Ernst Russ News – Interview with the Management Board
Three companies – one path? Investor’s Quarterly spoke with Jens Mahnke, spokesman of the Management Board of Ernst Russ AG, and board members Ingo Kuhlmann and David Landgrebe about the merger of the three companies, as well as about plans and perspectives at the corporate group Ernst Russ AG.
Investor’s Quarterly: Was there a long-term plan to take over König & Cie. and Ernst Russ, or was it more of a spirited seizing of two opportunities that spontaneously presented themselves?
David Landgrebe: The HCI Group and König & Cie. were always active in one and the same market environment, and there were good contacts between the companies. As early as 2013, both companies were considering a merger. However, U.S. investors beat us to the punch in acquiring controlling interests in König & Cie., meaning that these considerations had to be put on ice for the moment. But from 2013 until the takeover in 2016, HCI and König & Cie. continued to collaborate in various areas – for example, in Investor’s Quarterly but also on a project-by-project basis in various assets classes, like private equity, life insurance, and real estate.
Board spokesman Jens A.
Investor‘s Quarterly: How does one control such a deal? Can you explain this using the example of the takeover of König & Cie.?
David Landgrebe: The takeover of an issuing company is a complex process that is time and cost intensive. From the outset, the HCI Group ruled out taking part in a classic bidding competition, since we wanted to avoid high due-diligence costs where the chances for success were unclear. We succeeded in agreeing with the sellers on exclusivity for a considerable period of time. That allowed us to analyse the takeover of König & Cie. and its integration into the HCI Group calmly and with the requisite thoroughness. Also of great importance was that from the start, we laid plans with the entire management about the new allocation of responsibilities within the resulting merged entity. As part of the M&A process, that led to a great deal of certainty and clarity among all those involved.
Jens Mahnke: After our U.S. investors signalled their willingness to sell, discussions resumed between the HCI Group and König & Cie., culminating in the merger at the start of this year.
Investor‘s Quarterly: The takeover of König & Cie. enables Ernst Russ AG to provide a complete range of services in the area of ships, particularly commercial and technical management. How do HCI and König & Cie. complement each other, and where does the new strength lie?
Ingo Kuhlmann: For more than 30 years, the corporate purpose of the HCI Group has consisted of covering the value-added chain of closed funds. During this time, the company naturally acquired a wealth of experience. This experience comprises acquisition and linkage of investment assets, concept, sales, the resulting active management of assets, and the fiduciary management of placed equity in the after-sales area. We could build on this basis as we began to study the strategic realignment of the Business.
Vorstandsmitglied Ingo Kuhlmann
David Landgrebe: Starting in 2014, we then gradually adjusted our strategy to conform to changed market conditions and pursued the transition from a classic issuing company to an asset and investment manager. The HCI Group has always traditionally focused its investments in the maritime sector, and this area will continue to be a focus of our business activities. In other words, it was important to the HCI Group that it merge with a company that has proven expertise and access to shipping company business and, essentially as core expertise, has a mastery of active management of assets. Over the years, König & Cie. had firmly positioned itself as a maritime asset manager and, at the same time, as a provider of key shipping company services – a very exciting combination for us. With the merger of the HCI Group and König & Cie., we are now in a position to be able to offer all relevant services in the area of commercial and technical ship management. This represents an enormous expansion of the previous activities. It is of course accompanied by enhanced expertise in trust management and asset management for the areas of real estate, private equity, and infrastructure, as well as structured fund-of-funds products. Last but not least, a merger like this automatically leads also to an exchange of knowledge between employees. This of course presumes that integration is done well. If this succeeds, and we are assuming it will, everyone will benefit. That is a motivator!
Investor‘s Quarterly: Was the acquisition of Ernst Russ GmbH & Co. KG the logical consequence of the takeover of König & Cie.?
Jens Mahnke: The acquisition of Ernst Russ GmbH & Co. KG rounds out our range of maritime services, since we can now offer services along a shipping company’s entire value-added chain that are even more comprehensive. By integrating a shipping company like Ernst Russ GmbH, we gain, for example, access to an international network of shipyards though CombiTrade GmbH. At the same time, through Ernst Russ’s holding in the chartering broker Ernst Russ Shipbroker GmbH & Co. KG, we are strengthening our chartering expertise and opportunities. The areas of shipyards and chartering will constitute a key building block for the success of Ernst Russ AG. In addition, we are again expanding the fleet of ships we control by seven containers and four RoRo ships.
Investor‘s Quarterly: The company now bears the name of a long-established shipping company. Will the business direction of Ernst Russ AG now become a purely maritime one?
David Landgrebe: Our corporate group today holds about 50 ships in active management and more than 180 fund ships in collaboration with partner shipping companies. Initially, the focus is thus automatically on the maritime area and on the asset class of ships. In addition to this, we are expanding other asset classes for the purpose of diversifying the business model. Under the aegis of Assetando Real Estate, real estate business is being strengthened, and in addition we are expanding the topic of life insurance with currently 14 funds and drawing on our strong management expertise. Two other assets classes are currently in development – we are looking at the specifics here, but there’s nothing definite yet.
Investor‘s Quarterly: From today’s perspective, where do you see the chances for growth?
Jens Mahnke: The areas of asset and investment management will constitute the key business fields for Ernst Russ AG – this stems from the history of the three companies and at the same time also forms the strength of Ernst Russ AG. We consider becoming firmly established as an asset-specific service provider to be both a challenge and an opportunity. Our partners can use Ernst Russ AG as a one-stop shop. This means that our experts are capable of navigating the investment phase, handling the management of the asset, and providing assistance during the exit phase. But it is also possible to use just parts of our range of services. We see opportunities in offering maritime services in components in the same way along the entire value-added chain. In order to be able to generate revenues from the diversification of services, we benefit today from three aspects: the experience of three companies, and the organisational structures of Ernst Russ AG, which provide synergies. Not to mention the group’s broad market Access.
Ingo Kuhlmann: We also see opportunities for growth by creating added value as an independent investment manager. That will certainly take place on very different levels, from capital procurement and general structuring solutions to trust services for third parties and risk management. The recent acquisition of the HSH ship portfolio with 13 ships and the assumption of the associated management is a good example of a portfolio solution that has been realised in the sense of one-stop shopping. This portfolio solution makes one aspect very clear, namely the purchase and sale of assets as an own investment. In this respect, not only did we assume the structuring of the investment and the management of both the ships and the financial investment, but we also made an investment ourselves. In order to ensure that interests are aligned with the investor group, Ernst Russ AG will in future generally make a direct investment in the asset as an initiator and bear the responsibility for investment performance by taking a position in the governing bodies.
That is what many large international investors have come to expect, and we consider this to be sensible and economically smart in order to ensure and document the synchronisation of interests between Ernst Russ AG, as initiator and broker of the investment, and investors. With the HSH deal, Ernst Russ AG created the opportunity to position itself on the market with a high-quality reference portfolio and provide operational proof of its strategic direction.
Vorstandsmitglied David Landgrebe
David Landgrebe: In the course of a continuing recovery of the global economy and the financial markets in the coming years, we consider it likely that investors will forego their reluctance and again invest strongly in closed alternative investment funds. In the medium to long term, we see this chance not only for ship investments but also for all other asset classes. A key role will be played by HCV, a fully regulated alternative investment fund manager formed by HCI. Similarly, the trust company HTV, which is owned by Ernst Russ AG, will gain in importance in the area of investor Management.
Jens Mahnke: That’s right. And it is important that we develop ourselves further and identify opportunities that may arise in a changed market environment. Bringing capital in search of investments together with the appropriate investments will in future take place on a level different than that of a few years ago. The retail market with its classic corporate model no longer exists today. The key now is to offer the entire value-added chain from linkage until sale of an asset and also to be able monitor each step – in other words, a one-stop shop. Last but not least, the trust company will continue to assist us. In past years, the revenues from this constituted a stable foundation for our profitability. Through the merger of König & Cie. with HCI and the acquisition of two trust companies in early 2015, customer numbers and managed trust capital have risen markedly. We can use synergies here and are well positioned substantively and in terms of staff.
Investor‘s Quarterly: What challenges is Ernst Russ AG currently facing?
Jens Mahnke: We of course remain concerned about the market situation, which is not an easy one. Ship and charter markets continue to be extremely tense. This makes the good networking of Ernst Russ AG in the relevant markets all the more important to us, since through our network we can uncover and exploit emerging opportunities.
Ingo Kuhlmann: We are also currently monitoring (re-) financing opportunities on the capital market, which are still difficult. The sector is battling against its poor image and loss of investor confidence. Patience is needed here, but also corresponding opportunities for new business, which have to be identified. By contrast, we are less concerned about the strict regulatory requirements. We are in good shape here in technical terms with the alternative investment fund manager. We are convinced that the regulation of alternative investment funds and the advancing consolidation in the sector will present opportunities for Ernst Russ AG. We can professionally implement not just the substantive requirements but also the technical ones. That creates the basis for addressing a broad spectrum of investors and, above all, for building trust.