Principal doesn't plan to leave BT fallow
Philip Macalister finds out what US-based Principal Group plans to do with its latest acquistion BT Funds Management.
Wednesday, July 28th 1999, 12:00AM
There's a fair degree of satisfaction around BT Funds Management now after the very public sale of the business to United States based Principal. BT staff are happy they aren't going to be swallowed up by one of the Australian banks, and Principal is rapt that it picked up such a strong business franchise Down Under.
For Principal the opportunity to buy BT was like a dream come true. The group is currently on the global expansion trail and it was looking at the Australian market before Deutsche Bank decided to put BT on the market. What's more Westpac Banking Corporation almost pipped it at the finish line in the first round of bidding. However, after the Westpac offer fell apart rapidly and in a very public manner, Principal lined up for its winning shot.
But triumphing in the bidding process isn't the only reason Principal is happy. The big boost for Principal and BT is that there is commonality in their approach to the financial services business, and the two operations are highly complementary (see table below).
Principal's man Down Under is David Fallow. Fallow came down to Sydney several months ago "for a couple of days" during the due diligence process. The Glaswegian is still here and has been appointed executive vice president, working with BT's Terry Power.
Fallow says Principal plans only minimal changes to BT in New Zealand, and the new owner is supportive of the local management. While there aren't any major changes imminent, Principal is keen to tackle the superannuation market and is already talking about championing a US-style tax incentivised retirement savings regime in New Zealand.
Who is Principal?
Its roots are in the insurance industry and its structure is described as being a "mutual insurance holding company" - halfway between a mutual and a company.
Fallow says Principal has no plans to demutualise and issue shares as there are some benefits of the mutual structure. One of those being it is easier to take a medium term view of the business, as opposed to a short-term one focussed on the daily share price.
The group has been on a global expansion strategy and has been looking for opportunities in Australasia, Japan, United Kingdom and Brazil.
The opportunity to pick up BT was irresistible, because the two companies are a natural (see table).
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Principal is engaged in 5 core businesses |
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Employer-provided pension plans |
US $54.1 bill |
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Individual insurance and savings products |
US $12.1 bill |
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Mutual funds |
US $5.6 bill |
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Residential mortgages |
US $1.8 bill |
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Employer-provided insurance coverage |
US $1.7 bill |
Principal's vision is to be a leader in retirement and related services for small and medium sized enterprises and employee groups. In the US Principal's target markets are institutional asset management and retirement services for small and medium sized businesses.
Fallow says Principal is the biggest provider of 410k plans in the US. (401k plans are a form of tax incentivised retirement savings vehicle. People can place up to US$9500 annually into a 401k plan. There is no tax on the plan's earnings during its life).
He says it is imperative New Zealand does something about its retirement savings levels and is keen on seeing the country adopt something like the 401k model. (This fits with comments Labour's finance spokesman Michael Cullen has made about changing the tax regime from taxed, taxed, exempt to taxed, exempt, taxed).
Fallow says Principal relies solely on independent financial advisers to distribute their products in the US. The difference between NZ and the US is that American advisers tend to provide businesses with savings schemes, as opposed to individual investors. The advisers then service the plan, rather than the plan's participants directly.
The New Zealand equivalent of this model would be advisers providing company's with products which make up employer-sponsored superannuation schemes. Generally, in New Zealand this market is serviced by fund managers through master trusts, as employer-sponsored schemes are declining in number due to the prohibitive costs of disclosure.
The institutional asset management Principal targets is one which BT has been active and successful in over recent years.
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Comparison between Principal and BTFM |
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Primarily US funds manager |
Global money manager |
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Predominately "buy & hold" style |
Active management style |
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Credit and research based |
Research based |
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Distribution via IFAs |
Distribution via IFAs |
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Centres of excellence |
Centres of excellence |
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The fit between Principal and BTFM is very good (see table). Of all the areas outlined the major area of commonality is one which BT considers to be part of its competitive advantage. That is both firms rely on independent financial advisers to distribute their products.
Fallow says BT will continue to use financial advisers to sell its products, and it won't be establishing its own distribution chain. This decision leaves the group in a unique position in the New Zealand market. However, one area Principal says it can extract cost savings is through the use of the Internet.
The only other area of crossover, and it is minor, is the area of international equity management.
Fallow sees BT's international equities expertise as something Principal can export to the US. Plans are already underway for Principal to package BT's international fund management skills into appropriate vehicles and offer them to Principal's 2.9 million fund members.
While there is the opportunity to sell Principal products Down-Under, Fallow says it's not high on the list. After all the group has 2.9 million customers to sell to in the US and only 400,000 in Australia and 30,000 in New Zealand.
The two things Principal brings to Australian and New Zealand are its credit-based products and its 401k expertise into the master fund market.
While Principal is also strong in insurance and mortgage sectors, it has no plans to introduce those products Down Under. "I'd be hard pressed to see what our competitive advantage would be," Fallow says.
The message from Fallow is that it's business as usual for BT, however Principal will "preserve its options in the New Zealand market."
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