BOSTON - Despite formidable competition, United Asset Management Corp. plans to stick to its 100% acquisition model, and is weighing its ability to make a $1 billion buy if the opportunity arises.
But several new holding companies, backed by private equity groups, are directly challenging UAM's position as the most successful acquirer of private investment management firms.
To differentiate themselves in this market, new holding companies are shying away from UAM's pattern of acquiring 100% of a firm. Their goal is to control 51% to 80%, thereby gaining access to a portion of revenues and marketing the services. Their primary targets are owners who want to remain active and continue to hold an equity position.
"From a seller's perspective, this is a great time to take on a partner and diversify risk," said David Minella, president and chief executive officer of Value Asset Management Inc., a 2-year-old holding company based in Westport, Conn.
The new holding companies avoid acquiring firms with the same investment style; their goal is to build a suite of services that can be bundled together in cohesive marketing programs. UAM, by contrast, acquires profitable firms regardless of investment style, and thus has numerous firms with similar abilities.
Thomas Courtney Jr., president of The Courtney Group Inc., a New York investment banking firm that specializes in the asset management business, said private equity investors are willing to fund these holding companies because "a love potion has been unleashed regarding industry consolidation."
UAM has acquired 50 investment management firms in 17 years and has $206 billion in total assets under management, giving it the wherewithal to conduct a purchase of up to $1 billion, according to UAM spokesman Jonathan Hubbard. Mr. Hubbard confirmed the company is strengthening its informal relationship with investment bankers, although UAM continues to represent itself in most discussions.
In the average UAM deal, the acquired firm's revenue is divided 60/40 with UAM, with the firm's executives retaining 60% to control as they wish, without oversight by UAM. Firm executives sign employment and incentive contracts with UAM, generally with seven-year terms, under which they receive payouts based on the growth of the firm and the amount of new business.
Holding companies that acquire less than 100% majority control also engage in revenue sharing to a proportionate degree, but some equity is left directly in the hands of the firm's owners, with the aim of inspiring long-term growth and continuity. Each deal is structured a little differently, but the acquired firm may hold equity in the holding company as well.
That's why there is a push by holding companies to go public, which Affiliated Managers Group Inc. intends to accomplish by year's end.
Boston-based AMG has majority holdings in 10 mid-size investment management firms, with more than $40 billion in total assets under management. AMG was capitalized in part by ITT Hartford Group Inc., NationsBank Corp. and TA Associates Inc. of Boston, a provider of private equity capital.
Meanwhile, Value Asset Management just closed on its second acquisition. It has more than $4 billion in total assets under management. The company was founded by Christopher Kelley, formerly vice president of corporate finance for GE Capital Corp. in Stamford, Conn. A co-founder in VAM was Mark DeBlois, a managing director of BancBoston Ventures, lead investor and an arm of BancBoston Corp. that invests private equity. VAM will eventually go public.
"This had the growth prospects we (BancBoston) needed," Mr. DeBlois said. "There are over 3,000 money managers, an extremely fragmented industry, very profitable, looking for platforms and consolidation."
The new holding companies promote a strong emphasis on marketing and product development. Last month, New York merchant bank Castle Harlan Inc. led the capitalization of Matrix Capital Management Inc., a new company that will invest in money management firms.
"Matrix's strategy," said Castle Managing Director David H. Chow, "is to build a global investment management and asset-gathering operation by investing in money management firms with non-overlapping investment styles. Over time, this will create a broadly diversified product line."
