No longer perpetually the same

FIRING people is an unpleasant business. That’s why, in the stony vernacular of financial markets, they call it ”taking costs out”, or ”driving efficiency gains”. People are ”headcount” or, even more bloodless, ”costs”.

Inexorably, companies that become fat and lazy either die, are taken over and gutted, or are subject to internal restructure at the behest of shareholders and new management.

This is where Perpetual finds itself, with some urgency. As revealed by The Age last week, the corporate turnaround merchant Gary Weiss has been plotting a restructure at the blue-chip investment house alongside a small band of activist shareholders.

The Age did, it should be said, break the story a little early and upset Weiss’s plans to gather more shareholder support before delivering a courteous ultimatum to the board. Whichever way it goes – and Weiss is surely not the only one salivating over the potential to unlock value from the venerable finance house – Perpetual chairman Peter Scott and his colleagues know that unless they swing the axe, the axe will be swung at them.

They are at least trying to look busy. After less than a year in the job, Perpetual chief executive Chris Ryan was chopped two weeks ago to be replaced by former private wealth and retail boss Geoff Lloyd, who has a mandate for change. But how much change can he bring from within?

This chop-or-be-chopped scenario facing Perpetual’s board and management has put the spotlight on ”headcount reduction”. Perpetual can talk ”efficiencies” until the cows come home but the only thing to satisfy rationalists and rebel shareholders will be blood, buckets of the stuff.

You can bet that Weiss, a former 2IC of Sir Ron Brierley at GPG and no stranger to bloody corporate battles, has examined the paragon of profitability in funds management, Platinum Asset Management. Perpetual might be the blue chip of the sector but Platinum is something else altogether: the envy of the funds management world despite its less than glamorous portfolio returns of late.

Here is a company that made a profit before tax last year of $213 million on revenue of $264 million.

Platinum’s founder and 58 per cent shareholder, the brilliant and fiscally tyrannical Kerr Neilson, runs a tight ship. He, or rather his wife Judith Neilson in whose name the stock is held, makes well over $1 million a week.

Rivalled only by Mark Nelson’s Caledonia Investments and the three partners of Maple Brown Abbott, Kerr Neilson runs the market’s premier funds management business – from the perspective, that is, of long-term performance and profitability.

Neilson is the king of funds managers, rigidly disciplined and brutal on costs – not to mention the quintessential market beast as his investment track record and the timing of his own float attests. On listing at $5 a share, in May 2007, he was worth $2.9 billion and his company $4.9 billion on the sharemarket on day one.

For Perpetual, or any other contender, it is impossible to mimic the Platinum model with precision – Platinum has its own historical peculiarities, which deliver a product premium – but the comparison is awesome and instructive.

It is not a direct comparison, since Platinum is a pure funds management operator and Perpetual has a trust business and a few other odds and ends, but the numbers tell a vivid story. Perpetual is the bigger, in terms of funds under management and in terms of revenue. It has some $23 billion of FUM, compared with Platinum’s $16 billion.

Perpetual’s revenue is almost double its competitor’s at $513 million versus $264 million for Platinum. Yet, despite the far bigger business, Platinum commands a market capitalisation of $2 billion versus $935 million for Perpetual, before today.

This superior market rating is all about profitability.

The real schism between the two lies in staff costs, which run at $225 million for Perpetual, before equity remuneration, which is almost $19 million.

Platinum, in stark contrast, runs staff costs at a mere $19.9 million – a 10th of its rival when you add in equity remuneration at almost $6 million. So, while Perpetual’s business is 1½ times the size it has 10 times the staff costs.

This is back-of-envelope stuff but seeing Perpetual has some 1400 staff and Platinum 60 or so, the average salary is roughly $175,000 against $415,000. Neilson pays a poultice but he bids for the best people he can find and, by all accounts, nobody feels underworked.

There is no sales force at Platinum, little spent on marketing and advertising, no financial planners to entertain. Perpetual, on the other hand, spends up.

The size of its workforce is not just an opportunity to reduce costs for corporate raiders. This is a Sydney institution, which puts a lot of food on a lot of tables. It will be immensely difficult for anybody, especially new man Lloyd – being an internal appointee – to sack hundreds of people with no damaging reprisals.

Apart from the inevitable white-anting out in the marketplace among planners and the like, there is the matter of culture and consensus in the community, not to mention the shareholding base. Clearly, underperformance will not be tolerated forever. This is about timing. It is a matter of ”how” and ”when”, rather than ”if”.

KKR, the infamous American private equity vulture has already had a shot, its $40-a-share bid spurned by the board. The stock has halved since.

Perpetual’s disparate share register also conspires to make its restructuring a long-term gain. There are few large voting blocks to be lobbied in any battle for board control.

Conservative institutions such as Argo and AFIC speak for relatively small parcels but the other institutions are somewhat conflicted. Perpetual is by no means the only fund manager with too much flab.

Many of the blue-chip funds’ managers have big, soft, well-lunched underbellies. Now in the second decade of compulsory superannuation, this is a gravy train like no other. There are more ”trails” coming out of Perpetual than the Blue Mountains.

The star funds managers and others are even paid fully franked dividends on unvested stock equivalent to almost 8 per cent of the group’s listed shares.

Indeed, the big professional investors toting major stakes in Australia’s leading companies might be well versed in telling other people how to run their companies efficiently, but when it comes to themselves, all the adages apply.

Will its funds management peers, will the heart of Sydney’s financial community for that matter, countenance the quick-fire sacking of Perpetual? Or will the status quo prevail in a long, drawn-out affair?