Keeping it simple 

Global Investor looks at the key criteria for determining whether a transition is ‘complex’ – and the additional steps required to manage such transitions.

This article is part of the 2023 Transition Management Guide, which can be accessed here.  

The range of events where institutional and professional investors - including asset managers - engage the services of the transition management community continue to expand in both size and complexity.

We have previously explored how complexity comes in a variety of guises: complex trading strategies, complex exposure management challenges, liquidity challenges, or operational stakeholder management in a significant platform change.

Complexity is particularly driven by whole of fund restructures across asset classes, emerging and frontier markets which drives liquidity constraints to platform complexities across different beneficial owners – all of which contribute to trading, exposure and operational risks which need to be managed explains Ashish Patel, EMEA head of transition management at Citi.

“The primary value-add of transition managers is to act as a strategic partner with the client to understand the complexities, model various scenario analyses and provide an optimal solution tailor-made to the respective client,” he says.

Stuart Zanchi, senior multi-asset transition manager at Citi refers to the transition management mantra that every transition is unique and adds that this plays out in determining complexity where multiple and often overlapping factors can add challenges to a project. Liquidity, value, asset class, skews, involved parties, market conditions and ownership structure are just some examples of these.

Early engagement

“A knowledgeable, experienced and trusted transition manager is required to oversee these factors, one that not only understands the potential pitfalls but can investigate and address any new obstacles,” he says. “We are seeing an ongoing trend from the more understanding clients engaging with their transition manager much earlier in complex projects and higher up the chain to help determine timing and project structure.”

There are many different criteria that could give rise to calling a transition complex. Not just size, but the blend of instruments and mandate types involved, the operational complexity of having to support multiple in specie transactions, the liquidity profile, and the account structure.

“Often we see multi account or multi custodian events, which I guess leads into the number of stakeholders that are involved,” says Paul McGee, head of portfolio solutions EMEA, Macquarie Capital. “You could be dealing with multiple investment managers and custodians across a trading timeframe that could extend to weeks or even multiple phases lasting months, rather than a transition that is completed in a few days of trading.”

Tax considerations add to the complexity - where there are many different jurisdictions there are many different ways that tax either applies or where exemptions could be applied.

“It is not unheard of to have events that include all of those criteria, which can be defined as extremely complex and adds to the length of time that you need to plan for an event,” says McGee. “It is also not uncommon to be planning a transition for months rather than just days or weeks, which impacts the resource commitment you need to make on these types of transitions and demands a highly experienced team.”

Multiple stakeholders

He suggests that defined contribution events are generally more complex because they have multiple stakeholders and additional considerations over and above a standard defined benefit transition.

According to McGee, the transfer of local authority assets into pooled vehicles usually falls into the bracket of being highly complex. More often than not they have many stakeholders and different mandate types being redeemed and rather than just the pooling provider being the client, there are many underlying clients to a pooling transition.

“A fund launch will generate a lot more lead time involving the regulator and involving who is going to invest and agreeing on a common date,” he adds. “So they generally have longer lead times and exhibit a lot of those characteristics that make them more complex.” 

Outsourcing of the chief investment officer role is a major growth area for many transition managers.

“For us, it is just another client type to support and the same considerations apply as when we talk about pooling transitions or complex transitions,” says McGee. “They will generally be either launching a new fund or swapping out one set of asset managers for another, probably including a number of stakeholders and needing a lengthy planning period and potentially a lengthy implementation period. It is not game changing in terms of its nature, but it certainly falls into the more complex bracket.”

Unique events

Each event is unique but there are certain elements that contribute to moving a transition event move up the complexity curve. The least complex deals are domestically focused, operating in a single market for domestic equities or fixed income. A little further up the curve is international equities, and moving up the curve a bit further are emerging markets and then global markets.

James Woodward, global head of State Street’s transition management business suggests that the next level of complexity might be a multi-asset class deal. “The most complex types of deals that we undertake would be large multi-asset class, whole of fund type restructures or merger events,” he adds.

These are the fundamentals steps, but then there are extra dimensions and the first of these would be liquidity. If there is low liquidity in a particular asset class, that can cause it to move up the complexity curve. Some of the most complex transitions can be two-sided emerging market restructures and the reason for that is because there is complex scheduling and management of cash flow where markets have different cycles and rules.

“Another added dimension to complexity comes when you are dealing with, for example, unit trusts versus pooled unit trusts or pooled versus segregated-type mandates if you are dealing with a segregated managed manager to move positions or portfolios,” adds Woodward.

Finally, the number of managers involved can add complexity. If on the legacy side there is just one manager and it is the same on the target side that is a lot easier than if you have 30 managers on each side.

Pooled Complexity

Pooled events tend to be a little more complex when the assets are with a different custodian or there are issues with moving positions with a change of beneficiary ownership.

Complexity could refer to operational complexity (as was observed in the case of the pooling of the local government pension schemes in the UK) or structural complexity, for example if there was a need to move assets from one account to another and the order was too large or illiquid, raising the risk of market impact or not being able to complete a trade.

That is the view of Cyril Vidal, head of portfolio transition solutions at Goldman Sachs, who notes that complexity also increases where clients have certain sets of objectives, perhaps where they want to absolutely control the cost of their transition or the timeline.

In this case it is necessary to talk to the client to help them understand what they need to let go of in order to achieve the overall best results.

“Outsourced chief investment officers would have a greater tendency to use transition managers than other investors because they are probably closer to their topics and more focused on performance,” says Vidal. “The fact that you have larger pots of assets runs professionally and optimised is good news for transition managers.”

The outsourced chief investment officer is presenting itself as a new client type with very specific requirements, which requires the transition manager to develop new skills to handle the levels of complexity the client type presents suggests Andy Gilbert, EMEA head of transition client strategy, BlackRock.

“There needs to be strong alignment between the transition manager and the outsourced chief investment officer - in any restructure, the transition manager is there to help fulfil the fiduciary obligations of the latter,” he explains.

Working together

The successful transition managers of tomorrow are those who can work alongside clients and their outsourced chief investment officer to manage change across the whole portfolio, rather than just a subset of assets adds Nick Hogwood, EMEA head of transition management at BlackRock.

Generally speaking complexity comes with multiple asset classes, multiple managers, a larger number of stakeholders (both internal and external) and hedging or risk management requirements agrees Chris Adolph, director of implementation services EMEA, Russell Investments.

“A key requirement as events become more complex is a greater focus on project and risk management. We believe a single point of contact for the client - and all stakeholders during an event - reduces the risk of miscommunication, which is the biggest non-investment related risk in managing transitions.”

The growth of outsourced chief investment officers has led to an increase in potential transitions in the sense that a change in the management structure of a company or a fund often leads to a change in investment strategy and thus often to a change in investment managers.

“These events though are typically managed by the outsourced chief investment officer provider themselves and any subsequent changes they may make, rather than in the legacy state where the fund might put each of those events out to tender,” concludes Adolph.