Asset Manager M&A Values Surge | Chief Investment Officer

Merger and acquisition (M&A) activity among asset managers will continue to increase in 2015, recovering from the lowest levels during and after the financial crisis, according to PricewaterhouseCoopers (PwC).

Thanks to several mega-deals last year with values exceeding $1 billion, the total value of asset management M&A deals reached the highest since 2009, the report said. Total disclosed deal values in 2014 were $12.7 billion, nearly six times the $2.6 billion in 2013.

However, PwC found the number of deals remained relatively flat—86 in 2014 compared to 84 in 2013—indicating a slow but steady return to the height before the financial crisis.

The report also said stabilizing valuations and an increasingly fragmented asset management market, among various factors, would contribute to an uptick in future M&A deals.

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“We are cautiously bullish about the M&A outlook for 2015,” Sam Yildirim, PwC’s US asset management deals leader, wrote. “While surpassing the deal values from 2014 would be difficult, we are hopeful that we will continue to see a healthy recovery.”

M&A transactions would continue to be strong among hedge funds and mutual funds, according to PwC, with deal volumes already up by roughly 40% to 50% in 2014 from the previous year.

The narrowing valuation gap between buyers and sellers has played a big role in improvements in the two subsectors, the report said. Specifically, the report found growing investor optimism for hedge funds with strong track records and demonstrations of alpha continued to attract new investments.

A skyrocketing interest in exchange-traded fund (ETF) managers and firms seeking to gain access to the ETF market also fueled M&A activity, PwC said. Even small ETF firms are increasingly becoming acquisition targets for larger asset managers, as seen by notable transactions in 2014 including New York Life’s purchase of Index IQ and Janus Capital’s acquisition of VelocityShares.

PwC also said there was also an uptick in IPOs last year among managers of all sizes by acquiring niche products and players to “expand their operating platform and grow their investor base.”

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PWC M&A

The SEC’s compliance chief has announced his return to the private sector one year after the agency began its probe of private equity and hedge funds.

The US Securities and Exchange Commission’s (SEC) top private equity critic is leaving the agency for a job in the private sector.

Andrew Bowden, who has been director of the SEC’s Office of Compliance Inspections and Examinations (OCIE) since June 2013, will exit the agency at the end of April.

“We have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.” —Andrew Bowden

While the compliance chief generally oversaw routine examinations of brokerages, asset managers, and financial firms, he made headlines last year with his investigations into private equity funds and their handling of fees and expenses.

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“When we examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time,” Bowden said in May 2014.

Of various risks and temptations in the $3.5 trillion industry, Bowden pointed out “an enormous grey area” of fees and expenses.

“Many limited partnership agreements are broad in their characterization of the types of fees and expenses that can be charged to portfolio companies,” he said. “Poor disclosure in this area is a frequent source of exam findings.”

In the same speech, Bowden also emphasized serious compliance shortfalls—the likes of lack of due diligence and transparency—after an investor closes an investment. Limited partners are often left in the dark, he continued, largely due to the opaqueness of partnership agreements.

Bowden’s statements and the SEC’s continued probe prompted some large buyout firms including KKR to refund fees. Certain pension funds have come forward since the refund to voice concerns with KKR’s transparency, particularly in the way the fee credit came to light.

According to a person familiar with the matter, the SEC and OCIE will continue to thoroughly investigate private equity funds’ transparency and fee structures after Bowden leaves.

However, despite his critiques of the private equity industry, Bowden said it is the “greatest business you could possibly be in” at a panel hosted by Stanford University in March. He even joked he would recommend his teenage son work in private equity.

The agency has yet to announce an official search to fill Bowden’s position or an interim director, the source said.

The SEC did not say where Bowden is headed. Prior to his position at the commission, he spent 17 years at Legg Mason Capital Management as chief operating officer, general counsel, and executive director. Bowden received a JD from the University of Pennsylvania Law School and a bachelor of arts from Loyola College in Maryland.