BOSTON - As it prepares to close its largest acquisition to date, Affiliated Managers Group also is looking at future acquisitions, including potential affiliates outside the United States.
Having done six deals with domestic stock and bond managers, the money management holding company is looking at managers in non-traditional areas, said William J. Nutt, president and chief executive officer. And, Affiliated Managers may even help some of its affiliates do some acquisitions of their own.
With its most recent acquisition, AMG leapfrogged over many other holding companies emulating United Asset Management's money management acquisition business. It will triple its assets this month when it closes its acquisition of First Quadrant Corp., Pasadena, Calif., from Xerox Corp. First Quadrant will be AMG's largest affiliate, with nearly $11 billion in assets; its other five affiliates together have approximately $5 billion.
AMG could have done an acquisition of this size from day one, but it wanted its first five firms to be in the same class, said Mr. Nutt. The other five - J.M. Hartwell L.P., Skyline Asset Management, Renaissance Investment Management L.P., Paradigm Asset Management and Systematic Financial Management L.P. - all have between $500 million and $1.5 billion in assets.
With the First Quadrant acquisition completed, AMG will seek opportunities in international investments and non-traditional asset classes, said Mr. Nutt. AMG is looking at potential affiliates in Canada, the United Kingdom and, to a lesser extent, in continental Europe. It is studying targets among international, real estate, commodities, timber and oil and gas managers, among other classes.
The company might even do startups or liftouts, but only friendly ones, said Mr. Nutt. For example, he noted that in last year's acquisition of a minority interest in Paradigm, AMG acted to facilitate the spinoff of Paradigm from its parent, M.R. Beal & Co., in a management buy-out.
With its latest acquisition, AMG is playing in a new class. Sean M. Healey, executive vice president, noted in both the First Quadrant and Renaissance acquisitions, AMG prevailed in an auction format against several other buyers seeking to acquire 100% of those firms.
AMG does not acquire all of the equity in the firm, a main difference from its chief competitor UAM, said Mr. Nutt. AMG acquires a majority interest of 60% to 70% in a firm, and might go up to 80%, but makes it a point to recycle equity back to the management. In all but one acquisition it has done, it has made arrangements to allow management to increase its stake over time, said Mr. Healey.
Additionally, AMG's approach tries to make sure the management retains a direct financial incentive in the firm's performance by sharing the free cash flow with the firm's partners after AMG and the firm split the annual revenue, said Mr. Nutt.
Another key difference between UAM and AMG is that AMG was set up from the beginning to offer marketing and product development assistance to its affiliates, rather than just to buy and hold the firms, said Mr. Nutt. He noted UAM only now has begun to set up affiliates dedicated to support marketing and distribution for its managers. But despite the constant comparisons to UAM, AMG's management stresses they have a different approach. AMG executives don't see themselves as competing with UAM head to head.
"We don't set ourselves up as AMG vs. UAM, but it is a point of reference," for the industry and for investment bankers, said Mr. Nutt.
By the same token, AMG executives aren't worried about the recent surge in new holding companies seeking to clone UAM. Mr. Nutt noted none of the newcomers so far has closed any acquisition of the size of AMG's, between $500 million and $10 billion in assets. If the firms insist on cloning UAM's approach to the letter, then potential targets would have to ask themselves why not just go to the original UAM, rather than work with one of them, said Mr. Healey.
None of the clones has the capital backing or the expertise doing deals that AMG has, said Lee Chertavian, senior vice president. The capital backing recently improved with an infusion from NationsBank Corp. and ITT Hartford Group Inc., which acquired a minority interest for a total of $20 million.
AMG had selected the two partly for the distribution advantage they would offer its affiliates, something a purely financial investor could not, said Mr. Nutt. For example, NationsBank could market AMG's affiliates as a complement to the product lines of its investment management firms, TradeStreet Investment Associates Inc. and NationsGartmore Investment Management, he said.
AMG will step in to offer marketing expertise, and in some cases, it has done so even before an acquisition deal has closed, said Mr. Nutt. For example, AMG recently brought in consultants to make a distribution study for Skyline, which it acquired last year from broker/dealer Mesirow Financial Holdings, said Mr. Chertavian. The company has small and micro-cap equity funds it wants to grow, so the consultants will study how to best market them outside the Mesirow distribution network.
AMG also can help its affiliates acquire other firms that fit into their growth plans, said Mr. Healey. He noted First Quadrant's chief investment officer Robert Arnott has some ideas of firms that could make attractive acquisitions for First Quadrant and AMG will work with him to exploit those opportunities, said Mr. Healey.
AMG also can help by buying out a retiring senior partner in an affiliate and help the younger partners finance their purchase of that stake, said Mr. Nutt.