As the economic crisis of credit and confidence reshapes the global financial landscape, mergers and acquisition activity in the asset management industry in 2009 will be powered primarily by need and the availability of capital, rather than strategic dealmaking, according to a new survey.
Jefferies Putnam Lovell expects that private equity firms will be active buyers of asset managers, in some cases partnering with strategic buyers to gobble up failing firms as leverage becomes available. Deals in the alternatives space will be driven primarily by sellers that otherwise run the risk of folding, unable to generate a profit on (shrinking) management fees alone. Jefferies also believes that funds of hedge funds will “remain relevant”, and strategic buyers will look to acquire these firms once the broader markets and asset levels stabilize.
“Pure-play asset managers, acting alone and in concert with private equity firms, will increasingly take advantage of this unique situation as commercial banks and insurance companies shed non-core investment businesses to raise capital,” said Aaron Dorr, a New York-based managing director at Jefferies Putnam. “In asset servicing, we see a wave of consolidation looming, as undercapitalized companies look to divest operations, while small- and mid-sized independents seek shelter within better-capitalized partners.”
The survey also says that traditional long-only asset classes will gain inflows at the expense of alternatives, which will continue to play an important role, particularly among institutional investors. The alternatives universe will be reshaped in 2009 as investors reconsider fee levels, demand more flexible capital lock-up periods, and insist on greater transparency. Increased regulatory oversight will raise the cost of doing business for hedge funds.
Also, the initial public offering window will remain closed in 2009 for asset managers and those that still find going public appealing will wait for the multiples of listed asset managers to normalize before even considering a flotation.