Assets, OCIO business both rising; completion expected before 2018
Although money management unit State Street Global Advisors has experienced outflows since the deal was announced in late March 2016, assets under management continue to grow, reaching $2.56 trillion as of March 31. And its outsourced chief investment officer business — a key attraction of the deal — has skyrocketed since the integration.
"Integration is progressing well and is proceeding as anticipated. SSGA's Stamford office (where GE Asset Management's unit was established) is fully functional and operating well," said Greg Hartch, chief risk officer for SSGA. "A few legacy transition services agreements with GE remain in effect, but SSGA anticipates the integration to be fully complete by year-end 2017," he added.
When State Street acquired GEAM in July 2016 for up to $485 million, it was done to add new alternatives capabilities in direct private equity and real estate, strengthen SSGA's hedge fund, fundamental equity and active fixed-income teams, and add OCIO services to SSGA's lineup.
When State Street announced its intent to acquire GEAM in March 2016, SSGA President and CEO Ronald P. O'Hanley said at the time his firm was "highly focused" on building its outsourced CIO capabilities, an area "in which we see a lot of growth."
State Street's most recent earnings statement released April 26 showed its assets rose 3.8% from three months earlier and increased 11.5% for the year.
In the earnings call to investors, State Street Corp. Chairman and CEO Joseph L. "Jay" Hooley said most growth from the first quarter "was driven by market appreciation, with an additional 5% of growth in the acquired GE Asset Management business, which is performing very well."
Added Mr. Hooley: "We continue to make good progress in the integration of the acquired GE Asset Management business. Notably, for the first nine months, we've achieved accretive operating-basis earnings."
Associated AUM of GEAM operations was $120 billion as of March 31, up 9.1% from July 2016, documents from SSGA show. However, SSGA also experienced net outflows of $11 billion and institutional net outflows of $26 billion during the first quarter. The outflows came from alternatives, equities and fixed income.
Tne news is also good for SSGA's OCIO business, which has grown considerably. Data from P&I show SSGA had $80.25 billion in global institutional outsourced assets under management as of March 31, up 359% from a year ago. State Street spokesman Andrew Hopkins confirmed most of the increase in its OCIO AUM is due to the integration.
At least one GEAM client said that despite initial concerns, the integration appears to be working. "They've done everything they said they were going to do," said Gary Harbin, executive secretary of the $18.1 billion Kentucky Teachers' Retirement System, Frankfort. "The same people are in place, the process hasn't changed, the team has autonomy and the performance is where we expect it to be," he said. "So far we've been happy with the acquisition." The firm manages $800 million in active large-cap growth equity for the system.
Mr. Harbin added: "It was really concerning that GEAM was purchased by a passive firm. We were worried that (the investment team's) attention would be diluted. But 12 months later, things are fine."
For the most part, analysts are optimistic about the state of the integration. Stephen Biggar, director of financial institutions research at Argus Research Inc. in New York, said he considers the integration between SSGA and GEAM "to be on target if not slightly ahead."
"It takes a lot to move the needle," he said. "The important part is that they could get some positive operating leverage."
Marty Mosby, a director of banking and equity strategies at Memphis-based Vining Sparks IBG LP's research division, said SSGA is expanding on what it already had with this acquisition. "It's given them a few new customers, a few new products. AUM is still growing. There's no runoff, which is a good thing. From the outside, it generally looks successful," Mr. Mosby said.
The Vining Sparks analyst said he doesn't expect State Street to seek out any other similar acquisitions anytime soon. This deal was more opportunistic because GE was looking to exit the business as part of a plan to simplify its business platform. "I don't think this is something that State Street wants to continue actively pursuing; it was a nice way to expand at a reasonable price," said Mr. Mosby.
However, one New York-based banking analyst, who asked not to be identified, noted that if this deal was meant to kick the asset management business into high gear, that hasn't played out yet. "I haven't seen a huge amount of improvement in the outlook or the results for the asset management business since the deal," said the analyst, adding he also hasn't seen "a huge inflection or pivot in the velocity of the OCIO and alternatives businesses."
One consultant, who also asked not to be named, noted his firm has yet to receive any information from SSGA regarding its new capabilities gained from the acquisition. He said he found that unusual. "In the 12 months since this acquisition, they haven't called us, emailed us, or set up a meeting to talk about their capabilities," the consultant said.
In terms of expanding the business, Lori Heinel, SSGA's deputy global CIO, said in an email that the firm has "made good progress" on its push to build its actively managed AUM. "We are seeing strong performance across the strategies we've deemed as priorities, which will ultimately support our client engagement efforts even during a period where active flows remain relatively muted across the industry."
Ms. Heinel added that SSGA's approach to expand its actively managed capabilities has been to streamline its investment capabilities, which includes de-emphasizing legacy GEAM value strategies, and train its sales and service teams on active strategies.