AMP Capital has experienced recent outflows and the retention of its management rights of one of its major property funds is under attack from rival property manager Dexus. But this represents only one of the fronts on which AMP is fighting.
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The plan to demerge the private markets business (which accounts for the lion’s share of AMP Capital’s value) will orphan the remainder of the AMP.
That stranded rump is AMP’s wealth business - which is better known as the unit that contains the financial advisory business which was the subject of the fees-for-no-service scandal highlighted during the financial services royal commission.
This division’s business model was seriously undermined by regulatory changes in the wake of the royal commission and when combined with the brand injury it sustained,its future earnings capacity has been damaged.
Wealth is also the division inside AMP that is the subject of numerous class action lawsuits - the potential liability for which has not been quantified in the company’s latest annual report.
Two class actions relate to financial disclosure,another two concern fees charged to super fund members,yet another has been brought by AMP’s authorised financial advisers and another is the result of advice provided on insurance.
Together they amount to a hefty poison pill for any suitor that was attempting to invest in the company.
They also cast a long shadow over the value of AMP - and in the event of a demerger an even longer shadow over the wealth business which is saddled with the potential liability.
It is difficult to see how AMP can proceed with the demerger unless these legal actions are settled.
Once demerged AMP Capital private markets business will seek to sever its ties with the AMP brand and stem the funds’ outflows.
The company has made the decision to demerge as a strategy of last resort. Previous attempts to sell the company as a whole failed as did selling AMP Capital as well as a joint venture. After nine months of uncertainty,the only buyer that took the bait,Ares,didn’t get hooked.
As Macquarie’s research team noted in a report to investors on Monday,“We now have a potential demerger and likely strategy reset in financial year 2022,further delaying the ultimate recovery in AMP earnings. The current situation at AMP has resulted in elevated flow and earnings risk in the previously safe-haven division of AMP Capital.
“While the recently announced joint venture for AMP Capital valued this division at up to $3.5 billion,the realised value could be less than half of this,based on our analysis.”
This is the challenge that AMP’s next chief executive,Alexis George,will face when she puts her feet under the desk later in the year.
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