BOSTON — Executives at Affiliated Managers Group Inc. might soon be making a move into the private equity business, making early stage investments in money management startups, according to sources.
Boston-based AMG has built its business by taking majority equity stakes in midsize money management firms. It has evolved into a holding company with 24 “affiliates” that manage $250 billion in combined assets, including First Quadrant LP, AQR Capital Management LLC and Third Avenue Management LLC.
But, because of AMG’s success in growing the business and its increasing size, it has become more challenging for the company to “move the needle,” said one source who declined attribution.
“If they go out and buy a firm with $15 billion in assets now, it won’t have the same impact on its financials that it would have had seven or eight years ago,” added the source, pointing to AMG’s substantial increase in market capitalization. When AMG went public in 1997, its market cap was roughly $400 million; now that figure stands close to $5 billion. “They are at the point where they need to start looking for new ways to generate additional sources of business outside of their traditional model.”
This new business could soon come from private equity, sources said, in which AMG could target start-up managers or alternative investment management firms that might have been too small for AMG to previously consider.
Right now, AMG estimates there are roughly 1,800 midsize asset management firms industrywide, of which it has identified 150 to 200 as “core prospects,” according to a presentation made to analysts and investors last month.
Going ‘beyond’
AMG officials declined to discuss the possibility of launching a private equity business, but offered a brief statement: “As our business has grown and evolved, we are in a strong position to continue to grow through accretive new investments in outstanding boutique managers, and at the same time, pursue a range of attractive investment opportunities that are beyond our traditional affiliate model, including private equity,” said spokeswoman Laura Nicoll.
As AMG continues to grow through its traditional model, the “law of large numbers will eventually have to kick in,” said Marc Irizarry, an equity analyst who covers AMG for Goldman Sachs Inc., New York. “The bigger you get, the more pressure there is to do bigger deals. But AMG’s management is not going to do bigger deals just for the sake of doing bigger deals.” Goldman Sachs has a buy rating on AMG’s stock.
As an alternative, a number of industry observers said it would be a smart move for the company to get into private equity. By hatching a private equity business, AMG could take chances on smaller asset managers without having to own these firms in perpetuity and to develop a new source of investment income at the same time.
“It would give them the opportunity to take a grassroots approach and invest in new ideas and new firms, rather than taking a stake in a firm once it is fairly well established,” said Kevin Quirk, partner at Casey Quirk & Associates LLC, a strategic consulting firm in Darien, Conn. “And a lot of the most interesting and innovative ideas in the industry right now are coming from smaller firms.”
Looking to the future
Others pointed out that by investing in smaller firms or startups, AMG would also be putting itself in a position to groom potential future affiliates for its traditional business model — “like a major-league team with its own farm team,” added Donald Putnam, founder and managing partner of Grail Partners LLC, a San Francisco-based merchant bank that specializes in the asset management industry.
Also, by making private equity investments in asset managers, there would be less short-term pressure for these firms to contribute to the company’s financial results immediately. “Private investors have an advantage over publics when investing in growth companies; we have a longer time horizon,” said James Minnick, managing director of Lovell Minnick Partners LLC, a Los Angeles-based private equity firm.
The company could fund new businesses from its strong cash flows. AMG has generated $250 million annually in free cash flows, according to a first-quarter earnings report.
If AMG chose to launch itself into private equity, it could use this capital in part to fund the new business. “They are excellent capital disciplinarians,” said Goldman Sachs’ Mr. Irizarry.
Financially, AMG has performed well since going public 10 years ago, as evidenced by the total return of 591% on its stock price since its initial public offering.
