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ASSET MANAGER DEALS:
Trends in Asset Manager M&A –
Five-Year Empirical Deal Study
Christopher S. Harrison
Schulte Roth & Zabel LLP
Often, the most effective
argument at the negotiating
table is that a proposal follows
trends in the market, all the
more so when backed up by
numerical analysis. This paper
combines expertise in asset
manager transactions with
a quantitative approach to
produce a survey of the market
trends for buying and selling
stakes in asset managers.
Christopher S. Harrison Co-head of Asset Management M&A Schulte Roth & Zabel LLP New York City
ASSET
MANAGER
DEALS
Trends in Asset Manager M&A –
Five-Year Empirical Deal Study
CONTENTS
Introduction . . . 1
Deal Drivers . . . 1
More Deal Flow . . . 2
Rise of Minority Deals . . . 4
“THE NUMBER OF
ASSET MANAGER DEALS
HAS GROWN BY NEARLY 50%
SINCE 2010.”
INTRODUCTION
The number of asset manager deals per year has grown by nearly 50% since 2010. 2014 was a tremendously busy year, with no sign of a slowdown in 2015.
Asset management M&A is a specialty unto itself. These transactions often represent multiple deals in one: an acquisition, earn-out agreement, governance structure, retirement system, succes-sion plan and commercial services contract. Every deal is unique in its facts, the business issues at stake, the economic trends in play and the personalities and negotiating tactics involved.
DEAL DRIVERS
A few core drivers emerge:
• Consolidation — Smaller asset management firms are being rolled up into larger institutions. • Investment — Minority stakes in asset
manag-ers are being acquired as financial investments. Several new funds have been formed for the purpose of buying minority stakes.
• Regulation — Banks provided impetus to the market through 2012, as they sold divisions in light of regulatory shifts. Activity from banks has dwindled over the past two years, especially in the U.S.
Since 2010:
600+
1,200+
1,800+
Worldwide
These drivers resulted in the following trends: • Growing global market for asset manager deals. • Rise of minority deals.
• Increasing number of non-traditional players. • Bank activity has all but died out.
Yet, in analyzing the data, a number of trends emerge. These findings stem from an unprecedented collection of information on over 1,800 deals worldwide, across a five-year period from 2010 through 2014. This paper provides a detailed analysis of those trends and flags key findings throughout. I trust that you will find this study pertinent in ascertaining today’s market for asset management M&A and what the future of this field may hold.
7
More Deal Flow
The market for asset manager deals is growing. From 2010 through 2014, the number of deals targeting asset managers increased steadily on a global basis. Cumulative growth in the number of deals during that period reached almost 50%.Focusing only on the U.S. and Europe, the pattern is essentially the same, though the increase in activity has been concentrated to some extent in 2011 and 2012, leveling off but remaining high during the last two years. 0 100 200 300 400 500 600 2010 2011 2012 2013 2014 Deals per Y ear
Asset Manager Deals
(Global)
Asset Manager Deals
MORE DEAL FLOW
The market for asset manager deals is growing. From 2010 through 2014, the number of deals targeting asset managers increased steadily on a global basis. Cumulative growth in the number of deals during that period reached almost 50%. Focusing only on the U.S. and Europe, the pattern is essentially the same, though the increase in activity has been concentrated to some extent in 2011 and 2012, leveling off but remaining high during the last two years.
In the rest of the world, the activity level continued to grow rapidly during the last two years.
Despite steady growth, the spread of deal flow across quarters has changed. While in 2010 the number of deals signed up was roughly even quarter-over-quarter, more and more deals are now being announced around the end of the year.
0 10 20 30 40 50 60 70 80 90 100 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Asset Manager Deals
(Global Comparison)
Asset Manager Deals (US/Europe) Asset Manager Deals (Non-US/Europe) US/Europe Deals (4Q Avg)
Non-US/Europe Deals (4Q Avg)
In many cases, that pattern has been driven by efforts to close deals by the end of the tax year (or prior to the next year’s tax filing deadline) when tax rates are scheduled to increase. The increase in deal flow has not only come from all corners of the world, but also across both minority and majority deals.
These patterns are discussed in more detail in the next sections.
9
Rise of Minority Deals
Historically, majority deals have
dominated the asset manager M&A
market, and continue to represent
most deals today.
•
Minority deals:
the buyer takes a
stake in the asset manager which
does not grant them control.
These include both strategic and
financial transactions.
While the number of majority deals
has continued to increase over the
last several years, that growth has to
some extent stabilized and been
outpaced by the growth of minority
deals.
•
Majority deals:
the buyer
acquires majority control (over
50%) of the target asset manager.
These include spin-outs from
larger institutions.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2011 2012 2013 2014 Deals per Y earMinority vs. Majority Deals
(Global)
Minority Majority
RISE OF MINORITY DEALS
Historically, majority deals have dominated the asset manager M&A market, and continue to represent most deals today.
While the number of majority deals has continued to increase over the last several years, that growth has to some extent stabilized and been outpaced by the growth of minority deals.
• Minority deals: the buyer takes a stake in the asset manager which does not grant them con-trol. These include both strategic and financial transactions.
• Majority deals: the buyer acquires majority control (over 50%) of the target asset manager. These include spin-outs from larger institutions.
-10% 0% 10% 20% 30% 40% 50%
2014 Growth
Minority Deals Majority Deals
10 15 20 25 30 35 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Minority Deals
(U.S. and Europe)
Minority Deals Minority Deals (4Q Avg)
-10% 0% 10% 20% 30% 40% 50%
2014 Growth
Minority Deals Majority Deals
10 15 20 25 30 35 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Minority Deals
(U.S. and Europe)
Minority Deals Minority Deals (4Q Avg)
The pace of minority deals has almost doubled over the last five years. In 2014, the number of minority deals grew by roughly 40% compared to 2013. In contrast, majority deals actually declined by around 5% in the same period.
More asset managers, including less established asset managers, are finding that they are capable of raising capital through the sale of a minority stake in the current market.
0 2 4 6 8 10 12 14 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Deals per Quarter
Minority Deal Buyers
(U.S. and Europe)
Asset Manager Non-Traditional
Asset Manager (4Q Avg) Non-Traditional (4Q Avg)
2013 2014
Strong financial market performance has also played a role in widening the gap between buyers’ and sellers’ expectations of value. Managers who have performed well recently often have higher expectations for the value of their incentive fee streams. Buyers are often larger entities with institutional memories that reach back to the financial crisis and want to heavily discount incentive fees, in line with how
the public equity markets discount less predict-able incentive fees.
While there has been fluctuating growth in the number of minority investments in South American, Asian, and African asset managers, much of the rapid growth in minority deals has occurred in the U.S. and Europe.
Senator Investment Group /
Blackstone Strategic Capital
In February 2014, Blackstone’s new $3 billion fund, set up to acquire minority stakes in asset managers, acquired a stake in Senator Investment Group. Senator, a $7 billion event-driven hedge fund manager, explained their rationale for the transaction as allowing Senator to recapture substantial economics, to continue to re-invest in their infrastructure as well as reward and retain their partners and employees.
Many minority deals have some strategic compo-nent to them. Most, however, are primarily a financial transaction. The founders of the target manager are able to “take money off the table” by monetizing a portion of the equity value of their management company.
Several funds have recently been created for the sole purpose of taking minority stakes in various asset managers. These mostly U.S. and European funds are substantial, but are not the only buyers in the market.
Despite a brief drop around 2011, asset manager platforms remain the most active buyers of minority stakes by a large margin. These are made up of both a large number of specialist players that are making acquisitions with “house” money as well as private equity funds raised for the purpose of pursuing minority deals.
Financial institutions have demonstrated a sharp drop in buying activity over the last few years, and have drastically reduced the number of minority investments in asset managers.
Before regulatory changes pushed banks out of much of the asset management market, many financial institutions pursued majority deals as part of a strategic growth plan. Since 2008, there have been only a few acquisitions of asset managers by banks, some of which pursued a strategic minority path.
Non-traditional buyers, such as conglomerates and insurance companies, continue their slow but steady increase in activity in the minority-investment space.
In most minority deals, the founders are selling existing equity, and getting capital gains treat-ment for the sale. Recently, more asset managers are pursuing strategic equity raises. In these transactions, the management company issues new shares, and the funds go onto the balance sheet. This is being done for a variety of reasons, including raising capital for acquisitions and expansion.
Buyers have taken a range of approaches as to the liquidity of their minority stakes. On the one hand, a financial buyer will need to know that it can monetize its stake at some point. On the other hand, many buyers view themselves as long-term investors, planning alternative exit strategies such as an IPO.
DEAL SIZE
Majority Deals
The size of majority deals is getting larger. The average assets under management (AUM) of targets in majority deals in the U.S. and Europe has grown significantly over the last five years, with a dip in average AUM at the end of 2014. Growth in average AUM has been driven in part by a number of particularly large headline majority deals, as well as growth in the average manager
$0 $5 $10 $15 $20 $25 $30 $35 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Average AUM Billions
Average AUM
(Majority Deals)
Average AUM Average AUM (4Q Avg)
size in the industry generally. At the same time, the rise of minority deals has allowed many mid-size managers that otherwise might have done a majority deal to select a minority sale transaction structure that fits their firm, avoiding a sale of control over the business. This has pulled some deals with smaller managers out of the majority deal sample set.
Minority Deals
The average AUM of minority deal targets is getting smaller. It used to be that only the largest managers had access to the investors looking for a capital transaction in the form of buying a minority stake. Now, smaller managers are able to interest this source of capital and are becoming increasingly attractive targets. The average AUM of managers engaging in minority deals in the U.S. and Europe dropped meaningfully throughout 2011 and 2012, and has stabilized at a lower level in 2013 and 2014.
The drop in average AUM appears to be due to changes at both ends of the market. The largest deals in terms of AUM are being done less frequently. There are only a limited number of large, established managers — and a handful of those managers have decided to start making acquisitions themselves. On the other end of the spectrum, financial buyers have become more comfortable doing deals with smaller managers, and some are even seeking them out for their additional upside potential.
$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Average AUM Billions
Average AUM
(Minority Deals)
CHANGING PLAYERS
Sellers
Asset managers making divestitures represent the most predominant type of seller in asset manager deals, representing about 50% of all deals worldwide. With some fluctuation in the number of deals year-over-year, the number of divestitures from asset managers has been in slight decline over the last five years.
Changing Players
S
ELLERS
Asset managers making divestitures
represent the most predominant type
of seller in asset manager deals,
representing about 50% of all deals
worldwide. With some fluctuation in
the number of deals year-over-year,
the number of divestitures from
asset managers has been in slight
decline over the last five years.
The end of 2011 through 2012 saw a
rise in sales and spinouts by banks,
as they responded to regulatory
changes and higher capital
requirements around the world.
These sales have now dwindled,
presumably as most asset
management businesses owned by
financial institutions that were at risk
under the newly enacted regulatory
regimes have already been divested.
Strategic Partners / Blackstone
In August 2013, Credit Suisse sold
its Strategic Partners business to
Blackstone. Strategic Partners
primarily operates as a secondary
private equity fund of funds and had,
Types of Sellers
(Global, 2014)
Asset Manager Bank Non-Traditional
Strategic Partners / Blackstone
In August 2013, Credit Suisse sold its Strategic Partners business to Blackstone. Strategic Partners primarily operates as a secondary private equity fund of funds and had, at the time of the sale, approximately $10 billion in assets under management.
The end of 2011 through 2012 saw a rise in sales and spinouts by banks, as they responded to regulatory changes and higher capital require-ments around the world. These sales have now dwindled, presumably as most asset management businesses owned by financial institutions that were at risk under the newly enacted regulatory regimes have already been divested.
While not reflected in the data, there is some anecdotal evidence that banks are starting to consider buying stakes again, though these stirrings have yet to turn into actual deal activity. After all, asset management is a service business that is not capital intensive and that should not present a heightened regulatory risk or call for excessive capital requirements.
0 10 20 30 40 50 60 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Sellers
(Global)
Asset Manager Bank Non-Traditional
Asset Manager (4Q Avg) Bank (4Q Avg) Non-Traditional (4Q Avg)
More recently, an increasing number of deals have involved “non-traditional” sellers, such as conglomerates and insurance companies, a trend that has continued through the end of 2014. Taken together, these non-traditional sellers are becoming significant participants in the market.
0 10 20 30 40 50 60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Targets
(Global)
Hedge Fund Manager PE/VC Traditional Manager
Hedge Fund Manager (4Q Avg) PE/VC (4Q Avg) Traditional Manager (4Q Avg)
Targets
While deals targeting hedge fund managers are often some of the largest and most prominent, they represent only around 10% of the market by volume.
Deals to buy stakes in hedge fund managers have remained relatively flat, along with deals targeting venture capital and private equity fund managers.
Traditional investment managers, such as wealth management platforms, in contrast, witnessed substantial volatility: heightened deal activity in 2012 followed by a significant drop for the subsequent two years.
Buyers
Asset managers are the main buyers of other asset managers, representing the acquiring side in almost 60% of all deals during the five-year period covered by this study.
Over the last three years, the trend of asset manager buyers consolidating the industry by acquiring smaller targets has continued, while leveling off in 2014. 0 10 20 30 40 50 60 70 80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Selected Buyer Types
(Global)
Asset Manager Non-Traditional
Asset Manager (4Q Avg) Non-Traditional (4Q Avg)
After disposing much of their asset manager port-folios on account of regulatory developments and capital requirements, deals with bank buyers have shrunk to a tiny fraction of the market after 2012. Funds, by contrast, have consistently represented around 10% of the buyers.
Increasingly, pension funds, insurance compa-nies, and other entities outside the traditional asset management industry have started buying more stakes in asset managers. In 2014, these “non-traditional” purchasers accounted for over a quarter of all asset manager acquisitions; in the second quarter of 2014, they comprised about a third of all asset manager buyers.
Nuveen Investments /
TIAA-CREF
In October 2014, TIAA-CREF, a national financial services organization, bought Nuveen Investments for $6.25 billion from Madison Dearborn Partners. Nuveen, a highly diversified asset manager focusing primarily on mutual funds, commodities and municipal debt, managed approximately $230 billion at the time. Nuveen itself had made several acquisitions in recent years, including a controlling stake in the $15 billion commodity fund manager Gresham Investment Management.
For many years, pension funds have invested heavily into the funds of asset managers, and built up the infrastructure for doing so and evaluating the investment. Now, many pension funds have realized that they have excellent diligence teams and unique market insights into the relative performance and quality of managers. Some are beginning to use that talent to make acquisitions of minority stakes in asset managers.
29%
40%
22%
5%
4%
GLOBAL TRENDS
Through the end of 2014, the most prominent targets continued to be asset managers in Europe and the U.S. Historically, the number of deals involving European asset manager targets has maintained a small but consistent lead over U.S. asset manager targets.
While the European market has continued to dominate much of the growth in deal activity, U.S.-based managers have been expanding their share of transactions.
U.S. asset managers are not the only ones increasing their share of the market in the last couple of years. Asian asset managers are more and more active, strengthening their share of transactions as well. Asian managers have
0 10 20 30 40 50 60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014
Deals per Quarter
Selected Regions
Africa Asia
Europe North America Africa (4Q Avg) Asia (4Q Avg)
Europe (4Q Avg) North America (4Q Avg)
represented more than 20% of the targets in every quarter since the end of 2012. In the fourth quarter of 2014, deals targeting asset managers based in Asia outnumbered acquisitions of U.S. managers.
0 10 20 30 40 50 60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Deals per Quarter
Asset Manager Buyers
(U.S. and Europe)
Asset Manager Bank
Non-Traditional Asset Manager (4Q Avg) Bank (4Q Avg) Non-Traditional (4Q Avg)
2013 2014
Buyers in the U.S. and Europe also follow
expected trends, with bank activity dwindling after 2012 in the face of greater regulatory burdens and non-traditional buyers capturing a much greater share of the market.
Notably, asset manager buyers have a greater impact in the U.S. and European markets, as much of the activity from non-traditional buyers stems from Asia.
METHODOLOGY
This paper analyzes data on over 1,800 majority acquisitions of and minority investments in asset manager targets announced between January 1, 2010 through December 31, 2014. The data were compiled and reviewed by attorneys at Schulte Roth & Zabel LLP. The data set excludes transactions (i) for which no information on the parties involved was available, (ii) which were subsequently cancelled, (iii) which were deter-mined to be an internal restructuring or (iv) in which the target was incorrectly identified by the third party data sources as an asset manager. The findings described in this paper may not be representative of the broader M&A market and are not intended to be an exhaustive review of the surveyed transactions. The observations presented here are based solely on a review of publicly available information for the surveyed transactions. The views expressed in this paper are solely those of the author.
A number of caveats apply to this and any review of transactions. Quantitative analyses vary mean-ingfully from study to study. Different results are generated by:
• Sample size. The smaller the sample, the more they can be influenced by outlier deals. • Sample selection. Rarely do studies consider
all available data. How they pick and choose affects the results.
• Period reviewed. Trends change, by definition. The period studied matters.
• Mix of deal types. Different deal types constitute their own market. More or less of one type skews the results.
Christopher Harrison is co-head of
asset management M&A at Schulte
Roth & Zabel LLP in New York City
and an Adjunct Professor at New York
University School of Law, where he
teaches popular courses on negotiating
M&A deals. Mr. Harrison has worked
in all aspects of U.S. and cross-border
M&A transactions, with a particular
focus on asset manager M&A.
In 2015, Mr. Harrison published
Make the Deal: M&A Terms and
the Market with Bloomberg BNA.
Bringing behavioral finance, business
and law together, the book provides
a lucid analysis of how M&A deal
terms work and interrelate and gives
readers a clear sense for the realities
of M&A, by providing a thorough
market analysis for each deal point and
showing what is at stake in a deal.
Mr. Harrison’s undergraduate training
was in statistics and behavioral
economics. He then studied law and
economics at NYU School of Law. He
can be reached at +1 212-756-2191
and [email protected].
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