Tepper cited a recent survey by Chestnut Advisory which found that 73% of OCIO providers expect endowments and foundations to be the fastest growing investor segment in their OCIO businesses over the next two years.
By divesting its OCIO business, Vanguard can now focus on its core business serving the retail channel, both individuals and registered investment advisers, Tepper added.
"At first I was taken by surprise when this deal was announced, but I think it's a brilliant acquisition by Mercer," said Bradley H. Alford, founder of Alpha Capital Management, who directs the Atlanta-based firm's OCIO search service. Alford noted that Vanguard is renowned for its endowment and foundation business.
Sue Anderson, an investment search consultant at Curcio Webb, an employee benefit provider consulting firm, said while she was not expecting this deal to occur, it didn't surprise her either.
"It's a good transaction and a good match for both firms," she said. "Mercer wanted to have a stronger footing in the endowment and foundation space, while Vanguard likely felt it did not have enough in-house expertise — especially in asset allocation strategies involving alternative assets in portfolios — and might want to focus more on defined contribution and retail clients, which is what it does best."
Vanguard's 120-member OCIO team as well as more than 1,000 clients will move to Mercer once it closes in the first quarter of 2024, according to the deal announcement Dec. 5. Vanguard's OCIO business has about $60 billion in assets under management, while Mercer had $337.7 billion in OCIO AUM as of March 31, according to P&I data. Mercer has $16.45 trillion in assets under advisement. Terms of the transaction were not disclosed.
Larry D. Coats Jr., president and CEO of ClearView Fiduciary Alliance, an OCIO consultant, said although Vanguard has had a very successful OCIO business, he thinks that perhaps this segment did not "culturally align" with the remainder of its activities, which focuses on retail clients and largely passive investment strategies.
Coats also noted that Mercer primarily serves larger client bases and might be seeking to enter the smaller and midsized client market. He said Vanguard's OCIO clients have an average size of less than $50 million in assets, which is much smaller than Mercer's average client. "This deal could serve as the catalyst for expanding into this customer base," Coats said.
Coats added that his firm has worked with Vanguard and that he "knows the firm and its people and culture very, very well."
The OCIO business, Coats noted, in a "service business," which requires discussions with committees and investment groups. In contrast, more of Vanguard's other businesses are "product-oriented" which only require contact with individual clients.
It will be interesting to see, Coats added, what happens when Vanguard's OCIO clients move to Mercer. "Thus far, they have only had access to Vanguard-labeled investment products — but now they will be exposed to a much broader variety of investment vehicles offered through Mercer."
Chestnut Advisory's Tepper also suggested the deal may be a harbinger to more consolidation in the industry. "As the investment landscape becomes more complex, OCIO client demands are increasing," she said. "The OCIO marketplace is also becoming increasingly competitive."
Alpha Capital's Alford added that he "absolutely" expects to see more acquisitions like this emerge in the OCIO industry.
Freeman Wood, senior consultant role with North Pier Search Consulting, said there are a growing number of OCIOs in the market that range from large global organizations like Mercer to small and more boutique-focused companies.
"Given that there are economies of scale to serving a larger number of clients, the organizations that have the infrastructure and capabilities to grow their client bases will likely continue to look for acquisitions," he said. "There will continue to be change and consolidation in the OCIO market, and understanding your provider services and the market landscape as it changes is critical."
He also noted that acquisitions and integrating new teams can be a potential distraction, so it is important for asset owners to continually monitor and assess their relationships as changes occur.
ClearView's Coats added that his firm is advising clients to be "thoughtful, deliberate and to follow a prudent process" as required by UPMIFA (the Uniform Prudent Management of Institutional Funds Act) in monitoring their Vanguard relationship in the coming months and years."
But Christopher Cutler, founder and president of Manager Analysis Services, an OCIO search consultant and outsourced due diligence provider, took a decidedly opposing view.
While Mercer's acquisition of Vanguard's OCIO business is likely a very good deal for Mercer, it is "probably not a good deal for clients who subscribed to Vanguard's premise that investors 'own' Vanguard and that fees reflect only costs."
That premise is now gone, Cutler noted, and the business strategy will inevitably change.
"I remind OCIO clients that they are not the chattel of large advisory firms," he added. "When they are 'traded' with M&A activity, they should take a close look at their providers and control their own destiny."