“The big lesson from all this is: you have to listen to your clients.”

This is the view of one former director of Hastings Funds Management, the venerable Australian investment manager that disappeared this year.

The firm was one of the pioneers of infrastructure investing when it was founded in 1994 to manage Utilities Trust of Australia, one of the country’s first infrastructure funds. But in a cruel twist of fate, it was UTA itself that dealt the final blow to the business this year, when it terminated Hastings’ mandate to manage the fund.

This – combined with the sale by owner Westpac of Hastings’ international operations to Northill Capital last December, and the loss of the mandate to manage The Infrastructure Fund in August – effectively brought the company’s operations in Australia to a close. At the end of September, the Hastings brand quietly passed out of existence.

Opinions differ as to how things got to this juncture, but several points have been consistently raised by the several sources from within and outside Hastings that Infrastructure Investor has spoken to for this article: frustration over Westpac’s aborted attempts to sell Hastings; disquiet among TIF unitholders and UTA over misalignment between their interests and that of Hastings; and LP unease over the number of senior staff that left the business from 2015 onwards.

Westpac woes

Hastings Funds Management was born in 1994 as the founding manager of UTA, established by Mike Fitzpatrick, a former captain of Australian rules football team Carlton.

Westpac first bought into the business in 2002, when it acquired a 51 percent stake, increasing that to 100 percent in 2005.

One former director describes the culture of the business before 2002 as “excellent”, characterising it as a boutique investment management business that was punching above its weight when competing with home-grown stalwarts Macquarie and IFM Investors.

The first three years of Westpac’s involvement saw little change to this, with Fitzpatrick still in charge as managing director. In 2005, after his remaining ownership stake was bought out and he retired, his second-in-command Tim Poole took over, remaining in the post until 2007.

After this, the former director says, things began to change, with Westpac increasing its influence on the management of the business.

Westpac declined to comment on any points raised in this article, saying that it does not comment on speculation.

“It was a very simple business that was trying to buy, accumulate and manage infrastructure assets, and prices and leverage were very high [at the time of Westpac’s takeover]. It was difficult to buy assets at that time on a value basis,” the director says.

“Westpac felt they had to turn Hastings into a little Macquarie, or another Babcock & Brown, turning it into something more like an investment bank.”

Several senior staff at the time did not feel this was an appropriate way to run the business, leading to some departures in the leadership team just before the Global Financial Crisis was set to strike.

“As history shows, its two biggest customers ultimately decided they could live without Hastings – but obviously Hastings couldn’t live without them.” – van Rooyen

“The last thing you want to do when asset prices are so high is turn yourself into the same as everyone else. If we’d held the line, then everyone would have appreciated what you were and respected your price discipline, but we just became another one of the market chasers. So then senior people started leaving, because they were in a position where they had to toe the new line, or it was made fairly awkward for them.”

Jonathan van Rooyen, who was an executive director at Hastings and portfolio manager for TIF, before leaving to join TIF as general manager, investments, says Hastings’ culture during his time at the business from 2007-16 was like that of many similar-sized asset managers at the time.

“Asset values grew steadily as a result of inflation and economic growth and, as a result, fees grew steadily as well. It was a highly profitable business, but it wasn’t very innovative,” he says. “As history shows, its two biggest customers ultimately decided they could live without Hastings – but obviously Hastings couldn’t live without them.”

While there was not much open dissent outside the company at this time, this period would sow the seeds for the later problems with TIF and UTA. One UTA shareholder said the assets purchased by Hastings before 2007 performed better than those bought after – perhaps inevitably, if a lower price was paid, but significant nonetheless.

Back on track

Several former Hastings staff told Infrastructure Investor that the business underperformed for a period after this, but began to get its mojo back around 2012.

Andrew Day – now chairman at Blue Sky Alternative Investments – had been appointed chief executive in 2011 and the business went on a good run for a while, picking up a £750 million ($963 million; €842 million) mandate from RBS Pension Fund in 2012, as well as raising several billion dollars for the UTA fund.

One former director says that Hastings had “simplified” its business structures, focusing on its core activities of infrastructure equity and debt, after toying with property asset management. The firm also had “very little” staff turnover at this time, the director says, in contrast to the leadership upheaval of previous years and the exodus of senior staff that was to come.

Day’s appointment was a further sign that the days of Westpac’s ownership were likely to be numbered, with another former director saying he had an “unspoken mandate” to build the business back up and sell it. “He had no infrastructure experience, he was a telecommunications guy. He wasn’t a funds management guy,” a Hastings source says.

The sales process began to really ramp up in 2015, but it was denied by Westpac both internally and externally at the time.

“We were told that Westpac was just testing the market and that there wasn’t anything formal going on,” the first former director says. “But I had clients telling me they knew advisors had been hired, when I didn’t.

“There was a general dissatisfaction with how the sale process was being run, with the importance placed on getting the maximum price.”

It was also around this time that more senior people started to leave. Some Hastings sources speculated this was due to a combination of frustration over the sales process coupled with the vesting of a long-term share incentive plan – one that had taken years to come to fruition but that involved “significant sums” of money for those who were able to benefit.

Van Rooyen, who left in August 2016, says: “The Hastings LTI scheme clearly failed in its objective to retain people.”

The first sale attempt to sell Hastings fell through in March 2016, when the two bidders – TIAA-CREF and Massachusetts Mutual Life Insurance – declined to submit a bid in the last week, the first former director we spoke to says. This decision was partly prompted by the departure of senior figures, particularly that of global investment head Peter Taylor, now at Carlyle.

But the absence of bids was also because the two finalists had got a closer look at the books in more detail, he says, and were uneasy with what they saw when it came to TIF. Specifically, they felt Hastings lacked control over the situation, with LPs in the fund beginning to express a desire to pursue their own strategy, even at this early stage – a view that would be borne out in 2017 when TIF terminated Hastings’ mandate.

‘You have to know your place’

After this period, the culture at the business “fell off a cliff”, the second former director says, with a disconnect emerging between Westpac and the Hastings executive team, as well as between Hastings executives and its clients.

This was the beginning of the slippery slope that would lead to the termination of the TIF and UTA mandates.

“You have to know your place as a fund manager,” one ex-director says. “There was a lot of arrogance and self-preservation.”

More than one source says there was a lack of accountability from senior management at the time, too.

Former chief executive Andrew Day did not respond to several requests for an interview for this article and Westpac declined to comment on these allegations.

“How can you have a A$10 billion business where performance has been very strong over 20 years, then have to shut the thing down?” – Former Hastings director

In August 2017, TIF trustee Gardior convened an extraordinary general meeting at which it voted to remove Hastings as its manager, following a strategic review of the fund’s management that began in late 2016, led by former Hastings director Van Rooyen.

“TIF initiated a strategic review based on investor-agreed objectives including increased internal resourcing, increased transparency, better asset management, greater investor alignment, improved governance, a lower management-expense ratio, and greater access to investment opportunities,” Van Rooyen says.

“In response to this, Hastings materially dropped their base fees, which to some extent showed it had been overcharging a loyal customer. But it wasn’t able to convince investors they were best-placed to deliver on TIF’s strategy at that time.”

Hastings began managing the 1998-vintage open-ended fund in 2000, growing it from a single Australian asset to a global portfolio of 11, generating an average annual return of 12.8 percent after fees – a decent result in anyone’s book.

The TIF decision was not a surprise to Hastings staff, one of whom says it was “abundantly clear” that it was coming for a variety of reasons, not least a desire from TIF to reduce the fees it was paying and pursue its own strategy. TIF would eventually abandon the aim of increased internalisation.

“We are seeing more and more cases where investors have removed managers from listed investment vehicles because of excessive fees and poor alignment. Unless things change, it’s likely this trend will accelerate,” Van Rooyen says.

Compounding the atmosphere around the business was the timing, though, which coincided with the decision by Australian property group Charter Hall to drop its interest in acquiring Hastings, the second time a sale had fallen through late in the day.

Within a few months of the Charter Hall sale collapsing, a third sale process began, with Northill Capital, Macquarie and Morrison & Co emerging as the three most serious bidders. Northill Capital eventually won, first agreeing to acquire the whole business in November 2017 before eventually settling for its international operations in the US, the UK and Singapore.

UTA rebels

The change in takeover terms came as a result of UTA’s unitholders voting to terminate Hastings as manager in December 2017. Various sources have described their emotions at UTA’s decision as “shock”, “surprise” and “disappointment”.

UTA’s unitholders had grown tired of the uncertainty surrounding Hastings’ ownership and, while they were generally happy with the performance of the portfolio, some Hastings sources felt they were uneasy at diluting absolute returns through some of the fund’s more recent acquisitions, as well as the introduction of new shareholders.

One former director, however, says the UTA portfolio was performing so well they felt the pretence behind the vote was an “excuse” for a group of superannuation funds that wanted to lower fees and gain more direct control over their investments.

Morrison & Co, one of the bidders for the Hastings business not long before, won the mandate to manage UTA with a fee structure that was “very competitive”, one source says. The Hastings executive team tried to salvage the situation by pitching a new, lower-fee structure for managing UTA that was more in line with what Morrison & Co was offering, but it was swiftly knocked back – particularly as Hastings had not been invited to tender.

Once UTA had made its decision, it became Westpac’s priority to protect the A$160 million ($115.5 million; €102.3 million) termination fee that would be due to it as a result, effectively using that as a backstop in the event the whole Hastings business could not be sold. This meant that, even with the business broken up and the overseas assets sold, Westpac recouped the money it was looking for.

Therefore, with the loss of both TIF and UTA, the Hastings brand quietly ceased to exist at the end of September.

A positive legacy

Despite this sad end, everyone Infrastructure Investor spoke to for this story had positive things to say about the legacy Hastings leaves behind.

While all expressed frustration at how Hastings ended and were disappointed by what they felt was not an inevitable chain of events, they all said the culture of the business was strong at many points.

“I think some fantastic people have gone through that business over time,” one  former director says, pointing to the list of people who have left and continued to make a name for themselves with other organisations.

This is echoed by Van Rooyen, who adds: “I have always maintained that one of Hastings’ biggest legacies was its capacity to export some of its best people to potential customers or competitors.” The list of alumni includes Raphael Arndt, chief investment officer at the Future Fund; David Ridley and George Batsakis, at Westbourne Capital; James Fraser-Smith and Wendy Norris, on Future Fund’s infrastructure team; the aforementioned Peter Taylor and Richard Hoskins, who are now at Carlyle Group; Jason Peasley, Alastair Barker, Alex Campbell and Nick Ward at AustralianSuper; Matt Lorback at Atlas Infrastructure; and Peter Johnston at Lighthouse Infrastructure, to name just a few.

The core of the team that worked in the UK and US are also still with the Northill Capital-owned business, since rebranded as Vantage Infrastructure.

Still, as one former director put it: “I can see why it’s happened – but it probably didn’t need to happen, did it? How can you have a A$10 billion business where performance has been very strong over 20 years, then have to shut the thing down? It’s just incredulous.”

The Hastings staff that we have spoken to hope it will be remembered for the good work it did – and not the sad way this venerable brand has come to an end.

TIMELINE

1994
Hastings Funds Management founded to manage the open-ended Utilities Trust of Australia fund.

2000
HFM wins the mandate to manage The Infrastructure Fund, a 1998-vintage open-ended vehicle.

2002
Westpac acquires a 51 percent stake in HFM.

2005
Westpac ups its stake to 100 percent as agreed with founder Mike Fitzpatrick, who retires. Tim Poole becomes MD.

2007
Tim Poole departs as MD. Steve Boulton appointed from rival Babcock & Brown as CEO.

2011
Steve Boulton retires, replaced by Andrew Day as CEO.

2015
A long-term incentive plan involving “significant” sums of money vests, prompting senior departures.

March 2016
First HFM sale is suspended by Westpac after TIAA-CREF and MassMutual Financial Group decline to submit bids.

August 2017
Charter Hall drops bid to buy HFM.

TIF’s unitholders vote to terminate HFM’s manager mandate after strategic review.

September 2017
Andrew Day steps down to be replaced by Terry Winder, who would prove to be HFM’s last CEO.

November 2017
Northill Capital announced as buyer of HFM, before the deal is amended to just include its non-Australian operations.

December 2017
UTA votes to terminate HFM’s mandate as manager.

September 2018
HFM officially ceases to exist.