City of London institution M&G looks ripe for a break-up

The imminent appointment of a new chief executive at M&G is set to reignite a vexed question: is it time to break up the underperforming FTSE 100 savings and investment group?

M&G’s unwieldy structure — a £150bn asset management business attached to a near £200bn retail and savings division — may no longer be fit for purpose, according to some investors.

Three years after the company’s relaunch as an independent business following its demerger from UK insurer Prudential, some critics argue it should be split up again.

“Shareholders on balance would prefer to see the company get [more] value from its different parts by breaking it up,” said Andrew Crean, an equity analyst at Autonomous Research. “Investors want to see the [retail arm’s] annuity business sold. This would reduce the size of the whole company and could generate separate bids for the two remaining parts.”

The chief executive of a rival London-based asset manager put it more bluntly: “M&G’s integrated model doesn’t work.” 

A break-up of M&G would mark a new chapter for a City institution that is one of the UK’s largest asset managers.

Founded in 1931, M&G launched the UK’s first private unit trust and the country’s first investment savings plan in 1954. By the 1970s M&G was a household name in the UK savings market.

British insurer Prudential bought M&G Investments in 1999, combining it with its savings division, before demerging the enlarged business two decades later when it decided to focus on Asia and Africa.

“The reason [the asset management and savings businesses] were spun out together was that it was convenient for Pru, not because it made industrial logic for the business,” said the rival chief executive.

Investors hoped that as a standalone business, M&G would be less constrained by bureaucracy. But since the 2019 split its share price has barely grown.

Until the first half of this year, M&G had suffered from net investor outflows, while its culture has also come under scrutiny. “It’s been a long, sad demise,” said one industry veteran. “It’s difficult to see from the outside what M&G stands for.”

As John Foley plans to retire as chief executive, analysts have said a priority for his successor is to provide clarity on the group’s direction and structure.

“M&G can go one of three ways . . . Business as usual, sell the annuities business and bulk up in asset management, or start growing in insurance again,” said Farooq Hanif at JPMorgan.

Culture clash

A potential break-up of M&G has often been mooted in City circles but early last year provided a sign it might come to fruition.

Its listed rival Schroders, which has £770bn in assets under management, began exploring a bid for M&G Investments, attracted by its private assets business and distribution opportunities. The deal would have created a £1tn asset manager. But Schroders decided not to make an offer, partly because of concerns about M&G’s culture, according to one person with knowledge of the process.

Several former M&G employees have described an atmosphere of animosity between the group’s fund managers and the senior management team, who mostly came from Prudential.

“Asset managers as subsidiaries of insurers is a difficult place to be,” said a former M&G executive. “The cultures come from very different places. Insurers build around risk avoidance; asset managers need a risk-taking mindset because that’s what investment is. They make quite uncomfortable bedfellows.”

Another former employee said Anne Richards, a highly-regarded executive who led M&G from 2016 to 2018, tried to improve the culture but “hit a brick wall of testosterone”. Richards, who now runs rival Fidelity International, declined to comment.

£1tn


The combined value of the group if Schroders had made a successful bid for M&G

A deeper malaise developed under Foley, who several people described as a difficult personality to work with. One investor in M&G said the chief executive was “a shrewd operator, a bit quirky and unconventional.” 

Several former staff members recount stories of stress, sexual harassment and a laddish, heavy drinking culture.

In 2017, a former M&G employee was fired for gross misconduct — and later sentenced to 16 weeks in jail — after he created fake porn profiles of an intern who rejected his romantic advances.

Allegations of sexual harassment by a fund manager surfaced days before M&G was due to list in 2019. Reviews were launched by law firm Baker MacKenzie and professional services firm PwC but the results were never made public. “That was very, very hush-hush,” said another former employee of the PwC cultural probe.

In early 2021, M&G’s chair Mike Evans resigned, citing a stress-related illness. Then in April that year, chief operating officer Roddy Thomson died by suicide, according to a coroner’s inquest, which said he had become “very stressed with his work”.

M&G said it was “committed to providing an environment where our people work in a safe environment”.

“Since our demerger, John Foley has led a company-wide programme on culture and conduct to ensure that our people live up to these values, making clear that we have zero tolerance for inappropriate behaviours.”

Break with the past

Foley’s retirement is one of a number of personnel changes investors have tentatively welcomed as a chance to break with the past. Kathryn McLeland joined in January from Barclays as chief financial officer and Edward Braham took over as chair in March.

Some industry watchers see the appointment of Braham, a former mergers and acquisitions lawyer, as a sign the board will explore a sale or a break-up.

However, sceptics have warned a separation might be difficult to pull off.

“It’s clunky to explain but it’s quite hard to alter,” said one investor. “It’s a bit challenging to see how you break it up.” 

M&G is also a favourite of income funds because it has a dividend yield of more than 8 per cent and has completed several recent share buybacks. A sale of the annuities business would mean a cut in the dividend.

“I would like to be open-minded about a break-up of the company,” said a top-10 shareholder in M&G. “But it’s a big ask to think that management can create a mergers and acquisitions strategy that would lead to a re-rating for the shares above their peers.”

One person close to the firm said M&G should hold on to the Heritage annuities division because having the insurance arm was a “neat strategy” that brought permanent capital, a structure seen as a holy grail in investing.

But the rival chief executive dismissed this, saying M&G’s ability to attract talent and run an alternatives business was not in the same league as US managers such as Apollo and Blackstone.

M&G’s latest results, published this week, showed an encouraging improvement in new business growth, with net inflows (excluding the Heritage annuities unit) of £1.2bn in the first six months of 2022, compared with net outflows of £2bn a year earlier. But overall assets under management shrank by £21bn to £349bn and operating profit before tax fell to £182mn, from £327mn.

Under Foley, M&G has used acquisitions to build a presence in the UK wealth market, an area that provides higher profit margins than traditional asset management or annuities.

Its flagship PruFund range, which controls assets of £57bn on behalf of 455,000 customers, is expanding with the launch of a new “sustainable” series branded PruFund Planet and with products in Europe. M&G is also building out its higher-margin private assets business.

But Foley’s successor will inherit a company that has lacked strategic direction and suffered poor performance, and has yet to bring its wealth management ambitions to fruition.

“M&G could just carry on, paying out a large dividend,” said the industry veteran. “But it has a lot of reputation to rebuild.”

Another insider cautioned against dithering: “Hand on heart, if someone said would you sell M&G at the price it is today, I’d say yes because it will probably be worth less in a year or two.”

Additional reporting by Chris Flood in London