Rees-Mogg’s Somerset Capital prepares for second act

Three years after Somerset Capital Administration rejected a bid of as much as £90mn it’s in sale talks once more at a mooted valuation a fraction of what Artemis Funding Administration had supplied.

The autumn illustrates the challenges dealing with small fund managers, that are grappling with rising prices, and, for rising markets specialist Somerset, an investor sell-off that has contributed to its property beneath administration halving from a $10bn peak in 2018.

Whereas many boutique fund managers working a number of billion {dollars} function largely beneath the radar, Somerset’s high-profile political connections imply it enjoys no such luxurious.

The agency was began 15 years in the past by the Eurosceptic enterprise secretary, Jacob Rees-Mogg; Dominic Johnson, a former vice chair of the Conservative occasion; and fund supervisor Edward Robertson. The three had labored collectively at Lloyd George Administration, an rising markets fund supervisor in Hong Kong and London.

Somerset is now at a important juncture. Rees-Mogg left in 2019 and this week Johnson advised purchasers he was stepping down as chief govt, to get replaced by chief working officer Robert Diggle. The change means round half of the fairness within the enterprise will likely be held by retired companions who will not be concerned within the day-to-day working of the agency, leaving Somerset grappling with easy methods to incentivise the subsequent era.

“It’s been a horrible time for rising markets and all fund managers on this house have suffered,” stated Crispin Odey, founding father of Odey Asset Administration. “Somerset’s distinctive asset has been Dominic on the helm.”

The agency is now in discussions with potential consumers, together with rising markets boutique Emso Asset Administration. A administration buyout can also be being thought-about.

“Why is [Emso] pursuing Somerset? As a result of they’re additionally in a nasty state of affairs and small homes need to consolidate,” stated one particular person near Somerset.

The sale talks and administration adjustments come as Somerset finds itself on the nexus of two damaging developments. Rising market property are deeply out of favour with buyers, and rivals within the house, akin to Ashmore, Abrdn and Genesis Funding Administration are additionally struggling.

Of the 5 Somerset funds for which information is publicly obtainable, 4 are down by a median of greater than 15 per cent this yr and considerably under their benchmarks. In addition they underperform on a three- and five-year foundation.

Secondly, small funding homes, notably these with lacklustre funding efficiency, have been beneath explicit stress as they battle to compete.

So as to add to Somerset’s difficulties, a push into China has not gathered momentum, whereas the agency has been seen as behind on environmental, social and governance investing, a vital development space for the asset administration trade. It misplaced its head of sustainable investing to Redwheel in March after two years within the function.

Purchasers are taking discover. Wealth supervisor St James Place awarded Somerset a £930mn mandate in 2020 and a share in a multi-manager allocation this yr however has now positioned the agency on a watchlist for poor efficiency. “They acquired the mandate not way back and at the moment are anticipated to lose it. It’s fairly embarrassing,” stated somebody with information of the state of affairs.

Swedish nationwide pension fund AP1 had been a shopper for the higher a part of a decade, however stated it now not has investments with Somerset after retendering these mandates on the finish of final yr.

Others appear ready to remain the course, nevertheless. Omnis Investments gave Somerset a £322mn rising market equities mandate in mid-2021.

Some anticipate the departure of Johnson could pave the way in which for him to maneuver deeper into politics, after years of involvement with the higher ranks of the Conservative occasion as an administrator and a donor. He was appointed to the board of the Division for Worldwide Commerce in November 2020.

One senior Conservative near Johnson stated: “He has unbelievable connections within the UK and rising markets, however he’s been shifting away from the enterprise over time. He’s actually acquired caught into his function on the Division for Worldwide Commerce.” The particular person added that “it’s fairly wise he steps again” given the state of rising markets.

In the meantime at Somerset, the highlight is falling on fund supervisor Robertson, the one remaining co-founder, who would be the essential determine in deciding the agency’s future. He should weigh up whether or not to push forward with a sale to Emso, instigate a administration buyout or resurrect talks with Artemis — or certainly be part of forces with one other rival.

However whereas a sale or merger may make monetary sense and relieve some stress on Somerset’s price base, it isn’t a assured saviour. In follow, fund administration mergers are notoriously tough to tug off with out alienating purchasers or employees. One particular person near Somerset stated by way of any form of deal, “they should maintain purchasers and expertise . . . however that’s not essentially assured”.