Asset Management Acquisitions Unbowed by Bear Markets

February 18, 2003 ( - Few things have the potential to be as disruptive to a plan sponsor as a shift in management at a carefully selected investment manager.

And while slumping markets may have cut into assets under management by as much as 5%, and revenues by at least as much, at asset management firms, that apparently hasn’t slackened the thirst for fund company acquisitions.

That’s the conclusion of a recent report from consultant Cerulli Associates, which suggests that while 2002 acquisition levels were lower than the torrid pace of a couple of years ago, it remained largely in line with prior years.

Cerulli says that some $380 billion in assets under management changed hands in 39 asset management purchases last year, just slightly less than the 10-year average.   The record, according to Cerulli, was 2000, when it tracked 63 transactions.   Still, only that year, 1997 and 2001, which had 43 and 41 transactions, respectively, out paced 2002.   

Shift Shaping

However, Cerulli notes that the balance of power in such deals may be shifting, with buyers no longer willing to fork over the fat premiums paid in 1999 and 2000.   Citing figures from investment bank Putnam Lovell NBF that indicate the average buyer of a US asset management franchise in 2002 paid an average of roughly 13 times pre-tax profits and 4.4 times revenues – the lowest multiples since 1998, according to the report.   Those multiples are, however, nowhere near the lower levels recorded in the mid-1990s, according to Cerulli.

Cerulli notes other trends afoot in such deals, including:

  • More targeted buying, including the acquisition of single funds, or funds that fit a specific niche, rather than an entire complex
  • Cherry-picking, where buyers select only certain types of more profitable funds or fund types
  • Purchase prices that are contingent on future performance – Cerulli cites some deals where as much as half the purchase price may not materialize unless specific, aggressive growth targets are hit
  • Paying more attention to the next generation of managers in targeting the sale proceeds, and offering some retention incentive, rather than just focusing on the founders