Transition management events often involve huge amounts of assets and the service providers have very different capabilities – so it is of critical importance to choose the right partner to carry out each event. Due diligence typically starts with information gathering, which consists of a questionnaire covering aspects such as technology, trade modelling and equity execution. This is supplemented by on-site due diligence meetings, where the questionnaire responses can be verified and the systems and applications used by the transition manager assessed.

Justine Anderson, global co-head of transition management at BlackRock, said that one should not assume that a transition manager has undergone a thorough due diligence process by others, even if it has previously handled multiple mandates. “We always recommend that clients undertake at least the same degree of due diligence as they would for an investment manager,” she said.

The Request-For-Proposal (RFP) process is the standard approach, where clients send out a detailed prerequisite set of questions to a number of vendors.

“This will cover issues such as the nature of the vendor’s business model and process, the volumes they have managed and their performance versus execution benchmarks,” said Craig Blackbourn, head of transition management for Emea at Northern Trust. “Clients will also want to find out more about the vendor’s operational controls and risk and compliance processes.”

Once this process has been completed the client will undertake a due diligence visit, which involves talking to the people who would be managing their event to check there is segregation of roles and responsibilities. Systems should also be tested – clients can ask the vendor to demonstrate how the product works and what tools are used for portfolio analytics. The next step may be a formal presentation, where the vendor is questioned by client.

Many of the larger institutions – sovereign wealth funds, fiduciary managers – do their due diligence on a three to five-year cycle with an annual updates including statistics for the previous 12 months, said Blackbourn. “In the current environment, given the decline in the pool of available providers over recent years, clients are tending towards selecting a panel of two or three. We have completed more RFPs this year already than in the whole of 2016.”

The role of consultants

Smaller or less experienced clients will typically use the services of a consultant to help them with their selection. The larger consultants carry out their own research and have databases of events that have been completed.

Consultants offer various levels of service – in some cases they will guide the client through the process and then step away, whereas in others they will remain involved and will want to see daily project management updates, the pre-trade before going out to the market and the post-trade analysis. Consultants that offer additional post-event services will also scrutinise executions.

Macquarie Group division director David Goodman said consultants play an important role: “A small fund may want to do an extremely important transition – one that might represent a third of its assets – but may not have the time or manpower to be able to do an analysis of a provider or set of providers. In this content the consultant’s input is vital.”

Consultants that have been involved with many different types of transitions are particularly useful in determining which transition managers have the necessary skillset for a particular transition.

“As important as both of the due diligence steps is feedback from our consultants – and our own observations on a transition manager’s performance during live transitions,” said Andrew Williams, principal at Mercer Sentinel Group.

“This is invaluable information that can help show whether what a transition manager said about their process on paper, or in a meeting, is actually put into practice in a live event. Feedback on actual transitions can also provide insights into the calibre of the team and their ability to deliver to clients’ expectations.”

Williams adds that it is particularly important to understand the transition manager’s business model and fee structure. “You need to know how is it calculated and whether there are other opportunities for the wider organisation to earn revenue from the transition – this is particularly pertinent if the fee looks low,” he said.

“You will also want to know how the transition manager will ensure it has the resources available for the project, as well as the experience of the team. Have they undertaken similar transitions before?”

Changing demands

Northern Trust’s Blackbourn notes that, in the past, every time a client had an underperforming manager they would replace them – now they are more inclined to park those assets with an existing passive manager or tactically adjust back to their strategic benchmark using futures. As a result, large scale events are happening less frequently among smaller clients.

“When I am talking to a potential client I will always explain that even if they don’t use my service, a competing quote may give them some leverage with their existing provider to reduce their commission costs,” he adds. “No two transition events are the same, so we recommend clients have a panel of at least two providers since each provider will have different strengths in terms of access to liquidity, ability to cross and/or project management. The number of areas in which transition managers can add value has grown significantly as the industry has evolved.”

According to Blackbourn, clients will usually ask if a manager is T-charter compliant in the RFP, although there has been relatively little activity in this area in the last few years.

“Regulators have acknowledged that the T-charter is a step in the right direction and if we look at what is coming down the line with Mifid II, there is more than enough in the legal framework we have with our clients to deliver the openness and transparency the T-charter was designed to achieve,” he said.

Macquarie Group’s David Goodman describes the T-charter as an important effort to adopt standards that all clients would expect. Relying on a transition manager’s self-certification is no longer seen as best practice.

“A client will come to us as a transition manager and potentially leave assets with us for three to six months to manage for them, so they need to understand what is happening in our business – the process and operational processes that enable us to provide the service,” he said.

Thorough investigation

Even after receiving the pre-trade analysis, cost assessments and even pricing the proposal of each transition manager might look very similar.

However, if the client goes through a process of assessing the entire organisation in the same way they would for a large investment manager mandate, they should gain a much higher degree of conviction in their choice. “Many clients say this process has opened their eyes and left them impressed by the level of sophistication they found,” according to BlackRock’s Justine Anderson.

The desire for a fiduciary partner is strong among clients across all parts of the world. According to Anderson: “That is an area where clients see potentially significant differences between providers and how they contract.”

Not every client uses a consultant to select their transition manager, but those who do can draw on extensive experience and an overview of the industry gleaned from frequent dialogue with the various providers. Many of these consultants review their transition manager short list on an annual basis.

“We recommend that clients work with consultants,” said Anderson. “However, we also appreciate that some clients want to do the selection themselves and in those cases we recommend they take a similarly thorough approach. Proper due diligence must entail onsite visits to really see the offering in practice.”

Goodman said larger funds that have their own operational due diligence and manager selection teams operate to the same level of professionalism as consultants and have the advantage of being able to customise their review process.

He suggested changes in the provider landscape over recent years have been a catalyst for some clients to review their processes for appointing a transition manager and look at how their incumbent provider compares to others in the market. “We see a move from having a sole provider or two or three of similar profile to clients identifying the best provider for the specific event,” he concluded.

CASE STUDY: Co-operation key to M&A transition

Close interaction with both client and consultant enabled Northern Trust to deliver a co-ordinated solution for merging multiple plans

A large utility company sought assistance in merging multiple pension plans following a corporate acquisition and carried out a competitive process for the transition. The plan sponsor engaged Northern Trust and the two entities worked in close conjunction. Northern Trust also worked with the sponsor’s consultant, which was heavily involved throughout the transition.

The restructuring event encompassed six distinct plans under the oversight of the plan sponsor, with each one differing in size, asset type and allocation mix. Northern Trust was made responsible for ensuring that no single plan was either advantaged or disadvantaged over any other. Creating a robust project plan – with detailed timelines and action items – was crucial to the success of the transition.

The event essentially consisted of two transitions, under the umbrella of the six plans and a single client contact and involved rebalancing within the fixed income and equities allocations. Coordinating all activity was a crucial factor in mitigating risks and keeping total costs to a minimum.

The event entailed the movement of 177 different funds/accounts – 136 cash trades and open market trade activity for 41 legacy and target managers – with a focus on fund notification dates, settlement cycles and liquidity needs.

The event had a total value of approximately $1.8bn and the trade duration was seven days. For this highly complex event, Northern Trust completed all activity on the schedule set out in the original timeline.

The implementation shortfall proved to be within Northern Trust’s pre-trade estimate for each plan and asset class. Most importantly, at the end of the event, the plan manager was satisfied and in a position to relay the success of the event to his investment committee. Key lessons learned from the event included the importance of strategy and project management.

“As a client-centric transition manager, we recognise that our clients are not – and perhaps should not be – experts in managing transitions,” added a Northern Trust spokesperson about the event. “For the vast majority, transitions are both occasional and generally non-recurring and in this context leveraging relationships with specialists in the field is a prudent approach.”

“For a transition manager it creates a different dynamic throughout the event, as the wants and needs of the stakeholders may vary. That said, with in the region of 200 transitions managed on an annual basis at Northern Trust, we have the reporting, the team and the expertise to satisfy those needs.”