Amid the flurry of consolidation activity among defined-contribution-plan record keepers over the past few years,
Blackstone Group's
acquisition of Aon Hewitt's record-keeping business, announced Friday, stands as an outlier.
Whereas
high-profile acquisitions since 2014 by Great-West Financial, Aegon, John Hancock Financial, OneAmerica Financial Partners Inc. and Ameritas Life Insurance Corp. have added scale to existing record-keeping platforms and provided access to different market segments, Blackstone is a newcomer to the record-keeping market.
“It's inherently a new type of transaction,” according to Brooks Herman, head of data and research at BrightScope Inc. “We're not seeing a record-keeping business expand. This is a new record keeper coming into the field.”
Aon Hewitt is the fifth-largest record keeper of DC plans by assets, with $377 billion under administration as of Sep. 30, 2015, according to
Pensions & Investments data.
“I was a little surprised by the deal in that I assumed Aon Hewitt already had sufficient scale to be successful,” Neil Bathon, managing partner at FUSE Research Network, said.
Consolidation has been steady among providers as they try to gain scale to compete in a market environment of compressing fees and tight margins. Executives at Aon Corp., which also has business operations in areas like risk management, insurance and employee benefits consulting, alluded to these financial realities in the company's recent fourth-quarter earnings presentation.
“This is a lower revenue growth, lower margin business for us,” said Christa Davies, Aon's chief financial officer, according to a transcript of the call with analysts. “We believe Aon post-this-transaction will be higher revenue growth, higher margin, and a higher return on capital with higher free cash flow growth.”
Of course, that begs the question, why is Blackstone buying a low-profit book of business?
Mr. Bathon said Blackstone must believe it can perform a mix of the following: fix something in Aon Hewitt to improve margins; spin off something to provide the cash to improve growth for the remaining pieces; and add or combine something to improve margins.
Mr. Herman has his eye on the latter, with the record-keeping platform being a potential new channel to sell Blackstone investments, primarily private-equity funds.
“The thesis is it has to be a distribution game,” Mr. Herman said.
Private equity in 401(k) plans “is close to nonexistent,” he added. “Is this the big breakthrough everyone is waiting for?”
For most asset managers, the DC market represents a sort of gem because participant assets are “sticky,” meaning investors tend not to shift around assets frequently and funnel new money into investments with each paycheck.
Executives at Blackstone, which is among the
top three largest managers of private equity assets, as well as executives at other private-equity behemoths such as KKR and Carlyle Group, have
made clear their interest in tapping the 401(k) market.
'VAST, UNTAPPED TERRITORY'
While a Blackstone executive wasn't immediately able to comment for this story,
remarks made by Tony James, president and chief operating officer at Blackstone, during an analyst call last month signaled such an interest.
“The really big, vast, vast untapped territory is the $27 trillion that's in 401(k)s that we as an industry don't sell anything into,” Mr. James said. (401(k) plans
held roughly $5 trillion in assets at end-2015.)
“And if we could open up those pools of capital to our kind of investing I can assure you that retiring Americans will be vastly better off both short term and long term,” he added.
Mr. James quite publicly dipped his toes into the retirement policy debate within the past year or so, in promotion of a
proposal for a new national retirement system that would replace 401(k) plans. He developed the concept along with Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School and an ardent 401(k) critic.
There are several headwinds to private equity breaking through in DC plans, namely the higher fees typically associated with these alternative, illiquid types of investments, a general shift away from record keepers' proprietary funds, and a push by employers to simplify plans from a participant's standpoint, Mr. Herman said.
Aon Hewitt and Conduent Inc. (formerly Xerox) are the only two record keepers among the 10 largest that don't currently offer proprietary funds to plan sponsors. Some believe the actual record keeping of assets by vendors is only a means to an end, in order to
get their proprietary funds in front of participants.
The concept du jour for private-equity managers, and managers of other illiquid, alternative investments such as direct real estate, is to create a product that fits as a small portion of a custom target date fund, representing maybe 5% of the overall allocation.
Pantheon Ventures is an example of one private-equity company that has been actively shopping around such a product.
Custom TDFs have received some uptake, primarily among large DC plans. Roughly 22% of plans offering a TDF use a custom-built fund, according to a Callan Associates survey, respondents to which were mainly plans with greater than $100 million in assets.
Aon Hewitt primarily caters to large DC plans — the average size of the
roughly 450 plans under its administration is greater than $800 million. Roughly 92% of its overall DC assets are held in corporate 401(k) plans.
