There was an unprecedented 89 deals for fund-management firms in the first half of 2006, according to a July report by Putnam Lovell NBF Securities. Buyers spent at least $13.5 billion in disclosed and estimated dollars—almost as much as the total spent all last year—for nearly $1 trillion in assets. If this acquisition pace continues, it will top the previous high set in 2000.
“Divestitures continue to populate deal activity as strategic introspection and a renewed focus on core competencies convince some sponsors of subscale fund complexes to seek buyers for their asset-management operations,” the Putnam Lovell report says.
BlackRock’s purchase of Merrill Lynch Investment Management, the largest fund deal in history, was a big factor in setting the record pace. Other notable deals include private-equity firm Heilman & Friedman’s expansion of its stake in Artisan Partners in May and subsequent backing of the management buyout of Gartmore Investment Management’s European fund operation. In March, Phoenix Investment Partners purchased Harris Investment Management, manager of the BMO Funds. And T. Rowe Price, one of the largest fund complexes in the U.S., acquired Preferred Group of Mutual Funds from Caterpillar.
Following a painful three-year bear market, messy trading scandals and heightened regulatory scrutiny over fees and disclosure, firms are under greater cost pressure. That makes creating economies of scale even more crucial. As a result, more firms are now looking to build their brands, buy assets and gain access to deeper distribution. “You have a little pent-up demand,” says Jeff Keil, principal of Keil Fiduciary Strategies, a mutual fund consultancy in Littleton, Colo. He also notes that among publicly traded money managers, there is “little patience on the part of shareholders” to wait for meaningful organic growth.
But it isn’t just mutual fund assets they’re after. Roughly 22 percent of the 89 deals this year involved alternative asset managers, suggesting that a high demand for nontraditional asset classes is a key driver of deal activity. For example, ABN Amro Asset Management bought fund of hedge funds International Asset Management in January and Japan’s Sparx Asset Management acquired hedge fund PMA Capital Management. Putnam Lovell analysts expect larger commitments to more esoteric asset classes like private equity, global property, CDOs and infrastructure.
Cross-border transactions also continue to surge as firms look to expand their footprint overseas. One-fourth of all deals involved firms in different countries, which reflects a growing interest in international expansion. Credit Suisse Asset Management capped off its expansion efforts in Asia with its purchase of South Korea’s Woori Asset Management. BNP Paribas Asset Management upped its stake in U.S. bond specialist Fischer Francis Trees & Watts.
As for advisors, a shrinking industry will mean less choice and less overlap in competing products, making picking funds a little easier and leaving them with fewer marketing packages to chuck in the wastebasket.