infrastructure, and comprehensive strategic approach. Success depends on carefully navigating technological, regulatory, and operational challenges while maintaining a clear focus on investor interests and long-term fund performance.

ISC has experience of dozens of fund mergers across multiple fund structures and have experience of many of the pitfalls and mitigating strategies. Contact us to support your fund merger activity.

Contact us at [email protected] to see how ISC can support your fund merger activities