Mellon leads in deals during 2004; alternatives shine

NEW YORK — Alternative investments proved to be a bright spot in a mostly bleak money manager M&A period in 2004, with Mellon Financial Corp. leading the way with five deals.

According to Asset Management Focus, a report published by Freeman & Co. LLC, New York, there was a 13% decline in acquisition activity last year, to 147 deals announced, from 169 in 2003. The report stated alternative investments were the only sector that saw a significant increase in deals. "Alternatives continued to be hot, with the number of alternative acquisitions increasing by nearly 40% for the second straight year," the report stated.

Mellon Financial was the most active acquirer, announcing five acquisitions totaling $44 billion in assets under management, the report stated.

Mellon was followed by Affiliated Managers Group, Prides Crossing, Mass.; UBS AG, Zurich; Bear Stearns & Co., New York; and BNP Paribas SA, Paris. Each had four acquisitions last year.

In June, Mellon bought Evaluation Associates Capital Markets, a Norwalk, Conn., manager of hedge funds of funds for high-net-worth investors, pension funds and endowments. Evaluation Associates manages $2.7 billion in hedge fund-of-funds strategies and invests in event-driven, relative value and directional strategies. The deal almost doubled Mellon's $3.1 billion in hedge fund assets.

Patrick Sheppard, chief operating officer at Boston-based Mellon Institutional Asset Management, said in an interview that Mellon's latest institutional acquisitions were made for scale and to expand its fund-of-funds business.

Mr. Sheppard said Mellon is always looking for acquisition opportunities. "We like to look at gaps and future expectations," he said. Mellon is considering partnerships with long-short, quantitative international and European fixed-income managers, he said, but wouldn't discuss any pending deals.

Investors' appetites for alternative investments are on the upswing, Mr. Sheppard said. "The challenge is the sophistication and education level of the client base." Mellon also bought three high-net-worth firms: Safeco Trust Co., Providence Group Investment Advisory Co. and Paragon Asset Management Co.

"Mellon wants to transform itself into being a financial asset manager through various acquisitions they've done," said Geoff Bobroff, president of Bobroff Consulting Inc., an asset management consultant shop in East Greenwich, R.I. "Mellon is trying to catch the leaders through acquisitions, and it will continue into 2005," he said, referring to high-net-worth deals.

Mr. Bobroff added that Mellon has focused on its asset management business since selling its retail banking to Citizens Financial Group in Providence, R.I., in 2001. Currency management could be an important component of continued growth in the business, he added.

As Mellon closed its retail businesses, it has expanded the private wealth business.

Mellon acquired the remaining 70% of Pareto Partners' currency management business and global fixed-income business in August, totaling $38 billion in assets under management. It had already owned 30% of Pareto, a London currency manager.

The deal was made because interest in alternative investments, especially hedge funds and currency, has been rising, said Mr. Sheppard of Mellon.

In July, Mellon announced it would buy Paragon Asset Management Co., Las Vegas, adding about $600 million of client assets.

Jim McEleney, a first vice president at Mellon Global Securities Services, said in an interview that Mellon bought Derivatives Portfolio Management LLC, a Somerset, N.J., company that oversees $30 billion of assets for 91 clients. Its business also includes middle- and back-office outsourcing and transparency services.

Mr. McEleney said Mellon saw an important product gap in its hedge fund administration services to stand-alone managers and global institutions. Mellon plans to further expand DPM's operations in Europe to meet growing demand from international hedge fund managers, he said.

His unit has asset-servicing hubs in Dublin, London, Germany, and the Netherlands, and Mellon will next look to Luxembourg because it offers a good opportunity to do onshore and offshore business.

"Alternatives started out on the high-net-worth side, but for our side of the business it's another asset class for a client's portfolio," he said, especially for pension clients.

Mr. Bobroff said he expects other banks and financial institutions to make more acquisitions,

"A lot of top-tier banks will probably look at alternative investment management structures," but acquisitions will depend on how well the firms cultures mesh, Mr. Bobroff said.