Executives at many money management firms are on the prowl in the new year, seeking the perfect partner(s) to complete their product range, add assets under management or bulk up their client list.
* Larry Fink, chief executive officer, BlackRock Inc., New York, wants an alternatives manager and an equity shop;
* Doni L. Fordyce, senior managing director, Bear Stearns Asset Management Inc., New York, seeks an international equity manager, a private equity manager, a hedge fund of funds and, perhaps, an aggressive growth manager;
* Jim Hawkes, chief executive officer at Eaton Vance Corp., Boston, is in the market for an international equity shop after buying domestic equity managers Fox Asset Management, Little Silver, N.J., and Atlanta Capital Corp., Atlanta, last year;
* John V. Murphy, president, chief executive officer and chairman, OppenheimerFunds Inc., New York, would like a separate account manager for retail wrap accounts. Oppenheimer Holding Co. acquired hedge fund-of-fund manager Tremont Advisers, Rye, N.Y., last year and already has a new retail and an institutional fund in registration; and
* Officials at Deutsche Bank AG, Munich, haven't even inked a deal to acquire Zurich Scudder Investments, New York, yet they are rumored to have their eyes on Merrill Lynch & Co. Inc. and an unnamed real estate manager.
Demand vs. supply
In general, the demand for money management firms to buy exceeds the supply.
The list of available sellers has been shrinking by 10% to 20% per year during the past few years, said Chas Burkhart, a former investment banker who now has a private equity shop, Rosemont Partners LLC, West Conshohocken, Pa.
Among the marquee midsized firms (those with $1 billion to $10 billion under management) are: Silchester International Investors Ltd.; Kopp Investment Advisors Inc.; Turner Investment Partners Inc.; Chartwell Investment Partners; Marvin & Palmer Associates Inc.; Southeastern Asset Management Inc.; Sound Shore Management Inc.; Boston Partners Asset Management LP; Cramer Rosenthal & McGlynn; Calamos Asset Management Inc.; Artisan Partners LP; and Cohen & Steers Capital Management Inc., Mr. Burkart said.
"These are the leading employee-owned niche firms that would be on any acquirer's list," Mr. Burkhart said. "There are a couple more names a bit below these which are attractive, but when you get much below this list, you start running into the problem children."
Mike Beasley, managing director of Strategic Investment Solutions Inc., San Francisco, especially likes Dodge & Cox among Mr. Burkhart's list of "great firms that would be pearls for anyone to acquire."
Mr. Beasley and John Meier, a Strategic director, said among the sellers could be foreign companies that might be disappointed by the diminished revenue stream of U.S. money managers they bought several years ago.
Certainly, Old Mutual Americas fits the bill. It's selling some of the midsized firms it acquired with its purchase of United Asset Management Corp. a year or so ago. In addition, Messrs. Beasley and Meier suggested Allianz AG might be a source of investment management sell-offs as several of the companies it has acquired are potential competitors.
As for alternatives, nearly every money manager on the planet is seeking access to alternative investments, but "there are very few properties available to buyers," said Christopher J. Acito, managing director of vendor strategists, BARRA Strategic Consulting Group, Darien, Conn.
While few private equity firm owners are likely to sell now, when they won't command a decent price, Mr. Acito said hedge fund and hedge fund-of-funds managers are under siege.
"Every single hedge fund-of-funds provider I know is surrounded by M&A bankers, who are hovering, trying to interest them in a sale. But there is a strong parallel between this interest in hedge funds and the Internet bubble. People are selling their firms and creating a major liquidity event at a far earlier stage than ever before. The buyers are taking a big bet on hedge fund managers, but unlike the dot-com phenomenon, this is a real business and attractive," said Mr. Acito.
Among the largest independently owned hedge fund-of-funds managers that don't already have marketing arrangements with big institutional investors are: Permal Asset Management, New York; Global Asset Management Ltd., London; Grosvenor Capital Management, Chicago; Quellos Group LLC, Seattle; Soros Fund Management LLC, New York; and Mesirow Advanced Strategies Inc., Chicago, according to data collected from various sources by BARRA Strategic Consulting. Quellos and Mesirow are the objects of particular interest by buyers, Mr. Acito said.
Rosemont's Mr. Burkhart said many money management firm owners are less inclined to sell the whole company, and are more interested in selling a minority stake in their firm - between 20% and 25% - and gaining significant distribution. Aeltus Investment Management, for example, acquired a minority interest in Elijah Asset Management LLC, San Francisco, The terms of the deal were not disclosed. When ING Groep NV, Amsterdam, acquired Aetna Financial Services, Hartford, Conn., in December 2000, the deal with Elijah was dissolved. Also, Wilmington Trust Co., Wilmington, Del., took a 24% stake in Cramer Rosenthal.
Some money manager combinations sound ideal. Randy Lert, chief investment officer of Frank Russell Co., Tacoma, Wash., cites three pairings, none based on the likelihood of a deal ever taking place.
Combining Turner Investment Partners, Berwyn, Pa., and Systematic Financial Management LP, Teaneck, N.J., would pair an aggressive growth all-cap and a value all-cap manager with similar investment management philosophies. Both are quantitative managers that augment their stock picks with fundamental analysis, and each is sector neutral, Mr. Lert said.
A powerful global platform would be created by pairing up Suffolk Capital Management Inc., New York, and Mastholm Asset Management LLC, Bellevue, Wash. Both are personality-driven firms, with Dan Gilbert leading Suffolk's U.S. equity team and Ted Tyson heading Mastholm's international equity team. While their styles are somewhat different, each focuses on bottom-up fundamentals, and the combination would provide investors with a strong global equity approach, Mr. Lert said.