Leadership within the Boston-based State Street Global Advisors has wanted to beef up its active management and outsourced CIO capabilities for some time now.
State Street announced on March 30 that it agreed to acquire GEAM for up to $485 million. The transaction will add new alternatives capabilities in direct private equity and real estate, strengthen the firm's hedge fund, fundamental equity and active fixed-income teams, and add OCIO services to SSgA.
“We're highly focused on outsourced CIO — it's a reasonably big business for us now and one in which we see a lot of growth,” said Ronald P. O'Hanley, president and CEO of SSgA, in a phone interview. “As more defined benefit plans decide to outsource rather than have large in-house investment staffs, we think this trend will continue to accelerate.”
Mr. O'Hanley added that GE's asset management business also “comes with a set of building blocks that are quite complementary to our own in spaces in which we want to do more,” including alternatives and fixed income.
The sale follows General Electric Co.'s announcement in September that it would explore opportunities to sell GEAM to another investment management firm. The cash deal is set to add $100 billion in assets under management to SSgA, which is currently at $2.4 trillion.
The GE pension plan was $46 billion as of Dec. 31. GEAM manages a substantial portion of the plan; external managers also run GE pension plan assets. Upon the close of the deal, SSgA will assume responsibility for managing the assets of GE's primary benefit plans currently managed by GEAM, including the GE pension plan.
When Mr. O'Hanley was hired to replace Scott Powers as CEO of SSgA on April 1, 2015, both men in separate interviews expressed intent to grow SSgA's active management business (Pensions & Investments, April 6, 2015).
Discussing the GE acquisition, Mr. O'Hanley said it “helps implement that plan for sure.” He added, however, that the company doesn't “just want to accumulate active businesses.”
SSgA bought GE's asset management business because both businesses were “very complementary” to one another and also because “the chemistry was right,” Mr. O'Hanley said.
SSgA has been facing headwinds competing against rival passive management giant Vanguard Group Inc. in terms of bringing in assets. Based on quarterly data from State Street, the asset management business has experienced net outflows for four straight quarters, resulting in total net outflows of $151 billion for 2015.
“GEAM brings State Street a broader traditional product line with generally good performance and an alternative product suite that State Street doesn't really have today,” said Domonkos L. Koltai, a partner and co-founder of investment bank PL Advisors, New York. “One could also read (the deal) as a vote of confidence in active management from a large ETF player.”
Added Mr. Koltai: “It won't do much for their flows near term but should be a positive contributor over time when they combine some well-performing GEAM products with SSgA's sales and marketing infrastructure.”
Analysts that P&I spoke with believed the deal could help SSgA move from under Vanguard's shadow.
“State Street's been having some trouble with its asset management business,” said Erin Davis, senior equity analyst at Morningstar Inc., Chicago. “Flows are going to Vanguard, not to State Street.” Ms. Davis said this is due in part to Vanguard focusing on keeping costs low, enabling the Malvern, Pa.-based shop to consistently beat SSgA on pricing.
She added that this acquisition could help SSgA provide a well-rounded offering for institutional investors. “Certain investors are looking for things other than price,” said Ms. Davis. “So State Street does have some things institutional investors are looking for, but there's been some price exploration in that area that hasn't been too successful.”
Although active and alternative investment management is somewhat outside SSgA's specialty, Ms. Davis believes this transaction “seems like a good step” for SSgA.
Jeffery Harte, a principal at Sandler O'Neill & Partners LP in Chicago, said the acquisition of GE Asset Management “expands their offerings and the price is reasonable, so all in all, it looks like a good deal for State Street.”
Anne Elizabeth McNally, a spokeswoman for SSgA, said a joint integration team has been established by the two firms to bring the organizations together, and to “support the continuation of an exceptional” GE and SSgA client experience. She added that upon closing, the GEAM team of about 275 employees is expected to join SSgA.
In terms of what the future may hold for Dmitri Stockton, GEAM's chairman, president and CEO, GE spokesman Chris Linehan said that while the existing GEAM team is expected to join SSgA upon the closing of the deal, the firm is not commenting on individual roles.