By JAMES BRADSHAW
Tuesday, February 13, 2018
Bank of Nova Scotia has added much-needed clout to its asset-management offerings for institutional investors, striking a deal to buy investment firm Jarislowsky Fraser Ltd. for $950-million.
After 62 years in business, Jarislowsky Fraser is one of the largest independent fund managers in Canada, with $40-billion in assets under management. Founded by outspoken, self-made billionaire Stephen Jarislowsky, its strength is in managing approximately $27-billion in assets on behalf of pension funds, corporations, foundations and endowments, making it a rare commodity in a consolidated industry.
The tie-up will create Canada's third-largest asset manager with a total of $166-billion under management, trailing only Royal Bank of Canada and Toronto-Dominion Bank. More importantly, it satisfies Scotiabank's long-standing ambition to shore up its relatively small institutional investing business. For some time, executives have been signalling their desire to diversify the bank's wealth-management capabilities.
The deal is also the latest signal that Scotiabank is flush with capital and hunting for acquisitions, after chief executive officer Brian Porter spent large parts of his first four years at the helm turning over the executive ranks, increasing spending on digital technology and disposing of non-core assets. In the past three months, the bank has also agreed to pay $2.9-billion to buy control of Banco Bilbao Vizcaya Argentaria SA's subsidiary in Chile, as well as Citigroup Inc.'s consumer and small business operations in Colombia.
"The strategy hasn't changed in that we're looking to ensure that we can cover all our customer bases, whether it's in Canada or internationally," Glen Gowland, Scotiabank's head of asset management, said in an interview. Mr. Porter said in a news release that the deal "also enhances Scotiabank's ability to serve the banking, estate, and trust needs of high net worth families who are the clients of Jarislowsky Fraser."
The investment firm will keep its headquarters in Montreal, its management team intact and enough autonomy to run the day-to-day business with its own investing philosophy.
At the age of 92, Mr. Jarislowsky - the chairman emeritus known for his sharp tongue and crusades to improve corporate governance as well as a keen mind for investing - intends to stay involved. "If you don't work, you die," he said in a recent interview with management magazine Gestion. But Mr. Jarislowsky has been "thinking about the future," said president Pierre Lapointe, and the firm has entered an "inflection period" when it needs new ways to grow. "You reach a point where you've got to partner up with somebody with deep pockets that's got distribution channels, not only nationally, locally, but also internationally."
Mr. Jarislowsky could not be reached for comment.
Jarislowsky Fraser has had some struggles. The firm underwent a major management shakeup in late 2012, after president Len Racioppo and vice-president Marc Trottier left to start their own firm. At the time, the firm's assets under management had fallen from about $60-billion to $37-billion. But since then, a four-person executive committee led by Mr. Lapointe has steadied its fortunes and it is growing again.
Scotiabank will pay the purchase price mostly by issuing new shares. Jarislowsky Fraser's partners - who unanimously approved the deal - can earn another $56-million in stock if the firm meets performance targets and executives have been given incentive to stay. After the deal closes, which is expected in the bank's third fiscal quarter, Scotiabank plans to offset dilution from issuing shares by buying back a similar number.
Canaccord Genuity Group Inc. analyst Scott Chan thinks the deal "comes at a fair price based on past transactions." Ratings agency Moody's Corp. deemed it "credit positive."
Scotiabank has been seeking to grow its wealth-management business for years. Its last major acquisition in the field was DundeeWealth Inc. in 2011, for $2.3billion. But asset managers with robust institutional client lists are hard to come by, with knowledge, relationships and brands that are more easily bought than built.
"When you look at the success that Jarislowsky Fraser has had over the 62 years, that's certainly not something that you can do very quickly," Mr. Gowland said.
At a recent Scotiabank investor day, Canadian banking head James O'Sullivan said he wants wealth management to generate 15 per cent or more of the bank's total earnings, compared with 12 per cent now. "We will continue to invest in the wealth business," he told investors. "Our current business mix, as you know, is primarily in Canada with a retail focus."
Of more than $100-billion managed through its 1832 Asset Management L.P. subsidiary, nearly 80 per cent is made up of retail funds. By contrast, Scotiabank's business catering to institutional and ultra-high-networth clients has lagged. "We really didn't have a robust offering there," Mr. Gowland said.
Scotiabank isn't expected to spend much energy cutting costs at Jarislowsky. Instead, its aim will be to cross-sell products through Scotiabank's branches and commercial relationships.
"This is definitely a revenue growth play," Mr. Gowland said.