Private party

Markets wobble, but money managers continue to pursue the private client business.

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.”

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