While four transition management providers have left the business in the last year, two big-name financial firms are making a go at it with U.S. defined benefit plans.
Macquarie Group Ltd., already a major presence in transition management in Australia, is targeting U.S. clients with its appointment of Fred Fogg and Lance Vegna as directors and co-heads of transition management. Both held similar roles at Credit Suisse, which exited the business last summer.
Also, Fidelity Capital Markets, a unit of defined contribution giant Fidelity Investments, is leveraging its transition management business for its current, mostly retail, clients in an expansion into the institutional market.
Their push comes as Credit Suisse — as well as Bank of New York Mellon Corp., J.P. Morgan Chase & Co. and ConvergEx — announced in the past 12 months they're leaving transition management, most claiming that margins in the business are too low.
That's not how Macquarie and Fidelity see it.
“I would agree that some participants (in transition management) have suffered from margin contraction,” said Damian Hoult, New York-based global head of execution services at Macquarie. “But it doesn't mean it's not a profitable business for us. We're confident we can do well in transition management.”
Kevin Byrne, New York-based vice president, head of transition management at Fidelity, said transition management “is a profitable business for us, but it also complements other services we already provide for clients. We have a strong infrastructure and distribution chain. On a cost basis, even with fee pressure, we can make a profit. We transact purely as agents, with no cost of capital like investment banks have.”
Macquarie is targeting previous clients of Messrs. Fogg and Vegna to build its U.S. client base, while Fidelity is extending its reach to new clients outside its defined contribution base. And although each firm is looking to build the business differently, both have what it takes — infrastructure in place — to make it work.
Macquarie and Fidelity “are two different kinds of companies,” said Thomas Schoenbeck, senior investment consultant at Hewitt EnnisKnupp, Chicago. “As an investment bank, Macquarie already has the infrastructure to do this. It won't be a high cost to start up in the U.S. Fidelity has the infrastructure, too, given their retail clients. Fidelity has the U.S. presence already, while Macquarie is big in Australia with superannuation funds. Both can succeed. ... There would be way too much overhead to start a transition management business from scratch without that infrastructure.”
Mr. Schoenback and Paul Sachs, principal and senior consultant at Mercer Sentinel Group, Philadelphia, both said Macquarie and Fidelity are expanding in a business that is driven by relationships between clients and managers. That could, in some ways, give an edge to Macquarie in the early stages. “A firm like Macquarie can hang out their shingle today and do transitions for investment professionals, such as mutual funds or manager-of-managers platforms, right away,” said Mr. Sachs. “Fidelity is trying to solve a bigger equation, to move the firm from retail to institutional investors. That's not just for transition management; look at” Pyramis Global Investors, Fidelity's institutional money management business.
However, Mr. Sachs said despite the different starting points, both firms will be “up-and-comers” and challenge the established transition management firms still in the business — mainly BlackRock Inc., Russell Investments, Citigroup Inc. and State Street Corp. “It's a dead heat” between Fidelity and Macquarie for gaining new business, Mr. Sachs said. “They're different horses, but they're evenly matched.”
Macquarie's Mr. Fogg said the firm's U.S. and Canada transition management clients generally were clients of his and Mr. Vegna at Credit Suisse, “almost all” of whom have either moved or are in the process of moving to Macquarie. “We brought our relationships to Macquarie,” Mr. Fogg said.