Asset Managers Cashing in on Merger Madness

Small investment shops are selling themselves for a bevy of reasons, from struggling to keep up with technology to succession planning. Larger firms are looking to take advantage.

Illustration by II

Illustration by II

Consolidation is in the cards for asset management, industry experts say.

In recent months, LaSalle Investment Management, BlackRock, Macquarie Investment Management, and FIS Group have inked deals, and the velocity of acquisitions by both large and mid-size firms is expected to swell.

“From my perspective, the transaction activity is up meaningfully,” Mike McMahon — head of the financial institutions practice at investment bank Houlihan Lokey — said by phone. “That’s coming from both sides: both the number of interested parties globally that are seeking to invest in these types of businesses and those looking to monetize a stake in their businesses.”

[II Deep Dive: The Slippery Business of Manager Mergers]

Small asset managers are selling themselves for a bevy of reasons, from struggling to keep up with technology expectations to succession planning. Larger firms are looking to take advantage: they are on the hunt for asset managers that can produce strong returns. All this is likely to build on buyers’ increasing interest in the asset management sector.

Indeed, deal volume in the industry was up 32 percent in the first quarter of 2018 year-on-year, according to data from business valuation specialist Mercer Capital.


One firm looking to capitalize on the merger madness is Victory Capital Management, a multi-boutique focused on small-cap investing that managed roughly $61 billion in assets as of March 31.

“We are looking to be acquisitive, given our history and business model,” said David Brown, Victory’s chief executive officer, in an interview at Institutional Investor’s offices. “We think the industry is consolidating.”

The firm’s strategy has been to acquire smaller asset managers. Those managers typically keep their chief investment officer and investment strategies, while Victory helps them with distribution. “Smaller, mid-size firms don’t have access to clients,” Brown said. “There also needs to be a reinvestment spend on opportunities and technology that they can’t always do. So they want to attach to a larger platform.”

Deal activity has been particularly prevalent in the private equity industry, which has experienced an influx of new firms and a need for succession planning.

“It’s very easy for potential counter parties in private equity to sit down,” said Victor Quiroga, founding partner at private equity advisory firm Triago. “You have one calling up another asking to talk about the development of our companies. That’s an easy conversation to have because it’s a part of their DNA.” Determining valuations for these companies comes easy for private equity firms. “Another thing private-equity guys do is price assets,” Quiroga said. “It’s what they do all day.”

Pricing for asset managers is “all over the place,” according to Brown. Houlihan Lokey’s McMahon agreed.

“If you’re low growth or have mostly performance fees hitting the bottom line, you’re in the five times EBITDA area. If you’re high growth, you’re getting 10 times or more,” McMahon said. “Platforms with high performance fees relative to management fees may fall somewhere in the middle of that range on a blended multiple basis.”

But deal activity doesn’t just include outright acquisitions. Take Dyal Capital Partners, an arm of Neuberger Berman that buys minority equity positions in alternative asset managers. The firm has picked up several stakes in the past few months, including in HPS Investments and Round Hill Capital.

“In addition to interested strategic parties, there are also a number of minority-stake funds that want to buy passive minority stakes in these managers,” McMahon said. “There’s a lot of capital chasing these opportunities, which makes the founders more open and receptive to having that dialogue.”