Fund mergers – why HIP and Prime make strange bedfellows

When it comes to fund mergers, it is said that industries can’t or won’t mix, pointing to the apparent cultural difficulties of a hypothetical merger of, say, CBUS and HESTA.

But apparently jackaroos and healthcare workers do mix, if the recently announced merger of Prime Super and Health Industry Plan is anything to go by.  So is the conventional wisdom wrong or has it been overcome in this case?

At first glance this looks like an odd merger.  Prime Super refers to primary industries, and the fund positions as the super fund for regional and rural members.  HIP, on the other hand, positions as a fund for health and related industries, with a private healthcare flavor.  Notwithstanding that healthcare is also important in the bush, and HIP no doubt has plenty of members in regional areas, the overlap appears limited.

HIP is too small to make the large funds universe covered by the Tria Super Funds Review, but its key data for the 2013 year is as follows:

– Net assets $707m
– 
Inflows $69m
– Outflows $56m

So you can see why HIP would want to merge.  Quite apart from the regulatory preference for scale and the increasing difficulty for small funds in keeping up with spend on compliance and delivering new products and services, HIP is in a marginal position.  It’s small, and with net inflow of just $13m, it’s going to stay small.

But why would HIP select Prime as its merger partner?

The stated benefits of the merger basically come down to economies of scale, and better products and services.  Those objectives are fair enough.  But surely more logical partners would have been HESTA, or First State Super (which having absorbed Health Super, has a large healthcare membership as well).

Prime ranks no.71 in Tria’s universe of 80 large super funds, with net assets of $1.5bn and net inflow of $93m.  It’s in a healthier position than HIP, but if you wanted scale, and the benefits of scale, it is dwarfed by HESTA (net assets of $24bn) and even more so First State Super ($40bn).

We didn’t work on the merger, so of course it may well be that the projected benefits to members are indeed compelling.  But from the outside, it’s hard to see that a newly combined fund of only slightly more than $2bn is an optimal solution to the challenges of scale.  It’s notable that two other regional funds of about that size apparently decided it wasn’t sufficient, and themselves merged last year (ASSET into CARE and LGSS SA into Statewide).

So perhaps the answers lie elsewhere.  There was an interesting reference in the accompanying media release: “we will not be so large that we will lose focus on what is important to our members and employers.”  This indicates a view that merging into a much larger fund would be disadvantageous to members in some form, although why the needs of HIP members would be very different to the members of larger healthcare-related funds is not clear to us.

On the other hand, merging into a much larger fund would probably have been disadvantageous to other stakeholders such directors and senior management, with the likely loss of board and management roles.  And that’s one of the happy outcomes of this merger – all the directors keep their seats on a board which will almost double in size, the CEO of Prime Super retains his role, and the CEO of HIP becomes CIO of Prime.  Not a great look for the economies of scale story.

One of the inherent issues of the not-for-profit sector is that the market for corporate control does not operate. This has some positives, but the flipside is that the discipline of the market is not felt as directly by boards.  In the absence of that market pressure, fund mergers which make most sense are a self-sacrificing act, particularly on the part of the smaller fund.   A self-sacrificing act usually involves some actual sacrifice – and that needs courageous CEOs and boards who are prepared to do so.

Posted In: Trialogue