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With Russell Investments potentially on the block, all eyes are on this sector. The founder of Asset Management Finance and consultant to Alpha Strategic explains why asset owners could replace banks as the great financiers of asset management.
“Some large asset owners—the major pension and sovereign wealth funds—are actively looking for ways to invest more directly in infrastructure, real estate, and asset management. And it makes perfect sense. You have enormous amounts of institutional wealth being funneled down to asset managers on an outsourced basis, and yet there hasn’t been an effective alignment of transparency and economics. There is also continuing resentment of the high fees paid to outsourced managers. But alignment through ownership is difficult to do. Successfully investing in asset management likely involves key-man risk, concentration challenges, and a large-scale capital commitment. Prospective buyers also need to have the specialized skills to identify, execute, and monitor these investments. So it’s not something a lot of funds are equipped to do today. For example, a couple of years ago, Texas Teachers bought a stake in Bridgewater—one of the largest pension funds investing in one of the largest managers. It was a big transaction, and one that few institutions could have accomplished. That’s where going through a third party can help.
For asset managers, institutional buyers have a clear advantage. With private equity ownership, they’re going to end up on the auction block—whether it’s a good time or not. And that’s just the nature of the beast. At best, a sale is a distraction to the manager. At worst, it’s damaging. In contrast, institutional owners have a very long investment horizon, without these liquidity requirements—they are the ideal owner.
The sellers in the best position have some unique offering, be it in active exchange-traded funds, liability-driven investing, or target date. We will see significant interest for products that large mutual fund companies or institutional managers can really pump through their distribution channels. Businesses packaging up liquid alternatives into ’40 Act products would be another example. The convergence of traditional and alternative assets—a theme many have seen coming for a long time—has been playing itself out in slow motion. Now demand from the retail market place has really picked up.
It’s difficult to find a very cheaply priced mergers and acquisitions (M&A) transaction in asset management, given improving economies and the overall health of these businesses. A lot of managers are going to know what their company is worth and have a value in mind. The M&A market in asset management has been a steady state of transactions recently. Over the last couple of years, much of the dollar volume has been driven by European banks’ divestitures: Robeco, Dexia, Credit Suisse, among others. A lot of this has played itself out. Since the financial crisis, European banks have narrowed their focus down to core strategies, and many have had to meet more stringent capital requirements. These businesses are very valuable assets.
Private equity (PE) shops, which are traditionally value buyers, have been quite active in facilitating those divestiture plays. The market values of publicly traded asset managers have also been very strong lately, and that tends to be a bellwether for PE activity. But private equity investors in this space ebb and flow. A select few are continuously active, including TA Associates and Carlyle, but for most it’s episodic. Still, the industry has been pretty successful fundraising lately, so they have some money to put to work.
There is also some renewed activity in buying funds-of-hedge-funds businesses. Carlyle bought Diversified Global in Toronto, for one. It’s a contrarian investment, I suppose. That said, there certainly are some good funds-of-funds—those that weren’t just asset gatherers, piling on structured products for the retail market and suffering the unwind that came after. Some funds-of-funds have the right focus on risk strategies tailored for their clients, and those can be of value.
But of all the trends I see in the asset management M&A space right now, the potential alignment of institutions and managers through ownership is certainly the most energizing.”