Federated’s $350 million bet on socially responsible investing
Federated Investors has been looking at Londonbased Hermes Investment Management for six years. So it’s easy to understand why Federated president and CEO J. Christopher Donahue can’t wait to combine his company, a leader in the money market fund business, with Hermes, a leader in the growing business of helping investors identify companies with sound environmental, social and governance principles.
The Downtown investment firm announced this month it will pay about $350 million to acquire a 60 percent interest in Hermes from BT Pension Scheme, one of the United Kingdom’s largest defined benefit plan operators.
If regulators approve, the transaction will enable Federated to bolster its portfolio of offerings and expand its business into markets where Hermes operates.
“On the global equity side, on the private equity side, on the infrastructure side and on the ESGfocused side, we don’t have those products like they do,” Mr. Donahue said in an interview last week.
ESG — environmental, social and governance — investors use those criteria as well as financial data to evaluate a company’s performance. The style is sometimes called sustainable investing or socially responsible investing.
However you label it, interest in the approach is growing.
Globally, nearly $23 trillion in assets were managed based on ESG principles in 2016, according to the Global Sustainable Investment Alliance. That’s up 25 percent since 2014, according to the alliance of sustainable investment groups.
The U.S. Department of Labor may have thrown some cold water on that growth. Last week, the agency warned investors to “avoid too readily treating ESG issues as being economically relevant” and to put the economic interests of pension plans first. That walked back guidance provided by the Obama administration.
who these people were, how they functioned, their culture,” he said.
Hermes will open up new geographic markets for Federated, according to Moody’s Investors Service credit analyst Rokhaya Cissé. She said Federated will be able to tap a client base in Europe and Asia.
“This transaction should improve Federated’s business diversification and growth prospects against negative secular trends such as fee pressure and investor preference for lower-cost investment products,” Ms. Cissé wrote in a note to clients.
In recent years, investors have flocked to passive funds — which buy and hold stock market indexes or other baskets of securities — in order to reduce costs. That has hurt firms like Federated, whose portfolio managers actively buy and sell securities in an attempt to outperform the market despite the higher costs of active investing.
Hermes will increase the assets Federated manages to about $442 billion.
The London firm also advises another $454 billion in assets through its Equity Ownership Services unit. Investors hire EOS to engage with management, trying to persuade companies to increase investor returns by adopting environmental, social and governance criteria. Mr. Donahue believes some U.S. investors will be interested in that service.
Under the terms of the transaction, BT Pension Scheme will retain a 29.5 percent interest in Hermes and Hermes’ management will own the remaining 10.5 percent stake. Federated will have the option of increasing its stake in Hermes over the next three to six years.
Pending regulatory approvals, Federated hopes to complete the transaction in the second half.