M&A IN THE ASSET MANAGEMENT SPACE: USING INSTITUTIONAL DATA TO EVALUATE OPPORTUNITIES

Transcription

1 M&A IN THE ASSET MANAGEMENT SPACE: USING INSTITUTIONAL DATA TO EVALUATE OPPORTUNITIES 1

2 Executive Summary The institutional asset management industry is going through a disruption, which is likely to impact the business environment for the long term. Investment bankers and asset managers are looking for opportunities to build stronger brands and product lines through merger and/or acquisition. evestment s proprietary data and analytics can provide unique insights for in-house corporate development and acquisition executives and the investment bankers scouting and working on investment industry M&A deals. In this paper, we ll explore how data can be used to find the best opportunities in the changing industry landscape. We ll also share some of the best practices around evaluating the industry trends, assessing the fit of a target firm and insights that may impact valuation. This paper mainly focuses on mergers and acquisitions, but similar analysis can be used when exploring portfolio manager team lift outs. Changing Business Models Boston Consulting Group has found that the decoupling of AUM growth and revenue is a real problem for the institutional asset management industry. This is driving asset managers to different business models, including: 1. Distribution Powerhouse 2. Solutions Provider 3. Beta Factory 4. Alpha Shop These four models are centered around the breath of a firm s product line up and their primary distribution channels. Understand an asset manager s competitive strengths and weaknesses in context of the industry as a whole to create an acquisition target profile. When looking to match potential companies, understanding the size of the market and where assets are moving is a good starting point as it puts all of the analysis in context of the institutional asset management industry. Combining existing product line ups with trending asset flow information, will help buyers identify opportunities for synergies and business upside. Also, analyzing the product preferences for specific investor types versus a manager s distribution channels will create more transparency around the distribution gaps and what type of firms would provide the greatest benefit to remedy the situation. In additional to asset flows, viewership data on the universe level is a great tool to use when evaluating a firm s product line-up and distribution. This aggregate level data may be showing peaks and valleys for either positive or negative reasons, but it is an important indicator of the momentum that a manager has at that point in time. Evaluating an Asset Manager in the Context of the Industry Retail vs Institutional Assets When evaluating future cash flows going forward, it is important to note how much business comes from retail versus institutional assets. If calculations are 2

3 based on the incorrect type of flows, pricing models can be far off the mark. Evaluating list price with actual fees will help estimate the revenue impact of future asset flows. Product line up Product breath and focus are one of the major valuation drivers. It is key to understand how the target s and the buyer s product line complement each other. By incorporating analysis of the institutional demand to the product analysis, the value adds and potential upsides become more apparent. Asset flows and viewership data are good indications of where the products are headed in the future and helps buyers identify weaknesses that could impact the valuation of the company. Product Distribution If the buyer has a strong product assortment but poor distribution, then matching up with a target with strong distribution either by channel or geography may make sense. Having good data on client size and percentage of clients from each desired client segment and geography aid the buyers to evaluate the benefit of the merger. Firm valuation When pinning down the valuation of a firm, there are many intangible and tangible characteristics that may detract or boost the purchase price. Putting client retention, brand value and distribution effectiveness in context of the industry will make it easier to make the case to increase or decrease the proposed value. 3

4 CHAPTER 1 ANALYZING THE INSTITUTIONAL MARKETPLACE

5 Current State of the Asset Management Industry The asset management industry is facing challenges due to slowing organic growth, shrinking profit margins and increasing fee pressures. Additionally, competition among managers continues to increase as both established players and new entrants introduce additional product offerings to potential investors. In just the last three years, the evestment traditional dataset has increased by percent, up to nearly 20,000 strategies actively reporting data. This percentage increase omits inactive products. Traditionally, many managers have measured success by increases in assets under management (AUM); however, profitability has not improved incrementally with rises in AUM. Factors such as fee compression, the rise of passive investing and increased compliance costs are eating into bottom lines. In recent years, AUM has only risen modestly, much of which may be attributed to the stock market s positive returns. When analyzing the overall asset flows in the industry, cumulative flows dropped quite radically between The modest rebound last year can be attributed to the increase in fixed income investing. Under current market conditions, it is unlikely that asset flows to long-only universes will significantly increase in the coming years. State of Long-Only Asset Management Source: evestment 5

6 Industry Research Casey Quirk Deteriorating industry economics is driving managers to consolidate. While the volume and variety of competition is increasing, the pool of assets available for grabs for active managers is decreasing. Boston Consulting Group Alternatives, solutions and specialties will persist in generating strong fees along with passives will dominate the growth of AUM. Since 2010, fees have decreased by 3.5 percent per year since 2010 for highestmargin active products. This is causing a significant gap in an asset manager s revenue stream. It is this decoupling of AUM and revenue that will require managers to change their way of thinking and find new areas of growth by thinking differently about the business. Active core products accounted for 35 percent of AUM globally, but they only contributed 23 percent of revenues. This is leading to new business models in the industry, where the success of the firm comes down to the uniqueness of the product line-up or the effectiveness of the distribution. PwC A PwC survey of 126 investment industry CEOs showed that almost 80 percent are focused on organic growth as the primary way of growing in the next 12 months. Over 40 percent of the respondents were considering M&A in the next 12 months. PwC concluded that many CEOs in the asset management industry seem to underestimate the widespread industry reinvention under way and that current strategic approaches may not be sufficient to succeed. PwC Annual Survey of CEOs Q: Which of the following activities, if any, are you planning in the next 12 months in order to drive corporate growth or profitability? Asset & Wealth Management Global Source: PwC 6

7 Evaluating the Size of the Market and Asset Flows Industry information around AUM, flows and institutional investor search trends can give additional insights beyond traditional financial analysis during research of an acquisition target. When conducting a top-down analysis of the institutional market, understanding where money is moving in and out is a good starting point. As seen in the chart below, Europe has been seeing significant inflows in the last 12 months, while the U.S. has been suffering. Knowing which investor types are buying which products will help guide research. As not all investor types are alike, it is important to understand who is buying and who is selling. Pairing this information with the product line up and distribution strengths of a possible target will help support the story about the synergies the transaction will create. Asset Flows by Account Domicile Source: evestment Asset Flows by Investor Type Source: evestment 7

8 The current distribution of the AUMs between universes sets a baseline around where investors are allocating money. Having insights around future mandates and investor screening activity on a manager database such as evestment can indicate future behavior and focus. Identifying which universes have had either negative or positive momentum in conjunction with investor views helps to understand which asset classes are likely to be in favor going forward. In the example below, Global Multi-Sector Fixed Income has been receiving a magnitude of positive flows in the last year. Matching this momentum with possible product gaps of the buyer will help identify targets that can help with overall profitability. By pairing flow information with institutional investor views, a potential buyer can gain a solid understanding of the sustainability of this development. Investor screening activity in and of itself is an interesting aspect of the analysis. When comparing flows and reviewing trends, note that an increase in reviews may have a negative or positive impact on flows. In a merger situation, it is critical to know which of these scenarios the interest falls under to have a good pulse on the market momentum. Understand which universes and managers are increasing in popularity and which are not likely to offer much upside after the merger is completed. Asset Flows by Universe Source: evestment Universe Viewership Trends Universe AUM Q Net Flows Last 4 Quarters Reviews Trend 1 US Passive Fixed Income $740, % +14% 2 US Short Duration Fixed Income $554, % +10% 3 US Floating-Rate Banl Loan Fixed Income $380, % +12% 4 UK Cash Management $155, % -35% 5 Euro Fixed Income - Cash Management $271, % +26% 6 US Large Cap Growth Equity $716, % +13% 7 US Large Cap Value Equity $878, % -6% 8 Global Tactical Asset Allocation - Hedged $292, % +5% 9 US Large Cap Core Equity $613, % -8% 10 EAFE Large Cap Core Equity $289, % -5% Source: evestment 8

9 Evaluating the Fit of an Investment Manager Let s take a closer look at the asset management models defined by Boston Consulting Group. 1. Distribution Powerhouses include managers who have excellent product assortment and access to distribution and investors, as well as superior go-to-market capabilities. 2. Solutions Providers have multi-asset expertise and portfolio construction expertise. 3. Beta Factories have high operational efficiency. 4. Alpha Shops have deep expertise in either traditional or alternative asset classes. Boston Consulting Group s Four Winning Asset Management Business Models of the Future Source: Boston Consulting Group 9

10 BCG identifies three key reasons for M&A activity of asset managers: Product Expansion Managers who are seeing the need for product expansion are filling in gaps in their product assortment by offering a comprehensive set of strategies for global distribution. Also, managers are improving their profile by expanding their smart beta and alternative capabilities. In 2017, Amundi merged with Pioneer. One of the key reasons for the merger was to enhance and diversify their product offering within various asset classes such as European, U.S. and Emerging Markets equity, multi-asset as well as custom-designed services such as smart beta and alternative asset classes, which appeal to institutional audiences. asset managers can increase the impact of their distribution team. When U.K.-based Henderson and U.S.-based Janus merged in 2017, they were looking to create a truly global asset management firm to improve distribution globally. Volume Expansion Mergers based on economies of scale provide cost savings for asset managers. By merging operations and IT, many firms have been able to create significant cost savings. The Standard Life/Aberdeen merger created one of the largest asset managers in the U.K. with AUM of 670 billion. The intent of the deal was to create synergies between the two prominent managers and cost savings. Distribution Expansion By merging with distribution powerhouses, an asset manager gains entry to new markets and channels for their existing product assortment. Through the improved coverage, 10

11 How Asset Managers are Looking to Improve Profitability Globally, asset managers are looking for new growth opportunities from various sources, such as emerging markets, product innovation technology and cost management. That said, cost management is far less popular among asset management executives versus other industries. Per the PwC CEO survey, only about 30 percent of investment management CEOs are seeing cost cutting as a valuable tool to improve profitability versus 62 percent overall. Therefore, M&A has taken a prominent position in developing the business, as scale appears to be a key growth pillar for investment managers. Despite being concerned with overhead and fixed cost in recent years, firms have focused mostly on securing access to new product capabilities through their acquisitions. In 2016, acquiring more transformative investment strategies and access to new capabilities was the impetus for the deal in over 30 percent of the cases, while consolidation was the primary reason in only 12 percent of the deals. The asset management industry is moving to a point where you have to be either very big or very niche to compete. The guys in the middle are going to struggle. The shift to passive management is continuing to put pressure on industry fee levels, which will continue to heavily impact manager profitability. Asset Management M&A Transactions Worldwide by Category (2016) Source: Casey Quirk/Deloitte 11

12 CHAPTER 2 PERFORMING DUE DILIGENCE

13 How to Use evestment s Institutional Database for M&A Research and Analysis Many investment banks are going beyond traditional financial analysis when building their pitch books for a buyer in the investment management industry. It is essential to know where assets are likely to move and assess the firm s ability to capture more assets after the merger. Identifying M&A targets from the thousands of asset management firms out there can be tedious. At the end of Q1 2018, over 4,000 firms submitted data to the evestment database, and more evestment clients are using our database to research and narrow down the search of acquisition targets by utilizing basic criteria such as location, size of the firm and ownership structure. Asset managers must disclose ownership structure as part of the institutional investor due diligence process. By diving into the details of a firm s ownership, investment banks can quickly evaluate what percentage of the firm is employee owned and if portfolio managers have a significant equity stake in the business. evestment also tracks female or minority ownership stakes, so if improving diversity is the goal of the buyer, this process will help investment banks easily identify firms that have significant female or minority ownership. To establish solid financial projections, it is imperative to understand how much of the target firm s AUM is retail versus institutional. As the fee structures and stickiness of these two types vary a great deal, it will have a major impact on cash flows. When evaluating various targets, understanding what percentage of the business is invested through various vehicles can help identify the framework and potential dynamics of an organization. Understanding Retail Versus Institutional Assets Separate/Segregated Pooled/Commingled Mutual Fund: Institutional Assets Accounts Assets Accounts Assets Accounts Total $562, ,274 $174, ,239 $945, Equities: Active $132, $20, $248, Equities: Passive $ $ $1, Bonds/Fixed Interest: Active $335, ,186 $22, $533, Bonds/Fixed Interest: Passive $0.0 0 $0.0 0 $0.0 0 Alternatives: Real Estate/Property $9, $55, ,117 $0.0 0 Alternatives: Hedge Fund of Funds $8, $5, $ Alternatives: Overlay (TAA/Currency) $22, $0.0 0 $0.0 0 Alternatives: Private Equity $10, $12, $0.0 0 Alternatives: Other $0.0 0 $0.0 0 $0.0 0 Multi-Asset/Balanced $41, $56, $161, Source: evestment 13

14 INSTITUTIONAL DEMAND VS YOUR PRODUCT LINEUP Top asset classes attracting new assets with high consultant viewership Rank Asset Class Name 1 Year Net Flow Growth Offered By Your Firm 1 Global Multi-Sector Fixed Income 36.41% 2 Diversified Growth Funds 19.88% 3 Global Unconstrained Fixed Income 15.58% 4 ACWI Ex-US Passive Equity 11.17% 5 Global Credit Fixed Income 11.03% 6 US Long Duration Fixed Income 9.08% 7 US Core Plus Fixed Income 8.23% 8 US Passive Core Fixed Income 8.04% 9 Global Agg Fixed Income 7.53% 10 Global Emerging Mkts Fixed Income - Hard Currency 6.55% Source: evestment Depending on the goal of the deal, use different criteria to narrow down a search. Above is a chart showing the fastest growing sub-asset classes and how many of these universes the buyer has a product in. By clearly pairing up asset growth centers with current capabilities, it becomes more obvious where the gaps are located. When focusing on distribution benefits, knowing the target s geographic and client segment focus will help to analyze the fit of a manager. If the goal is to get better distribution in the U.S., the firm below would provide a significant boost. Also, this firm is mostly managing large mandates, so if a buyer wants to move up in the mandate sizes, this manager would provide that benefit. The research should focus intensely on the product line-up and the distribution capabilities of a potential acquisition target. Having impartial information around these characteristics will help uncover new opportunities. Assets By Account Size < 1 USD Million $ USD Million $ USD Million $ USD Million $2,697.9 > 500 USD Million $22,

15 Assessing the Upside of a Firm s Investment Strategies When evaluating the upside potential of managers, look beyond performance to identify firms and strategies that will continue to deliver after the transaction. Flows are the most reliable indicators for firms either winning or losing assets. With a rise in the equity markets, all firms running a large equity portfolio should see AUM rise, but this can often disguise the true picture of certain areas of weakness that need further investigation. For instance, evestment data can help a potential buyer or investment banker understand how a strategy s asset flows look in context to target firms peers with similar performance. Has this fund done a better job at raising capital versus similarly performing peers? This can indicate if a better distribution machine really could make an impact on the bottom line. Uncover managers and strategies that are experiencing sluggish growth caused by lack of distribution channels or inefficiencies in operations. When representing a manager with a great distribution organization, this could indicate a potential buy target. Composition of the team and repeatability of the investment process are characteristics that can set apart managers. Doing a deep analysis on these factors will help to better predict the success of a firm going forward. based on various characteristics, including not only performance, but also flows, marketability, universe health and distribution impact. Doing this makes it easier and more efficient to do a quick analysis of the health of the product line. On the contrary, if a unique investment strategy needs more robust distribution, doing analysis on a manager s sales process can uncover complements from either client segment or geographic perspective. For each strategy, pull the breakdown of each type of investors based on client type and/or geography. Match these distribution efforts to a manager s current capabilities to unveil synergies that will enhance the value of the deal. When looking to add qualitative information to a deal s virtual data room, incorporate consultant perceptions pulled from commentary released by public investors. As these are actual mandates, consultants provide real-life feedback on managers and strategies, which can be used to complement the quantitative feedback process. This commentary will also help to understand the asset class and competitive landscape better, where the asset management industry is heading and how to stay in front of the wave. When researching interesting targets, investment banks may put the managers product line in a side-by-side comparison 15

16 CHAPTER 3 OTHER FACTORS IMPACTING THE FIRM VALUATION PROCESS

17 Variables influencing valuation of target company When building a pitchbook, there are many aspects of the institutional investment business that can influence the valuation of the target company, including client retention, brand awareness and the effectiveness of the target s distribution. Client Retention Client retention is an important part of future cash flows. When working on a deal, investment banks often analyze retention based on information received from the target acquisition. To really understand what it means, putting retention numbers into context compared to industry peers will give the buyer more bargaining power. In this example, the industry top five has retention of over 95 percent while the target s equivalent is at 83 percent. This could be used as a bargaining tool around the valuation negotiations. INSTITUTIONAL ASSET RETENTION Your institutional asset retention compared to top competitors Rank Firm Name Inst. AUM (Mil) Retention 1 Sample Manager 1 $257, % 2 Sample Manager 2 $253, % 3 Sample Manager 3 $514, % 4 Sample Manager 4 $264, % 5 Sample Manager 5 $2,219, % 72 Target Firm $267, % Source: evestment Brand Awareness Brand awareness is an important driver in the growth of institutional asset managers of all sizes. Brand awareness answers the question how familiar are investors with a firm and its products? This awareness is the first step in an investor s path to eventually placing a mandate. Managers who are effective in creating awareness are better able to compete in a crowded industry. In an attempt to quantify this intangible, evestment has identified a metric based on consultant reviews in our database as a proxy for brand awareness at the firm and product levels. evestment data shows that firms with both high firm and product awareness realize growth as much as 24.4x that of those with low awareness. Reaching a broad audience and doing so across multiple products in tandem is extremely difficult and achieved by only a select few only 2.2 percent of managers. In the path to achieving high firm and product awareness, there is steep competition faced for investor and consultant attention. 17

18 The average institutional consultant reviews less than two strategies per asset manager within a quarter. This illustrates the challenge asset managers have in building brand awareness. Despite having more strategies to attract investor attention, we find that large asset managers do not have a sizeable built-in advantage over smaller counterparts. In other words, simply having more products does not strongly correlate to an increased ability to cross-sell and does not automatically translate to higher brand awareness. For managers that do achieve both high firm and product awareness, negative effects can be just as impactful as the positive. Our industry has seen managers with the highest brand awareness experience some of the biggest asset losses. The managers in the top decile of brand awareness who did experience outflows, did so at a rate 4.5x greater than those who experienced inflows. Negative events for a single product such as poor performance, lacking stability or the departure of a key figure appear to greatly impact firm outcomes. Distribution Effectiveness When looking at the target s product line, investments banks need to get a grasp of how good the manager is at distributing their products. Evaluate what products are likely to succeed in the future based on their distribution track records and which ones will not provide much upside in the future. The M&A Environment in 2018 The number of transactions in 2017 were at record low of 781 globally, a nine percent drop from However, the average deal price has increased to $40.9 billion, which is the highest it has been since Despite industry conditions being ripe for more merger activity, the valuations of the companies have deterred some of the transactions from being completed. Towards the end of 2017, UBS financial analysts estimated that a significant pickup in M&A activity would require a market correction of more than 10 percent. In 2018, the recent increase in market volatility will impact the valuations for investment management firms. DISTRIBUTION EFFORT EFFECTIVENESS How successfully your products attracted assets versus expectations based on various factors. MOST EFFECTIVE Product Name 1 Year Institutional Net Flows (Mil) Distribution Score US Fixed Income $5, Global Equity $4, European Fixed Income $2, Global Fixed Income $1, US Passive Fixed Income $1, LEAST EFFECTIVE Product Name 1 Year Institutional Net Flows (Mil) Distribution Score Global Real Estate -$3, US High Yield -$2, Absolute Return -$2, International Equity -$1, Emerging Markets Equity -$1, Source: evestment 18

19 References 1. Why investment houses must be big or niche to survive, FT Advisor, 2 October Skill through scale? The role of M&A in a consolidating industry, Casey Quirk & Deloitte, Investment Management Outlook, Deloitte, Global Asset Management 2017: The Innovator s Advantage, Boston Consulting Group, 11 July Target Identification, Boston Consulting Group, Asset and wealth management deals insights: Q1 2018, PwC, PwC s 21st CEO Survey: Asset and Wealth Management, PwC, How to Conduct a Successful Acquisition Search, Third Coast Capital Advisors, January Industry Headwinds Produce More Manager M&A at Lower Values, FundFire, 24 January Project of acquisition of Pioneer Investments, Amundi, 17 December Aberdeen Asset and Standard Life complete 11bn merger, Financier Worldwide, October Janus, Henderson merger will reduce investment lineup, Pensions & Investments, 15 May M&A trends: how the barbell effect turns companies into targets, Financial Times, 21 January

20 Contact Us Maria Simon Global Marketing Manager Institutional Investors & Consultants Media Contacts Mark Scott, Corporate Communications, evestment +1 (678) Hugh Cunningham Cognito (US) +1 (646) Francesa Bliss Cognito (UK) Natalie Chan Teneo Strategy (Asia) About evestment evestment, a Nasdaq company, provides a flexible suite of easy-to-use, cloud-based solutions to help the institutional investing community identify and capitalize on global investment trends, better select and monitor investment managers and more successfully enable asset managers to market their funds worldwide. With the largest, most comprehensive global database of traditional and alternative strategies, delivered through leading-edge technology and backed by fantastic client service, evestment helps its clients be more strategic, efficient and informed.