Asset Managers Hot on M&A Trail
August 20, 2007
Merger and acquisition (M&A) activity in the asset management industry is booming, and demand is not likely to stop anytime soon, nor are the competitive prices buyers are willing to pay for the deals. However, market turmoil and a more challenging leveraged finance environment could temporarily cool the enthusiasm of some private equity shops for asset managers and derail initial public offerings,
Long-term globalization and demand for alternative investment management products and skills have been fueling the trend, according to the report "The Long and Short Of It" by Putnam Lovell of New York, a division of Jefferies.
During the first half of this year, buyers spent $33.7 billion to buy 114 fund managers, which beat records for any other half-year period in history, the report found. The acquired fund managers represented almost $1.24 trillion of assets under management, increasing 25% over a similar metric for the first half of last year.
One strategic motivation for M&A activity is finding new products, especially retirement ones to capture Baby Boomer assets, said Benjamin Phillips, co-author of the report and managing director at Putnam. Also, institutions are realigning their portfolios, looking for higher alpha and cheaper beta, he said.
The asset management industry is viewed as very attractive right now, said Burton J. Greenwald, president of B.J. Greenwald Associates, a fund consulting firm in Philadelphia. "The industry is extremely rewarding and has shown it's not subject to market fluctuations as much as other financial sectors are," he said.
There are two main forces driving M&As, Greenwald noted, one being international investing. International companies are very attractive, as companies in the U.S. are instantly able to acquire expertise and develop a relationship for distribution, he said.
Growth equity managers, especially international, will be in high demand as the markets and clientele globalize, Phillips said.
Sustaining an 18-month trend, Americans remained the minority of both buyers and sellers. More than 41% of deals, accounting for 34% of assets acquired, were cross-border in nature, according to Putnam. Activity in Asia especially surged as global fund managers sought local footholds in the world's fastest-growing asset management marketplaces.
Putnam expects M&A activity in local Asian fund management marketplaces-overcrowded with high numbers of small players offering similar products-to further define deal flow for the remainder of this year, and beyond, perhaps even in Japan.
There is a huge opportunity for any firms with the ability to acquire expertise in India or China, Greenwald said.
Buyers will start to focus more on Asia as they want to establish contacts and local products with which they hope to attract cross-selling business, particularly into higher-margin international equity portfolios, the report states.
Asia's rise in popularity is only now beginning, and might be slow to cultivate, but it will transform the worldwide asset management industry, potentially giving way in the next decade to a group of global asset managers headquartered in the Pacific Rim.
Asian conglomerates are also emerging as potential formidable acquirers in the asset management space. The Chinese government's $3 billion purchase of shares in Blackstone Group is the 15th largest fund management acquisition ever in terms of deal value. Similarly, Nomura Holdings made an $888 million investment in hedge fund Fortress Investment Group before its initial public offering.
Besides looking overseas for opportunities, companies are looking for innovative, esoteric products, as well, Greenwald said. For example, there is no shortage of large-cap managers in the industry, he said.
Firms with strategic products will be in high demand, Phillips agreed. High-quality alternative asset managers will be in demand, especially after the shake out of this month, he said.
Additionally, companies that are able to demonstrate a revenue stream that is not volatile will be successful in getting acquired, Greenwald said.
The deals are also going for big bucks. "Pricing for the deals at the end of the second quarter was very high for the trade and the public U.S. market," Phillips said. "Pricing is very strong and very aggressive; firms know what they want and need and are willing to pay for it," he said.
"Generally, deals are running on the high end of the range, and we will continue to see that," Greenwald observed.
Valuations of trade-sale targets worldwide rose to nearly 12 times the earnings before interest, taxes, depreciation and amortization at the median, the most aggressive seen in any recent year with rising equity markets, Putnam found. Median prices of U.S. quoted fund managers rose 14 times EBITDA to set another record.
Paying at the high end is looked at as a conservative move because when companies acquire other firms they expect that revenue and sales will increase sharply, Greenwald added. The company has every expectation that the acquired firm can deliver distribution better than they would have been able to build themselves, he said.
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