US investment giant Federated Investors has swooped on UK asset manager Hermes Fund Managers, acquiring a 60% stake from BT Pension Scheme (BTPS) for £246m (€285m).

Under the terms of the deal, BTPS will retain 29.5% of the business with the remainder held by certain members of Hermes’ management team. The combined company will have almost £330bn of funds under management.

J Christopher Donahue, president and CEO of Federated Investors, said the deal represented a growth opportunity for both companies, as the UK asset manager’s range of investment strategies would complement Federated’s existing expertise in equity, fixed income and cash management. 

“In addition, Hermes’ capabilities and client relationships in the UK, the rest of Europe and the Asia-Pacific region significantly broaden Federated’s distribution capabilities,” Donahue said. 

Hermes started life as BTPS’ in-house asset manager but in recent years has expanded its client base significantly. It now has 550 clients in wholesale and institutional markets, offering 16 differentiated investment strategies including environmental, social and governance (ESG) investing, real estate, infrastructure, and private equity. 

Hermes has been actively building up its expertise in ESG investing in recent years.

In addition to managing £32bn of funds, Hermes advises on £336.1bn of assets through its Hermes Equity Ownership Services (EOS) stewardship division.

Saker Nusseibeh, CEO of Hermes Investment Management, said the tie-up would allow Hermes to gain greater international reach. 

“Through this opportunity, the same Hermes investment and stewardship teams will remain dedicated to our investment philosophies in London, while our products and services gain greater exposure through the network of 8,500 financial intermediaries and institutions that already do business with Federated,” Nusseibeh said.

A source close to the deal said the move represented a “natural evolution of Hermes’ business and ownership”. The person said the decision to expand the EOS division in particular had helped turn around the business, in addition to the focus on ESG investing, real estate and infrastructure.

M&A in the UK

UK asset managers have faced growing pressures on management fees in recent years, as investors have demanded greater accountability over costs. 

“In the investing world, big has suddenly become beautiful,” said Amin Rajan, CEO of asset management research firm CREATE-Research. “This merger makes sense for both parties, as it enables them to expand their respective footprints.”

The acquisition should also be seen as part of a wider trend of consolidation across the investment management sector, Rajan added.

“We have seen a large amount of mergers in the last two years, with last year being the highest in terms of the size of assets involved,” he said “Now that we’ve entered a low return environment, more and more asset managers are starting to realise that size could be major factor for both growth and survival.”

At £49.3bn BTPS is one of the UK’s largest pension funds. It is currently grappling with an estimated £14bn shortfall.