Somerset Capital is exploring a sale in a deal that would provide a windfall to business secretary Jacob Rees-Mogg, who co-founded the boutique fund manager.
Three people familiar with the situation said talks to sell the firm, which manages about $5bn, were being held as chief executive Dominic Johnson prepares to step down ahead of a potential move into politics.
Johnson, a former Conservative party vice-chair who co-founded Somerset with Rees-Mogg 15 years ago, will be replaced by current chief operating officer Robert Diggle, according to two people familiar with the matter.
Several options are on the table, including a management buyout or a merger with another asset manager, these people said.
Johnson told the Financial Times that Somerset hired advisers Spencer House earlier this year “to help us manage our capital structure”.
He added: “There are now a number of partners at Somerset who are now no longer active in the business. Our aim has always been to be an independent, employee-owned emerging markets boutique and Spencer House are helping us with ways of continuing to achieve this.” Spencer House declined to comment.
Following Johnson’s departure, around half of the equity in the business will be held by retired partners who are not involved in the day-to-day running of the business, including Rees-Mogg.
Transferring their ownership to an external party or to current management of the firm is a way to incentivise the next generation, said a person familiar with the matter.
One potential buyer is Emso Asset Management, which like Somerset specialises in emerging markets, according to one of the people. Terms of any deal have not been finalised and talks could still fall apart.
Emso, with just under $6bn under management and offices in the UK and US, was founded in 2000 by former Salomon Brothers emerging markets banker Mark Franklin. Emso declined to comment.
The deal is being negotiated at a fraction of the price Somerset was valued at three years ago, the people said, when Somerset explored a tie-up with Artemis Investment Management at a mooted valuation of £70mn to £100mn. Artemis is majority owned by US-based Affiliated Managers Group.
Artemis declined to comment. AMG did not respond to a request for comment.
Somerset has since endured a period of poor performance and falling profits amid a sell-off in emerging markets that has hurt the firm and peers, including Abrdn, AMG-owned Genesis Investment Management and Ashmore. Somerset’s assets under management have roughly halved from $10bn at its peak in 2018.
Profits at Somerset Capital Management LLP fell by over 35 per cent to £9.7mn in the year to the end of March 2021, according to its latest accounts.
A deal would mark the latest example of consolidation in the fund management industry, where volatile markets have compounded a multiyear squeeze on margins and left groups trying to find ways to share costs and reduce overheads.
Somerset, which runs money for retail and institutional clients, said in the accounts it expected profits to decline still further in the coming year, citing increased investor caution due to the coronavirus pandemic, as well as a fall in assets under management and fees. The benchmark JPMorgan emerging market bond index has fallen over 18 per cent so far this year.
Rees-Mogg stepped back in 2010 to be an adviser to the company when he became an MP; then in 2019 he resigned from his advisory role at Somerset when he joined then prime minister Boris Johnson’s cabinet. He was appointed business secretary by prime minister Liz Truss earlier this month.
Johnson owns around 15 per cent of Somerset, while Rees-Mogg’s stake is in the low to mid teens, the people said.
Johnson, a vice-chairman of the Conservative party between 2016 and 2019, will remain an adviser to Somerset’s executive committee. He is also a non-executive board member of the department for international trade.
Additional reporting by Jim Pickard and George Hammond