Markets wobble, but money managers continue to pursue the private client business.
By Vince Calio
November 2001
Institutional Investor Magazine
When Charles Schwab Corp. paid $3 billion for U.S. Trust Corp. in January 2000, it set off a flurry of deals involving high-net-worth money managers. Among them: Alliance Capital Management’s June 2000 $3.5 billion acquisition of value manager Sanford C. Bernstein & Co. and Franklin Resources’ $910 million purchase of old-line Fiduciary Trust Co. Amid a bear market and a shell-shocked economy, the push for private client business remains as fierce as ever.
Why? The high-net-worth market is large (total assets of some $17 trillion), fast-growing (up about 25 percent in the past year) and very fragmented (no firm has a market share of more than 2 percent). An attractive, wide-open market is worth the fight in today’s tough environment.
The past four months brought a spate of deals, large and small, targeting the high-net-worth and managed-account markets. Managed accounts, also known as wrap or separate accounts, usually have minimum investments of $100,000; they appear in many HNW portfolios. Investors in managed accounts pay an annual money management fee, which ranges from 1 percent, for clients with a few million dollars to invest, to a high of 3 percent.
In July Legg Mason paid $215 million for Royce & Associates, a retail value manager with $3.5 billion in assets under management. In August Affiliated Managers Group paid $247 million for a 51 percent stake in Friess Associates, which has $7 billion in assets. And that same month Eaton Vance Corp. bought Fox Asset Management, a two-year-old shop with $1.6 billion in assets, for $32 million and paid $75 million for Atlanta Capital Management, which manages $6.4 billion.
“It’s like bees to honey,” says Paul Schaeffer, head of Investment Counseling, a consulting firm. “Pension assets are growing at a sluggish pace.” Most of the increase in pension assets in 1998 and 1999 came from market appreciation, not net new cash flow, he says.
According to Investment Counseling, the high-net-worth segment saw faster year-over-year growth than any other segment since 1997: Its assets grew by 33 percent in 1999 and 25 percent in 2000. Institutional assets grew by 10 percent in 1999 and just 9 percent last year.
Ronald Peyton, head of pension consulting firm Callan Associates, sees the trend in full force. “I certainly recognize that a larger portion of revenues is coming from the high-net-worth side,” he says.
“Deals have been driven by the fact that there’s been a huge increase in demand for managed accounts and for investors and financial consultants in the high-net-worth market,” says David Heaton, co-head of asset management banking at Merrill Lynch & Co.
Heaton expects more deals down the road, and most of his colleagues agree. Although Heaton predictably declined to discuss specifics, he noted that “we’ll probably see a few more of those deals in the coming months.” Adds Brad Hearsh, a banker in the financial institutions group at UBS PaineWebber, “The high-net-worth market is fairly high up in the priorities of acquirers.”