Monday, March 10, 2014

Banks shedding asset management businesses

Here is a chart showing the number of transactions that involve acquisitions of an asset management business by year. It tells us about a couple of trends developing in recent years.

1. Increasingly asset managers are bought by other asset managers in strategic acquisitions (and to a lesser degree by financial sponsors).

2. Banks have stopped acquiring asset management businesses. In fact what the chart doesn't tell us is that banks have been actively selling their asset management businesses (especially in alternatives such as private equity) mostly to established asset management firms (which is where the trend in item #1 above comes from). Here are some high profile examples:
  • Blackstone buys secondary private equity fund called Strategic Partners from Credit Suisse (see press release).
  • Grosvenor (fund of hedge funds) buys private equity fund of funds named Customized Fund Investment Group (CFIG) from Credit Suisse (see story).
  • Aberdeen Asset Management buys Scottish Widows fund from Lloyds Bank (see story).
  • SunTrust sells RidgeWorth asset management business to Federated Investors (see story).
  • Credit Suisse blows out its mezzanine fund business called DLJ Investment Partners to Portfolio Advisors (see story).
  • Deutsche Bank to sell its asset management business (see story) - likely to Guggenheim Partners.
  • JPMorgan is still trying to sell its private equity business (see story), although the price tag has been a bit too rich for potential buyers (see story).
Why are banks selling these businesses? The obvious answer of course is the looming Volcker Rule. But these funds invest clients' money - why would it impact banks' balance sheets? The answer has to do with alternatives investors' requirement that banks that manage money put some serious "skin in the game". A typical general partner (fund manager) may put in say 1-3% into a fund it manages. A bank however is required to coinvest a much larger percentage with its investors. That's because investors worry that banks will stuff deals which are difficult to sell into their funds, focusing on lucrative investment banking deal fee income at the expense of performance. But the Volcker Rule only permits banks to commit up to 3% to their funds, making the business of managing funds untenable. That, combined with banks' relatively high cost structure and in some cases capital constraints (particularly for European banks), is driving them to shed asset management businesses.
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