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Strategic Overhaul in Global Asset Management Industry to Drive Dealmaking to New Peaks
NEW YORK, February 27, 2007 – Dealmaking in the global investment management industry in 2007 and beyond will be propelled by strategic, not financial, considerations, according to Rolling Out the Red Carpet: A Blockbuster Year for Fund Management M&A, 2006, a new report from investment bank Putnam Lovell NBF Securities Inc.
Motivated by the desire to build organizations that can weather all market conditions and expand geographically, asset managers, not distributors of investment management products, are driving transaction activity. Other financial actors – commercial and investment banks, insurers, and private equity firms – are also active participants, spurred by competition from asset managers, and rapidly changing investment management industry dynamics.
In 2006, strategic catalysts reshaping the global asset management business resulted in a record-busting year for M&A. Buyers spent almost $44 trillion to acquire over $2.65 trillion in assets under management and were involved in 191 transactions. By contrast, the previous peak was 159 deals in 2004, with 2000 as the high-water mark for disclosed deal value and assets acquired: $30.9 billion and $1.38 trillion, respectively. This year’s dealmaking may surpass 2006 in a number of categories, said Ben Phillips, Managing Director and Head of Strategic Analysis at New York-based Putnam Lovell NBF, and author of the new M&A review.
‘’For many firms, the strategic overhaul is in the early rounds,’’ Phillips said. ‘’That’s what makes the current wave of deal activity so much more vibrant than the one that ended with the market slump of 2000—it’s more sustainable for the longer-term. Moreover, asset management M&A is now a global phenomenon, with US buyers and sellers now representing a minority of transactions.’’
Avid appetite for alternative asset managers fueled nearly a third of deals announced during 2006, Phillips said. “But what many dismiss as vanilla is actually in vogue,” he added. “Asset managers are seeking more expertise in core global equities, European equities, and U.S. large-cap growth stocks, reflecting the fact that their increasingly multinational client base expects to meet many needs with traditional investment products. Such demands will drive activity in 2007.”
M&A activity last year lifted valuations of asset management transaction targets to a three-year peak of 11.3 times EBITDA (earnings before interest, tax, depreciation and amortization), according to the Putnam Lovell NBF report. Public market valuations are higher still, approaching 14 times EBITDA, and may lead to another record year for asset management IPOs.
The heady growth of alternative investments – hedge funds are now the biggest factor in global securities trading – continues to fuel deal activity in the financial technology sector, with more than 140 deals announced in 2006, Phillips said.
Putnam Lovell NBF expects the following M&A themes to be dominant in the year ahead:
- Robust deal flow, record-setting in various categories, led by firms retooling asset management strategies, and private equity flush with capital ratcheting up their investments in the investment management and related financial technology sectors.
- More fund management IPOs – particularly in London and continental Europe – as private equity and hedge fund firms imitate Fortress Investment Group and last year’s crop of listings.
- Innovative asset swaps, similar in concept to the BlackRock/Merrill Lynch and Legg Mason/Citigroup transactions.
- Search for the next frontier for alpha generation, as hedge fund strategies become commoditized.
- Increased level of cross-border activity, including outright acquisitions, asset swaps, joint ventures, and minority stakes.
- Focus on sophisticated solutions supporting asset management business will lead to more financial technology deal activity and higher valuations of those businesses.
- Rise of Asia as area of concentration for asset management dealmaking amid wealth creation in China, India, and the southeastern region of the continent.
- Financial engineering to play increasingly important role in dealmaking to achieve successful blend of control, financial incentives, and autonomy.
- Narrowing, albeit persistent, gap between public market and rising private market valuations for asset managers.
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