NEW YORK BNY Mellon Asset Management is eying pushes into private equity and ETFs, rejiggering index portfolios run by three separate BNY Mellon units and continuing its march into non-U.S. markets, especially Asia.
In an interview with Pensions & Investments, Ronald P. OHanley, president and chief executive officer of the money management firm with $1.1 trillion under management, discussed the possible strategic changes.
Private equity is a glaring hole in BNY Mellons alternative investments capability one that Mr. OHanley would like to fill. Hes considering adding distressed debt capabilities, for example.
Weve talked a lot about when to go into private equity, and this may be the time to do that, Mr. OHanley said. Executives could pursue an acquisition or might hire private equity specialists in combination with internal staff, but he ruled out doing a liftout.
The firm, formed by the July 1 merger between Bank of New York Inc. and Mellon Financial Corp,, has a private equity fund of funds available only to high-net-worth investors. Among its subsidiaries, Urdang Capital Management offers real estate investment trust and private real estate capabilities, while Ivy Asset Management Corp. and EACM Advisors give the parent firm access to hedge funds of funds. The Boston Co. Asset Management LLC, Standish Mellon Asset Management Co. LLC and Mellon Capital Management Corp., San Francisco, each offer hedge funds among their other offerings.
Mr. OHanley said BNY Mellon has not made a formal commitment to move into private equity. Officials are not in talks with a private equity team or management firm, but Ive talked about this at a high level with my team.
The time to get into private equity is at the start of a new cycle, which is where the asset class is right now, he said.
Some form of distressed investing may be a way to back into private equity, Mr. OHanley said. A lot of highly leveraged deals got done in the last year and a half that might need to be restructured, he added.
Stephen Nesbitt, chief executive officer of alternatives consultant Cliffwater LLC, Marina Del Rey, Calif., said a move into distressed debt makes sense. Were at a point in the cycle where distressed has the greatest opportunity from a return perspective, he added.
But it might be tough to acquire a distressed debt operation because the subasset class is hot. According to Dow Jones Private Equity Analyst, New York, distressed debt funds raised $23.7 billion in the first half of this year, up from $19 billion in all of 2006 (P&I, Aug. 20).
Not only are private equity firms unlikely to part with distressed debt teams, but they also could be expensive, said John C. Siciliano, partner for Grail Partners LLC, a New York-based merchant banking firm.
Meanwhile, BNY Mellon also plans to increase the exchange-traded funds it offers. Currently, its Bank of New York Asset Management subsidiary manages $4 billion in ETFs. Theyre a big subadviser of ETFs, Mr. OHanley said.
Mr. OHanley gave few specifics on the ETF business but said he liked its potential. Youll see a proliferation of ETFs much like you saw with mutual funds in the late 80s and early 90s, he said.
BNY Mellon Asset Management spokesman Mike Dunn said a European financial institution is looking to BNY Mellon to take over the investment management of its ETFs so the institution could focus on distribution. He declined to name the institution.
Gaining market share of ETF assets in the U.S. could prove difficult. As of June 30, there was $689 billion in global ETF assets, according to Deborah Fuhr, a managing director of Morgan Stanley in London. Barclays Global Investors, San Francisco, and State Street Global Advisors, Boston, manage the bulk of those assets with $357 billion and $101 billion, respectively. In the U.S., those two firms account for 84% of the ETF assets under management.
Internationally, however, ETFs are a younger market, Ms. Fuhr noted in an e-mail response to questions.
Mr. OHanleys firm also could face ETF licensing issues. Before a company can issue an ETF based on an index, it has to get a license from that index provider. Managers have generally locked up exclusive agreements with many of those firms, Ms. Fuhr added, although this exclusivity might apply only to certain markets. Just because you have an index fund, it doesnt mean you can make that an ETF, Ms. Fuhr said in an interview.
Mr. Dunn responded that BNY Mellon officials expect there will be increasing opportunities to put both quantitatively and actively based products in a distribution vehicle like an ETF.
BNY Mellon Asset Management will consolidate its indexing business in short order, Mr. OHanley said.
The firm manages $169 billion in index strategies, $4 billion of that consists of enhanced index strategies among three of its subsidiaries the Bank of New York Asset Management, Mellon Capital Management and Mellon Equity Associates LLP, Pittsburgh. (The firm did not break out indexed assets of each unit.)
Mr. OHanley said he sees three centers of competency emerging from those firms, with Bank of New York possessing ETF expertise, Mellon Equity providing mutual fund and international equity capabilities, and Mellon Capital, the largest of the three in terms of indexed assets, having broad-based index capabilities that include domestic equity.
The plan is to bring the entire index business under one roof, which would give one manager larger volumes, in turn saving money on cross trades and getting clients an extra couple more basis points out of return, Mr. OHanley said.
Well bring them all under one roof but in a way we can keep all the people, Mr. OHanley said. He did not say which roof they would be brought under, but that the moves will be completed by the end of the year.
Mr. OHanley also is viewing international markets as a major source of growth for the firm. Non-U.S.-sourced business now accounts for 34% of the money management holding companys revenue, he said.
Asia offers the richest opportunities. Business from Asia has doubled to 12% of BNY Mellon Asset Managements revenue during the past two years. Mr. OHanley, who was appointed to lead the growth strategy development plan for the Asia-Pacific region for the entire bank, said the manager has a very strong presence in Japan and a reasonably strong presence in Australia.He also hopes to leverage existing relationships in Korea, Singapore and India.