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Money Management

Canadian firms continue manager acquisition spree

Focus shifts to buying shops outside country with expertise in alts

Vincent Duhamel said Canadian managers must go global to prosper.

An appetite to expand their investment strategies and client base, along with a stronger local currency, have Canadian banks and money managers looking for acquisitions beyond their country's borders.

Previous acquisitions by Canadian banking giants Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank involved non-Canadian money managers, and sources said they are again looking outside of the country for still further expansion.

In the past year, "there's been a lot of consolidation and acquisitions in the industry regarding Canadian independents; foreign, not so much," said Rebecca Cowdery, partner at the law firm of Borden Ladner Gervais LLP, Toronto. "But the chartered banks (BMO, RBC, TD Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce) all are looking to expand."

Strategies now being sought by Canadian banks and money managers include alternatives, emerging markets equities and fixed income, credit and global equities, sources said.

In just over a month, two manager deals were announced involving Canadian firms: Toronto-based Bank of Nova Scotia announced it would buy Jarislowsky Fraser Ltd., a Montreal-based institutional money manager, for C$950 million ($737 million); and Montreal-based manager Fiera Capital Corp. said it planned to acquire credit and special situations manager Clearwater Capital Partners LLC, Hong Kong, for $21 million.

Those deals come after a 2017 that saw mostly domestic acquisitions, including Sun Life Financial Inc. buying the mutual fund assets of Excel Funds Management Inc., and CI Financial purchasing Sentry Investments Inc. All four companies are based in Toronto.

The recent acquisitions point to an unabated hunger among Canadian banks and money managers to add scale to their overall business and bring more investment strategies under their roofs, diversifying away from their traditional domestic securities investments.

Mark Chow, associate partner, Canadian head of manager ​ research, at Aon Hewitt Investment Consulting, Toronto, agreed. "Asset management is attractive" to Canadian banks, Mr. Chow said. "Banks like their profile. It's just a matter of whether they want to spend the money to do it." Previous major deals — BMO acquiring London-based F&C Asset Management in 2014; Toronto-Dominion purchasing Epoch Investment Partners of New York in 2012; RBC buying Blue Bay Asset Management, also of London, in 2010 — "were intended to diversify the banks' asset management product lines," Mr. Chow said. "They went after expertise they couldn't find in Canada."

Spokesmen at the banks either could not be reached or had no comment.

Looking to expand expertise

Growth beyond Canadian managers' traditional expertise is a driver of the acquisition trend, said Benjamin Phillips, principal and investment management lead strategist with Casey Quirk, a practice of Deloitte Consulting LLP in New York. "Their primary product is Canadian equity and debt, which is not as in demand as other securities," Mr. Phillips said. "So if these firms want to keep going, they need to add skills to what they already know. They also view their market as a little overcrowded, allowing them to reinvest in the firms by acquisition to bring new capabilities to market."

Vincent Duhamel, Montreal-based global president and chief operating officer of Fiera Capital, said Canadian managers "have been quite satisfied to provide Canadian products to investment clients. But now they need to work in a global market."

Also, Canadian financial firms are still expanding their strategy offerings since the Ottawa government lifted the 30% limit on foreign investment in 2005.

"You couldn't invest outside of Canada, so a global model wasn't necessary," Mr. Duhamel said. "There's no frontier any more in Canada. We need managers to be where the alpha is."

Along with the desire to expand their product lines, the current value of the Canadian dollar makes foreign transactions more attractive. As of March 16, the Canadian dollar was at 76 cents in U.S. currency and 55 pence in U.K. pounds, down 4% and 7%, respectively, since Jan. 1 but up 6% and 12.6% from the start of 2016.

"The cyclical trends in the Canadian dollar provide even more initiative" to seek acquisitions, said Casey Quirk's Mr. Phillips.

Added Mr. Chow of Aon Hewitt: "The Canadian dollar's value has a massive impact on prices" for international firms. He said the longer-term rise in Canadian dollar vs. currencies like the U.S. dollar and the British pound has made acquisitions less expensive for Canadians. Given current currency prices, Mr. Chow added, managers in those countries should be attractive targets.

Although the favorable currency climate and need to expand strategies are general drivers of acquisitions, Mr. Chow said, the Bank of Nova Scotia deal for Jarislowsky Fraser was the culmination of the bank's ongoing attempt to break into the institutional investment market.

"Scotiabank was late to the game on institutional management," Mr. Chow said. "They had been looking for a manager for quite some time but (it) wasn't able to get the deals done. The deal for Jarislowsky Fraser got them into the (institutional) space. They did look in the U.S. but they struggled because the Canadian dollar fell in 2017. And for Jarislowsky Fraser, there was no real succession plan."

Officials at Bank of Nova Scotia could not be reached for comment.

Location, location, location

Fiera's Mr. Duhamel said Clearwater's location in Asia and its investment strategies were what attracted his firm. "We had nothing in Asia," Mr. Duhamel said. "We never did because we didn't have the experience in administering Asia from Montreal. With market growth, the size of the opportunity set, you need to be there. ... The other reason with Clearwater was the asset class. Alternative credit after the financial crisis was clearly in distressed debt. That's not a big story now, but Clearwater has shown the capacity to create new strategies like private lending and lower quality credit. Sooner or later, we'll hit a recession. These strategies would be important to have once that happens."

Fiera has been active in acquisitions. In December, Fiera agreed to take over management of City National Rochdale Emerging Markets Fund, a $1.7 billion mutual fund that invests primarily in Asian emerging markets equities, for $12 million. In 2016, Fiera acquired private debt manager Centria Commerce Inc., emerging markets equity manager Charlemagne Capital Ltd., growth equity firm Apex Capital Management, and the strategies and staff of hedge fund-of-funds and liquid alternatives manager Larch Lane Advisors LLC.

And Fiera will continue to look for acquisition opportunities, Mr. Duhamel said. "We made it a strategy to get firms that fit the needs of our clients. We're two years out on that plan. … The big part of that is where can you find the opportunity."

Mr. Duhamel also said the push to add investment strategies among Canadian managers follows the lead of the country's largest public plans, like the C$337.1 billion Canada Pension Plan, Ottawa; the C$298.5 billion Caisse de Depot et Placement du Quebec, Montreal, which manages Quebec's provincial plan assets; and the C$180.5 billion Ontario Teachers' Pension Plan, Toronto.

"They're the most sophisticated investors in the world, one, for their asset allocation strategies and, two, for the investments they have," Mr. Duhamel said. "They combine interesting alternatives strategies with long-only strategies that offer a stable return stream. They need to invest outside Canada to do that. They allow their managers more independence in the investment process. What that's done is clearly defined the scope of what their managers can do. That level of sophistication has moved to money managers' relationships with other clients. Smaller pension funds and investors want to invest the way they do and want managers who can do that."