Deal focus: KKR’s Colonial First State breakthrough

Kenneth Hayne, the high court judge tasked with probing misconduct in Australia’s financial services sector, was brutal in his assessment. Hayne’s Royal Commission report – published early last year – advocated stringent reforms in compensation, customer education, regulation, and accountability to eradicate a perceived culture of greed. A wave of divestments was expected to ensue as the big four banks responded to rising compliance burdens by exiting non-core business areas.

Various assets were put on the block across insurance, wealth management, financial planning, and asset management. Strategic investors have been the most prolific buyers, but last week private equity made a breakthrough as KKR agreed to acquire a 55% stake in Colonial First State (CFS), the wealth management arm of Commonwealth Bank of Australia (CBA). The deal values the business – a leading provider of superannuation and investment products – at $3.3 billion ($2.1 billion).

While the Royal Commission gives the transaction some context, an earlier Productivity Commission report on Australia’s superannuation system is equally instructive. It found numerous inefficiencies in the management of the A$3 trillion retirement savings pool. Problems included unintended multiple accounts, product ranges that didn’t meet members’ needs, a lack of information on investment options, and insufficient use of technology in product design and service delivery.

“We recognize it’s a competitive market and so for this business to continue to grow as a standalone business – and to attract new customers, not just grow with existing customers – it must evolve. You should expect to see a lot of accelerated investment in digitization and improving the customer experience through technology,” says David Lang, head of Australia private equity at KKR.

Customer retention is a key consideration in the country’s superannuation industry given accounts are essentially portable. But KKR and CBA’s plans for CFS bear similarities to the Productivity Commission report in areas beyond technology. Simplified product offerings, more choice, competitive pricing and better access to education, support and self-service tools are all flagged up.

CFS has one million members and about A$135 billion in funds under administration. According to SuperGuide, it operates Australia’s second-largest retail superannuation fund, trailing MLC. CBA initially planned to sell CFS and its asset management business together. When this didn’t pan out, it ran a process for CFS alone and drew interest from multiple parties.

“We mapped out the industry and created a detailed matrix of where we believe we could be value additive and genuinely help platforms invest and scale. CFS kept coming back to us as the high-quality name,” says Lang. “We were looking for a strong alignment of interest with all stakeholders and that really came together, with CBA, in the months leading up to signing.”

KKR will apply lessons learned from Soderberg & Partners, a Swedish wealth manager it acquired last year, in supporting CFS. Beyond that, there might be further acquisition opportunities in Australia if consolidation accelerates within the superannuation industry. Lang declines to be drawn on the subject. “We’re closely observing how some of these trends will play out, but ultimately, our focus is on the opportunity for CFS to be a strong standalone market leader,” he says.

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• Topics
• Buyouts
• Australasia
• Financials
• Australia
• KKR
• Financial Services