Big institutional investors will be keen to acquire parts of AMP's business if, as expected, the Australian financial services group is broken up after a malpractice scandal has come to light at the firm, say industry observers.
The company's real asset portfolio and its Chinese pensions business are both seen as potentially particularly attractive for the likes of private equity firms, pension funds and insurers.
Last week's revelations about AMP have further shaken trust in Australia's financial services industry and led to chief executive Craig Meller quitting on Friday (April 20). His is just the first of senior heads that could roll at the insurance, pensions and investment group, as the full extent of its wrongdoing emerges.
AMP has been charging customers for services it never intended to provide, according to the banking royal commission investigating malpractice in financial services. The firm compounded its breach of trust by making a series of false statements to the regulator with regard to this activity.
The commission is likely to hand greater power to the Australian Securities and Investment Commission to hand stiffer penalties to companies and executives, said market commentators. The government has proposed the imposition of fines of at least A$200 million ($153 million) for companies and 10-year jail terms for senior executives found guilty of corporate wrongdoing.
Reverberations from the scandal will be felt across Asia and beyond, given that AMP has substantial international business and tie-ups with firms such as China Life, and AMP Capital is 15% owned by Japan's Mitsubishi UFJ Trust and Banking.
Even before this scandal came to light, industry commentators and potential investors had called for the group, which has $110 billion under management, to be split up.
One Hong Kong-based senior executive at a fund house, who has been a close observer of the developments in Australia, told AsianInvestor: "The company should be broken up to unlock value. For example, all of the real asset parts of the investment business, such as global infrastructure and Australian real estate, would be of great interest to overseas investors.”
Private equity firms such as Blackstone, Carlyle and KKR, along with Canada's larger pension funds, would be prime candidates to buy parts of AMP, he said. The real asset portfolios would also be of interest to asset management arms of US insurers looking to boost their allocations to such investments.
Canada Pension Plan Investment Board, Caisse de depot et placement du Quebec, and Ontario Teachers Pension Plan are all big direct investors in real assets such as infrastructure and property. They, like other large retirement funds, as well as international insurance firms, are looking to increase exposure to such investments.
AMP’s JV partners in China will be watching developments with interest. Its funds joint venture, China Life AMP Asset Management, is 15% owned by AMP Capital, while the local pension company, China Life Pension Company, is 19.9%-owned by AMP Life. If AMP decides to sell the life company, its stake in the China Life pension business would likely be a key attraction for any buyer.
There is not only a long-term threat to Australia's financial services industry from potentially tighter regulation, but also from the likely erosion of client trust, at a time when the industry is being disrupted by technology, downward pressure on fees and the shift towards passive and self-managed investing.
One Melbourne-based consultant to superannuation funds told AsianInvestor: “AMP has a long history but it has no inherent right to stay in business. It operates in a trust business and it has failed that. This should really be a wake-up call for investors.”
An outspoken executive on professional ethics in the investment industry is Paul Smith, Hong Kong-based global CEO of the CFA Institute. Asked to comment on the AMP scandal, he told AsianInvestor: “To be a professional means that you always put your client's interest first. Alas, all too often in the recent past the financial services industry has demonstrated that it is self-interested. Until we address this core issue, we will face increasing regulation and increasing investor apathy.”
Smith and others have long argued that more regulation is not necessarily the answer to the industry’s failings.
Chris Trevillyan, director of investment strategy at Melbourne-based asset consultant Frontier Advisers, told AsianInvestor: “The regulatory pressure in Australia has increased, and when you look at the year ahead, we’ve got the royal commission that has now been expanded to financial assets in general, a productivity commission review of the superannuation industry and then we have the super-regulator, Apra [Australian Prudential Regulatory Authority], introducing a number of different regulations and increased oversight. It seems for a long time there’s been too much tinkering by successive governments.”
Meanwhile, the Australian government, which at first did not want a royal commission to investigate but which, like many in Australia, has been shocked at the revelations coming out in the daily hearings, is now looking to extend the time for reporting, which would potentially allow more damning evidence to come out.