Mr. Bruno: Thank you all very much for coming. There were record levels of M&A activity in the money management industry in 2005 and 2006. How much longer do you think the good times will last?

Mr. Hunt: I think the characteristic of M&A will change dramatically. And I think one of the most important trends — and I’d be very interested in other folk’s perspectives — is the one of international. We’ve seen a lot of activity within the U.S. We’ve seen a little bit of activity trans-Atlantic. We’ve seen some consolidation within European countries. We haven’t yet seen the scale and the size, I think, of the building of global asset management firms that we will see.

And there are some important reasons for that. Part of (the reasons) are longer-term trends of the globalization of how money is managed, which we should have a longer debate on, and then (there are) some more prosaic reasons like the actual value of the dollar to many European players. So I think that will be a major trend.

I think the second one will be the continued expansion into alternatives of traditional players. And I think that will remain a very active arena. And I think the third will be the building up of more successful multiboutique models, as opposed to a lot of the traditional players. And I think we’ll see active volumes for all three of those reasons going forward and that will be somewhat different than the … volumes that you referred to.

Mr. Pakenham: The statistics that we gather suggest that this year it’s going to come in (strong). In fact, I think we’ve already had over 200 transactions, which is compared with 190 for the whole of last year. In terms of deal value, we’re at about $44 billion. So that’s pretty impressive as a start and we think that’s going to continue.

But I think what’s interesting is to even consider whether this is a consolidating industry at all. I don’t think there is evidence that this is a consolidating industry because if you look at the M&A transactions that are taking place, they are things like IPOs, MBOs, partial stakes in alternatives, which are not consolidating (moves).

In fact, outside of maybe the Generale transaction in Switzerland and the AmEx Bank transaction with (Standard Chartered) — which are really more banking transactions where there are clear cost synergies — in the main, these transactions haven’t been driven by cost synergies at all.

So I don’t think this is a consolidating industry and I think that most of the trends that we’re seeing are taking us away from that. The great feature of the European asset management industry has been the growth of the independent asset manager, in contrast to the asset managers in this country, which you are long accustomed to — strong, independent (firms) from Fidelity onward.

In the U.K., our largest independent asset manager would be Schroders. And Schroders is a fine business, but it doesn’t have, for example, a very strong U.S. business. And if you can be a global player without having a very strong U.S. business, then explain it to me because I don’t see that happening.

So, in Europe, we’ve got a few developing independent asset managers like Henderson, New Star, which are interesting but (in terms of scale), they don’t really compete with the Franklins and the Capitals that you have here. So (it’s) a very different industry shape.

In so far as we see consolidators, they are the old asset management companies within banks and insurance companies. And those don’t have quite the drive to make the acquisitions that they had four or five years ago. And although they played on a number of auctions, the auctions have been won by non-consolidators, the big private equity players, like the Jupiter transaction or the Gartmore transaction.

So that, I think, is where we’re going and I think it’s going to continue. I think (it) is a trend, not a cyclical phenomenon.

Mr. Bruno: From the money manager side, how do you see things developing?

Mr. Fetting: After the pickup in ’05-’06, … (transactions) will still certainly make strategic sense and be pursued, but I think there will be a more discerning aspect. …

I agree generally (with Kevin), but I think there are pockets within the business (where) consolidation makes sense, (such as) the U.S. mutual fund business. There are economies to be had with thoughtful consolidations.

And I think there will be more of that because there are just too many mutual funds out there relative to the real need. I think they were created when demand was just growing and growing and growing, and now I think the mutual fund business is becoming more of a share game than a growth game.

If you look at the growth of flows, a lot of it is coming from international funds and global funds, but they’ve taken flows from other categories as opposed to the total pie growing the way it used to.

Mr. Heaton: The first thing I’d say is these big transformational deals are awfully difficult to get done and they take an awfully long time to incubate ...

That being said, the conversations we’re having now are a lot more focused on contribution-combination ideas than frankly they have been over the last couple of years. Now, that’s not to say that these transactions will take place, because in a lot of these situations you’re talking about captive subsidiaries in Europe thinking, “How do I become global. I have to combine with somebody in the U.S.”

But the other interesting thing is, when I’m in Europe, the European captives and the independent asset managers all want to talk about, “How I can become bigger in the U.S.?” In the U.S. the big interest is, “How I can become bigger in Europe?” Interesting what people haven’t talked about — except for the hedge funds or alternative asset managers — is “How can I scale in Asia?”

So I think you’re going to see a lot of discussions around creative combinations, but it’s tough to predict if any of these deals are going to get done.

On the alternative side, you’ll continue to see the preferred structure be minority investments, at least if you’re talking about the single-strategy or multistrategy funds.

Finally, on the alternative side, clearly there’s going to be consolidations or combinations.

Mr. O’Hanley: Picking up on David’s point, our belief in M&A going forward — at least the big transactions that will make your front page — will be ones that are all about strategic positioning.

I think the biggest single driver of that, particularly outside the U.S., is the separation of manufacturing and distribution, and the notion that open architecture is here to stay. There may in fact be conflicts, financial conflicts, other kinds of conflicts, of having those together.

Having said that, I think this is not a new concept. We certainly have a lot of conversations, and a lot of these things haven’t happened. Lots of talk about them happening and they haven’t happened. In some cases, if you own an asset manager, even if it’s only 5% or 7% or 8% of your income statement, it’s a high ROE business and how do you replace the income?

That may change with what we’re seeing now. There’s potentially a lot of owners that may be troubled in some way. And this would be a nice asset to do (sell off). But strategically, in our view, it makes all the sense in the world to start to separate this and to see different kinds of disaggregation and reaggregation of companies.

Mr. McLane: David mentioned consolidation and then Kevin said … he feels there’s a lot of de-consolidation going on. In fact, both are happening. Where it all nets out, I don’t know.

We began our investing in the industry in 1989, at a time when the banks were under a lot of pressure. Sound familiar? And the investment that we made then was the purchase of the Keystone mutual fund business from Travelers. Subsequently, there were several other buyouts that we were able to do together with management teams ...

I think some of that may occur and we may see some of that over the next year or two, or even sooner: Good businesses needing to shed pieces of what they have because it’s a quick way to raise some capital, improve their shareholders’ equity … A lot of that often doesn’t show up because money management firms contribute a lot of earnings, but not a lot of balance-sheet value.

In 2008, I wouldn’t be surprised to see less overall deal activity and fewer transactions because what I see happening is a slowdown. There’ll be lots of things being talked about, but people will have trouble getting the prices they want. So inventories will build. It’s the same sort of thing that happens in the housing market. People don’t immediately sell their homes at distressed prices. They just stay on the market longer while they hope for a rebound.

Prices in some transactions recently have been remarkably high and to the extent that they were done together with a lot of leverage, that’s not going to be available for a period of time.

Mr. Heaton: I think it’s a combination of what Mark said and what Andy and what Ron said, that certain business lines within asset management are ripe for consolidation — U.S. mutual funds. We will see the continued separation of manufacturing and distribution, and certain financial institutions are under pressure.

Now even before these credit issues arose, banks we talk to in general are thinking about being net sellers, not net buyers, in the mutual fund business. And I think with the added pressure to increase capital ratios, you will see banks going forward absolutely being, in general, net sellers of their mutual fund subsidiaries. The buyers will be asset managers or insurance companies with scaled asset management subs and they will treat that more as a consolidation than a product extension.

So in that part of the business you will see consolidation. But that’s certainly not a general comment broadly across asset management.

Mr. Hunt: I agree with Dave, (but) just to make one comment that maybe we haven’t touched on as much. We all like to believe that things will happen because of the economics or strategic reasons within asset management. You could make a reasonable case that changes to the industry structure over the next year will happen at least as much because of changes to the financial institutions more broadly.

I think we’ll see some bank consolidations. We’ll see some international transactions that will happen, which will just bring together asset management firms as an almost secondary consequence. That will trigger the question of spinoffs: “Are we really the best owner for this consolidation?”

So a lot of the shifts may actually occur not within asset management, or at least that will not be the genesis of why the changes occur.

Mr. Pakenham: I just wanted to make one point about the distinction that we are all now very accepting of, the distinction in manufacturing and distribution, (which is) much better advanced here in the U.S. than it is in Europe, where I think it’s still very early days in a number of European countries.

But I think there’s a middle ground, which is extremely important. It’s what I’ve described as the skilled assembler. And the skilled assembler — I would put in fund of hedge funds, fund of private equity managers, I would put a whole group of people in the skilled assemblers — is in fact a sort of battleground between the distributors, who want to acquire and maintain margin, and the manufacturers who want to take on, use their brand, their distribution, their technology to build out a broader set of products that are not so performance based. So I think there’s an interesting third category which is very important to M&A at the moment.

Mr. Fetting: Skilled assembler. He’s always got a good phrase; I’m going to take this one back with me.

Talented teams are the scarce resource, and their ability to basically pursue alternatives, and get capital from various approaches. So like what Andy was saying, I think they’ll have a lot more options, even with the debt market not there.

And we have found that factor to be more of a driver in successfully completing a transaction than before. The influence of the talented team — the options they have and the keen awareness they have that they can deploy those options. It kind of leverages the skilled comment …

Mr. Pakenham: I think that’s absolutely right. It’s clear (in) a number of recent transactions that management are seen as being in the box seat in a way that was unthinkable five years ago.

Mr. Bruno: What role will convergence between alternative and traditional managers play?

Mr. Heaton: My thoughts on convergence between the extreme illiquid hedge fund and the traditional U.S. mutual fund: I just don’t see that happening.

I certainly do see convergence between hedge funds and private equity. That’s happening as we speak. I do see traditional managers adopting new products … liberating the efficient frontier, being able to use incrementally more leverage, being able to use shorting.

But the cultures of a long-only asset manager firm and a traditional private equity firm are just so darn different, the compensation structures are so different, the ways you gather assets are so different. It’s tough to say that that will never happen, but I don’t see that happening in droves as predicted by some pundits.

I do, however, see hedge funds, especially as they think about becoming public companies, having to adopt strategies that play in more liquid markets and are scalable. If you’re a public company, you have to grow, as opposed to if you’re a boutique. And they will do that by, you know, enhanced indexing, potentially porting alpha, potentially acquiring long-only managers.

But, frankly, I see some of the public hedge funds as more likely to buy long-only managers than public long-only managers going out and making an acquisition spree in hedge funds.

My view is that the driver of M&A in alternatives will continue to be the investment banks taking minority stakes in alternative managers. It will be the sovereign wealth funds and the government investment corporations who basically are private equity firms in themselves.

And, as we were talking about before, there are tens and tens of startup companies out there thinking about executing a rollout model in hedge funds. As we all know from our experience in the long-only world, … one or two of them may succeed, but many won't; many will fail.

Mr. O’Hanley: Perhaps you’d expect me to disagree, David, with you a little bit because we started out as a long-only manager and we have nearly $50 billion in alternatives and most of that we built, we didn’t acquire it.

There is convergence in the sense the clients are pushing us there. Starting with our high-net-worth clients, institutional clients and it’s only a matter of time before the retail client will want to be there too, in some form.

I do think, though, that David’s points on how do you have these things reside alongside a traditional long-only (group), that is a big challenge. How do you do it in a way that makes sense compensation wise? How do you do it in a way that makes sense for the client? There’s a lot of compliance issues that come up with this, but I don’t believe it’s impossible and I believe that we have to figure out a way to do it because clients increasingly are seeking these kinds of non-correlated returns and we’ve got to figure out a way to provide it. So in my mind, it’s happening.

Mr. Heaton: And especially in a multiboutique holding company model, which is basically what Legg Mason is. Those business models can very well be successful acquirers of hedge funds, or fund of funds. Look at what Mark did with Permal.

Mr. Fetting: We opted for the skilled assembler in the notion of having that buffer between an individual hedge fund and a fund-of-hedge-funds manager. We thought that was a more appropriate vehicle to be part of our business portfolio. And actually feel somewhat vindicated through this turmoil because, not just for Permal, but generally the fund-of-hedge-funds managers haven’t been exposed to some of the single-firm risk that you’ve seen out there.

But that was a very important step for us … This was our first real business dedicated to alternatives.

We have had experiences where some of our managers developed an alternative (strategy) and it did develop to be kind of dysfunctional in the culture and they stopped it. So it isn’t easy to do within a firm, within a traditional long-only firm.

Mr. McLane: When we talk about alternatives, it’s always meant to us hedge funds in some form of another. And it’s sort of surprising now. We realize, “Oh, that means us too.” Private equity firms, too, are alternatives ...

The single biggest factor I believe that’s driven the transactions that we’ve seen in the last few years with alternatives, and here I really mean hedge funds, is that the discount for performance fees has disappeared.

It used to be that when we would look at and value an investment in a manager who had base management fees and performance fees, that there would be agreement on both sides that performance fee earnings were not worth as much as the earnings coming from the base management fees. And we even went so far to almost have a discount factor where one could argue about what the multiple of revenues ought to be or the multiple of earnings — whether it was an eight or a 10 or a 12 or a 14 or whatever number it might be. But whatever that number was, it ought to be half that number for the performance-fee contribution. So you’d get a blend where you might find a business that would be sold for 10 times earnings, but on pre-tax earnings because there’s sort of a blend of eight times for the performance fees and 12 times for the base management fees. Because of that, if you didn’t have the discount, all of a sudden you could have firms with large portions of their earnings coming from performance fees getting market multiples for those performance fees.

So, guess what? “Hey, let’s go public.” Guess what? “Let’s sell 20% to AMG.” Guess what? “Let’s sell to TA Associates” …

What will be very interesting to see is if that holds up as we go through and see the dispersion of returns that has developed within these much more volatile markets and if people start to become a little wary again of performance fees. Are they worth something? Absolutely. But how should they be valued?

Mr. Bruno: When we talk about alternatives, a lot of people tend to think strictly of hedge funds. Can we talk a little bit about some of the other types of alternative investment vehicles that you think will be attractive in M&A.

Mr. Hunt: Alternatives are rapidly moving from an asset class to a set of techniques. It’s important to recognize that those are very different things and they play out in the industry in different ways.

Some forms of what we now call … hedge funds or private equity players or, I think you could argue, real estate, commodities, real assets, are truly uncorrelated asset classes, which will remain so. Many other things we see out there are strategies and simply techniques that I think will play out across the normal course of stocks and bonds as we know (them) today.

To answer your question about convergence, the reality is it’s already happened. We recently completed a survey of the profitability and growth that covers about half of the industry. Right now, basically a third of the average revenues of a large asset manager come from alternatives.

So it’s not about will there be convergence or anything else. It’s happened, and it’s certainly happened for the larger players. It’s a big part of their revenue and their profitability. I think part of that is exactly what Ron said, which is: This isn’t a choice that the industry has; this is about what clients are demanding.

In the good old days, this was mostly a high-net-worth game and that’s where most of the assets built. Going forward, the assets are going to come from big international governments. They’re going to come from major pension players. It’s going to be institutional money. And that’s going to put the money managers in the real driver’s seat of building out these businesses.

And I think there are some important implications for how the industry develops in that.

One is that we firmly believe that the multiboutique model will be very successful at the expense of some of the others, partly because it has the capabilities of acquiring and building out different pockets of this while maintaining some control over distribution.

Secondly, we believe that pricing will come down, and that a lot of what’s been kind of in the hedge fund arena and others has really been kind of beta at alpha-plus pricing. You’ll see a lot of that washing through the system. There’ll always remain a few people who really generate alpha, but we will see — whether it’s 130/30 or a whole range of much cheaper products (that) use alternative techniques — will be offered to institutions.

Last, we would say that we do see the professionalism of the alternative space, whether or not it’s the large alternatives that might be going public. They all need to begin to put in place the people, processes or … more advanced managerial techniques, rather than (the) kind of pure craft businesses that they have today.

Mr. Pakenham: Asset management companies always operate in two dimensions. One is they are looking after their clients, and then the other is they’re looking after their own future. And that — I would think it would be true to say over here, but maybe you could say even more so in Europe — as an industry we are very poor, I think, at listening to the demand of our clients. Because very frequently we have investment teams who love managing money, and they have a God-given right to do that, and it’s a question of finding the right person to buy their product rather than, unfortunately, the other way around.

So that’s the sort of dimension I think would come into play. Where you have today a British asset management company, which traditionally has had much worse margins than in this country — or hedge funds or the private equity, the alternative space or the real estate also — with a God-given opportunity to improve margins tremendously.

Actually, almost all the asset managers in the U.K., with some very extreme examples like Gartmore, really turned the guns in a new direction, which was a very much more profitable direction, to deliver alternative products to their clients. Fortunately, for once they were listening to their clients because that’s what the clients actually want, and are going to continue to want, as we go forward.

If they can deliver it, then there’s not that much doubt in my mind that absolute-return and non-correlated returns are going to be an increasingly important part of the investment environment. That is, incidentally, why I think the valuation point that management fees and performance fees appear to have come together, actually (is) perfectly logical … If you don’t make performance fees, you’re not going to keep the management fees very long. On the other side, the true value of an asset management business as we know is really driven off the growth of earnings, not off the solidity of earnings, although there obviously is a trade-off between those two things.

And what we are seeing in the alternative space is such a fast growth of earnings that it is making up for the volatility and risks that reside in the nature of the client relations on the alternative side.

Mr. Bruno: Mark, would you talk about your views on globalization, cross-border transactions and so on? How much of a driver do you see that being on future mergers and acquisitions?

Mr. Fetting: It’s just obvious that the growth rates are higher non-U.S. The opportunities, therefore, are higher. In 1970, two-thirds of the equities were U.S. and now U.S. equities represent 48%. So the opportunities to invest in non-U.S. equity markets and debt markets, for that matter, are substantial.

For us, the Citi transaction was very much around a recognition of the importance of being truly global, both as an investment organization and as a client-serving organization, so that we could have centers of investors on the ground in many of those countries and we could also have client-servicing teams on the ground in many of those countries.

The alternative piece and the pricing, I haven’t seen any real pushback on that pricing. Those who are delivering value are getting it and getting more. If anything, they’re allocating that scarce resource with higher prices in one form or another. …

There are fewer and fewer people who deliver outsized returns. What would cause them not to charge appropriately for it?

Mr. Heaton: And it’s consistent outsized returns. We all in this room know it’s a disservice to lump all alternatives together. But if we have a low-vol, a low standard deviation hedge fund of funds that is returning 80 (basis points to) 100 basis points a month and they have a slug of performance fees, I don’t think people are going to be reticent about capitalizing them on your management-fee level.

However, there are a bunch of hedge funds out there that either almost blew up or did blow up in August and September that were very focused on underlying assets, illiquid collateral. Those firms will never get the capitalization of the performance fees, but the more consistent, more diversified, lower-vol alternative firms will.

Just as we’re now starting to bifurcate management fees and performance fees, we’re going to be bifurcating performance fees, depending on how they’re generated, how liquid the collateral is and what your track record is. …

(And one other point.) We talked a lot about convergence on the manufacturing side. A lot of the discussions we have (are about) convergence on the distribution side. Just like when we talk to a mutual fund company, if they want to partner, they want to partner with someone that can help them gather assets. There aren’t a lot of firms out there that are best-in-class asset gatherers for hedge funds.

And I’d be interested in Ron’s perspective as (head of) a multiboutique holding company model. Clearly, your clients are asking you for more access to alternatives. How are you developing your distribution infrastructure and organization? Because the long only managers I talk to, who are planning to make acquisitions in the alternative space, many of them are saying, “I need to build up a distribution force first before I go and buy somebody.”

Mr. O’Hanley: That’s a very good question because we built our global platform in the first part of this decade basically for traditional long-only kinds of investments. Much of our growth has been in the alternative space. I think that if we hadn’t built out the global distribution first, I don’t think we would have grown the alternatives as fast, because it’s not the same people. You’re in the same places, but it’s not the same people. You’re kind of glomming onto some of the same infrastructure but we’ve had to, in fact, put specialty distribution, basically product specialists, in place in various geographies to support this.

There’s not a lot of translation from providing, for example, alternatives to the high-net-worth space and providing it to the institutional space. The clients are thinking differently about it. So it’s a challenge.

Mr. Pakenham: I just wanted to say one point about the role of brand in asset management, and particularly what we’ve seen rather interestingly is in the hedge fund space, and actually the other parts of the alternatives.

The brands have been created surprisingly quickly. What these brands stand for is skill in a way of managing money. Having created those brands, that leads to the bifurcation that was being talked about — that you’ve got people who’ve made it above that level and can then stand alone and they can launch more and more hedge funds with different strategies and different styles, and those that don’t make it and they stand, as it were, below the sort and can't make the breakthrough.

And I think that the role of brand in our industry has always been very strong, very exploitable.

Mr. Bruno: Ron, you mentioned that you had been building the non-U.S. side of the business for quite some time. Could you give an update on where you are now and what it is that you might be looking to do in terms of build vs. buy?

Mr. O’Hanley: Going back to Mark’s point, the trend here is clear. What you’re seeing is, for lack of a better term, an Anglo-Saxon export of know-how. The question is, how do you do that? Our non-U.S. revenues are about almost 40% of our business, but it’s growing at three times the rate of the core business, which itself is growing reasonably fast. Now you’re seeing a global demand. The challenge is that it’s one thing to have the know-how, it’s another thing to be able to get it to the individual areas.

If you want to be large, I think you’ve got to build your own platform. It’s very hard to rely on that of others because I think too much of the margin gets taken away. Plus, I think you find yourself in a situation where your capacity is being used in a way that may not be for the highest and best use of yourself.

Asia is where our biggest growth has been. We started out like a lot of others in the late ’90s, early 2000s in Europe, but Asia’s far and away been the biggest growth area for us in the last three years.

Mr. McLane: I’m listening to (Ron’s) comments about scale and distribution, alternative product and I think we have seen numerous examples of that being successfully done in the high-net-worth space. This was not a new concept, picking up on what I think David said.

But whether it’s UBS or Goldman Sachs and Merrill — it’s the big investment firms that have done a pretty good job here. I haven’t seen a lot of examples of it in the institutional space, except through the fund-of-funds vehicle. In that case, you’ve got some scale.

But actually trying to herd these cats called hedge fund managers and run them all through the same distribution channels has proved challenging for a lot of businesses.

Mr. Bruno: David, would you talk about the role that non-U.S. firms may play in mergers and acquisitions moving forward?

Mr. Hunt: We would say that again you have to look pretty carefully at the different markets to see where the big advantages are going to lie. International is clearly growing much more quickly. If you’re a U.S. firm, you’ve got to be focused on being in harm’s way of that.

Many firms are focused in the wrong place. A lot of them have spent their time on the Continent. They’ve spent a lot of time on complicated distribution deals that haven’t worked and they haven’t spent time in Asia. They haven’t really understood some of the changes that are under way in Japan. And they also have underestimated the importance of the Middle East, which has gone through a real transformation, I would say, over the last five years.

For U.S. players, you’ve got to be on top of those three major buckets if you’re going to capture the international opportunity.

Mr. Pakenham: Clearly, the growth opportunities outside of the U.S. are very attractive to U.S. money managers. But I also agree with what David’s saying, it’s very easy to be a snare and a delusion because the European market is not an integrated market. It’s a very difficult market to operate in, and open architecture is honored more in the breach than the observance. I think there are a lot of opportunities. You have to go with the right partner.

The thing to remember is that (European institutions) find, in particularly the mainland European continent, they’re not to give up their position in a short order as distributors of savings products because it’s a very important part of their revenue stream. So whatever happens they are concerned to be able to deliver product to what they see as their client base that they own. And I hope I’m not putting it too strongly when I use the word “own.”

An American fund … almost certainly is going to have to (penetrate that) through some sort of joint venture. But, as David’s saying, joint ventures are tough to do and require a lot of work and it’s not an easy thing.

But I do think the growth opportunity is, therefore, probably higher in places like Asia and Latin America, the oil states — whether they’re Middle East oil states or other sorts of oil states — there’s a lot of free money …

So those are the opportunities, but I think they have to be reckoned to be very differentiated place by place. This is not like looking at the U.S. market. …

Everybody talks about the boom in ’05-’06. There actually were more billion-dollar M&A deals done in 2000-2001 than there were in ’05 and ’06. There were a lot of deals done in ’05 and ’06, but they were private equity …

So I do wonder if you believe that private equity may be, if not going away, that the valuations won't be there. If whether this will open it up to some kinds of M&A from outside the U.S. into the U.S., more like the platform deals that you saw in the early part of this decade.

Mr. Heaton: To have the $1 billion to $2 billion platform deals, you need to have the motivated or the interested seller. I certainly think that there’s a lot of interest (by European firms) … to make that type of acquisition. The challenge is finding the interested or motivated seller.

A lot’s been said about the future of private equity. Let’s keep in mind that the Nuveen deal got financed and the Marsico deal got financed after the credit bubble burst. So private equity is still going to be a very real and active player in money management for as far as I can see.

But I do think that the deals, the larger deals that will happen that are cross-border, are probably going to look more like these contribution deals — the Merrill-BlackRock deal — than an Allianz acquisition of PIMCO.

Mr. Fetting: Marsico and Nuveen — the terms got struck before the credit crunch. (They) funded afterwards. Don’t you think those terms are unlikely?

Mr. Heaton: A lot of the terms, at least in the underlying loans, were modified to get the deals done. Now, do I think you’re going to see, a high-teens EBITDA going-private multiple? It’s going to be challenging, but Marsico was not done at that ZIP code ...

Mr. McLane: It’s interesting you brought those up because those are … outliers. The Nuveen (deal) was an extraordinary price, with an extraordinary amount of leverage committed to before the bubble burst. Maybe the terms were modified a little, but this is the game that’s going on right now. Who’s going to walk? Underlying those (deals) were pretty strong commitments on the part of the banks to fund.

I actually think Marsico is the poster child of management empowerment. The multiple at which that was purchased was a modest multiple. If I remember correctly, the total amount of equity that was put into the purchase was $150 million. That’s all. So it was mostly done with leverage because the purchase price itself was a modest price.

It was essentially funded in good part by the seller. The seller didn’t have a choice. I don’t know the details, but I assume there was a team that was just going to simply walk away if they didn’t do that inside transaction.

Mr. Bruno: Six months ago, if conditions are what the conditions are right now, does the Nuveen deal still get done?

Mr. McLane: I don’t believe so. Not at that price. Not on those multiples of leverage and not at that aggregate price.

Mr. O’Hanley: So then the question isn’t whether a deal would have gotten done, but a different one, not involving private equity.

Mr. Hunt: And that’s where I think, Ron, to your earlier point, … the strategy deals actually are going to come back more to the fore. Because I slightly disagree ... Private equity will remain an important force in this, but I don’t see them leading the charge and driving some of the deal structure the way that they might have …

Mr. O’Hanley: Absolutely right.

Mr. Hunt: With that kind of price ceiling, if you will, going away, I think you come back to the strategic buyers. You come back to the European players that want to find their way to get into the U.S. That becomes now much more the likely theme.

Mr. Heaton: There will be a role for private equity. The strategic buyers, the strategic partners are going to be the drivers of larger-ticket M&A …

Mr. McLane: Nuveen probably just would have gone on its life as a public company. They got a premium to a public price.

Mr. Pakenham: I must say that I’m slightly skeptical about these European (buyers). Maybe a vision will arise amongst the Asian buyers, but I think the European buyers would like to do what we described, but they would probably like to do it through some sort of combination rather than the sort of pricing that we saw in 2000 to 2001 — when, after all, we were looking at high-teen multiples of EBITDA. There have been opportunities to play in auctions and they haven’t been there as really effective buyers at low-teen EBITDAs.

The situation for the banking sector in Europe is only going to get worse and it’s probably going to get worse for the insurance sector, too. I don’t see the Europeans (as) those sort of strategic buyers, the sort we had before. But I think we will see combinations of various kinds as banks and, less so, insurance companies, continue to question whether asset management is either a core requirement or a core competency for them. They will find a different way into the U.S. market.

Mr. Bruno: Where is the greatest potential overseas?

Mr. Fetting: I would agree with what David said in terms of Asia, the Middle East. I think you’re just spot on.

Mr. Bruno: What types of strategies?

Mr. Fetting: We’ve seen considerable growth in our fixed-income strategies in all of those markets. We’ve also seen our alternatives, fund of hedge funds (as being) very attractive in those markets. The actual greater growth has been in those two areas. That could be just some specific dynamics within our firm.

Mr. Bruno: David, can you talk about what it is in the U.S. that non-US companies are interested in?

Mr. Heaton: It’s just having access to a superior manufacturing facility in the world’s largest market. If you want to be a global asset manager, you have to have a core competency in large-cap U.S. equities and U.S. fixed income.

Again, we need to bifurcate a little bit. There are strategies where being global is a huge competitive advantage — fixed income — but there are other high-growth areas — defined contribution, subadvisory — where you don’t necessarily have to be global to be successful.

I’m not here to say that if you’re not global you will not be successful. However, if you want to be a broad provider of a full suite of investment products, then being global is a huge competitive advantage.

When we speak to European firms that aren’t scaled in the U.S., they’re looking at: “How can I both get capability in large-cap equities, in fixed income and, oh, by the way, it probably should come along with a scaled distribution engine as well because I’m not going to be able to build that from capability.”

Mr. Hunt: I actually think we will see a few of these deals. And I think it will be for exactly the reasons that you said, David.

They’ll probably take the form of some kind of contribution deal because you can imagine European firms (having to let go of) their manufacturing arms — and I think this is the tough decision for them — essentially what will become a reverse takeover, if they want to attract U.S. firms.

The key problem is there aren’t a lot of U.S. firms wanting to sign up for these. If they could have the potential to actually run now a global asset pool and the Europeans would contribute some to that, I think that would open up a new suite of possibilities. We’re getting closer to that kind of structure making sense.

Mr. Pakenham: It’s very difficult though for banks — European banks, or any banks — to get their mind around that proposition. It doesn’t go in the DNA to be a partial owner of a created company or whatever. It’s a difficult step to take. And they continue to have an involvement … at the regulatory level.

So yes, there’s been a lot of talk about it … but I’m trying to think of the big European (bank) that has actually taken part in such a deal. The only one which is standing out there is AllianceBernstein. And AllianceBernstein continues to operate with glorious indifference to access. So what does that tell you?

Mr. Bruno: How will the euro’s strength influence activity?

Mr. Pakenham: The capital base is far more an important factor and, generally speaking, the currency, I don’t think, drives these decisions. The currencies are operating on both the balance sheet and the P&L in a pretty negative way. Foreign currency is not a tremendous invitation.

Mr. Bruno: Ron, is it more important to have better manufacturing or better distribution abroad?

Mr. O’Hanley: We’ve tried to pursue this in parallel. Much of our distribution outside the U.S. has in fact been non-local product distributed into that market. You tend to get a higher fee; you tend to have a little bit less competition. So that’s basically been our strategy. But at the same time, we’ve built up our non-U.S. manufacturing either organically or through M&A.

This may be obvious but it’s clearly no one-size-fits-all. We chose a particular road that may or may not make sense for others. If you look at how we’ve grown in Asia, how we’ve grown in Australia, even to a large extent how we’ve grown in Europe, a lot of that’s been non-local product, distributed global product, dollar-based fixed income, whatever.

Mr. Bruno: Are we looking at perhaps some other transformational deals in the near future? And to what extent are the public markets viable alternatives.

We’ve seen BlackRock and Merrill, and Citi and Legg, and Bank of New York and Mellon. What are the odds of a deal of somewhat similar size taking place perhaps next year?

Mr. O’Hanley: I’m somewhat skeptical. First of all, I’m not even sure you ought to put our deal in there. We show up in the numbers but, from an asset management perspective, Mellon started out at $1.1 trillion before the close and ended up at $1.2 trillion. This deal was not done for asset management. It was almost a byproduct. That was the transformation, putting two large custody platforms together.

The BlackRock-Merrill deal was preceded by lots of misfires and lots of work that I’m sure David knows (better) than anybody. These things are hard to do, really hard to do. And you need a willing buyer and a willing seller.

To the point that both Mark and Andy were making, if it truly is good manufacturing there, you’ve got to have the teams onboard, too. This is kind of like bringing the U.N. together on a particular issue. So there may be the right kind of circumstances … but I don’t think you’re going to see a wave of this.

Mr. Heaton: I’d agree with Ron. But if one doesn’t happen, it’s not going to be because of the lack of effort or conversations that you’ll see.

And I think to bring that really together, the robust public markets for asset management franchises are going to potentially get in the way of contribution deals as subsidiary of institution X now has an IPO as well as a potential contribution deal as an alternative. There are clearly a lot of options, a lot of moving pieces, a lot of intrigue, but as Ron said, these things are awfully difficult to get done.

Mr. Bruno: David, do transformational deals make sense?

Mr. Hunt: I think that scale is a hugely misunderstood concept within asset management. People tend to focus on the total assets under management as an important measure of something. We’ve never been able to prove that that is, in fact, true.

This is not an industry where the logic simply is — as you might actually argue in custody or credit cards — that actually having a lot of footings or a lot of customers automatically leads to major benefits. We don’t really see that here.

We believe that there’s scale that happens in some specific distribution channels. There’s scale that happens by having more assets in a particular product strategy, which does work. And there are some scale advantages particularly in retail on the operations, technology and branding side. But it’s going to be scale within those silos rather than an overall asset level that really drives benefit in the industry.

And I continue to be exactly (in line) with Ron. I think it’s going to be a very challenging year for something like that to come together. Personally, I think it’s much more likely that we have a transformative deal for reasons other than asset management (such as the Mellon-BNY deal).

We could easily see one of the major banks for reasons that have nothing to do with asset management ending up being acquired in the U.S. We could see a trans-Atlantic deal also done, which would have important implications for their asset management.

Mr. O’Hanley: There have got to be some transactions falling out of the ABN AMRO deal. ABN AMRO has an asset management firm. Is that as valuable to the new owners? That would be an example.

Mr. Pakenham: The question will be whether there will be a number of small deals that result, which I think could be very likely, or whether there will be anything very large. Because actually there already is a large deal, which is Fortis ABN asset management being put together. So that is a fallout. Although … I think there will be at least one major deal in the course of 2008 in the trans-Atlantic space. And I think it will probably involve a European bank and probably a U.S. bank.

Mr. McLane: Mark, you mentioned public offerings. I wish it were not so, but I think … there will be more money managers electing the go-public route. Among those will be the alternatives. That’s sort of been the new phenomenon.

But I visited recently with a large private, very traditional manager that you would never have thought would consider a public offering that is mulling the idea now. That maybe we can handle that, because, again, they keep the autonomy. They have liquidity for the partners of the firm.

They don’t have to sell. They can sell. They can't sell suddenly but they can sell, not to put away a lot of money.

Mr. Bruno: What’s the rough AUM? What’s the ballpark?

Mr. McLane: It’s over $100 billion.

Mr. Bruno: That’s interesting. I definitely want to get into that question but I did want one final transformational —

Mr. O’Hanley: You did a transformational, David.

Mr. Fetting: (Our transaction with Citigroup is) frequently compared to BlackRock and Merrill. The difference between the two to me is fundamental. It was a distribution connection there (in the BlackRock-Merrill deal. With us, there was a total separation (of conflicts).

What we view as the reality of open architecture is worth the short-term pain that we’re (gone) through. And I think that’s profound; of course, for us it was. It was really three and, if you want to, it was four deals in one because we divested ourselves of the brokerage business. We acquired Citigroup’s asset management business. We also simultaneously announced the acquisition of Permal, which we’d been working on for some time.

Our brokerage business got split in two (with Smith Barney getting the retail piece and) Stifel (Nicolaus & Co. actually took the capital markets business. So a very complex transaction with (a long) gestation period ...

It was literally years of consideration of, “Do we take this final step? How do we take this final step of divesting ourselves of the brokerage business, getting bigger and we hope better in asset management?” So the complexity of it is enormous.

If you’re working with more of a partnering deal, however you define that, it’s still going to be significant, but it’s less complex.

Mr. Bruno: Would you do it again, given the short-term pain you had mentioned?

Mr. Fetting: I think the strategy for us strategically was sound, very sound. Where we are today … as a firm is better than where we were pre the transaction. You know, these past two years (have been) the best 20 years of my life.

Mr. Bruno: I’d like to come back to the public markets question. We just saw the Pzena IPO not that long go, some others are still in the works. David, can you talk about that?

Mr. Heaton: Part of it comes down to pricing. Our sense is there’s a public market premium. In general, the publicly traded asset managers are trading at multiples above where a vast majority of the private deals are getting done, which is somewhat kind of intuitive. But there is an allure out there both financially and strategically to be a public company.

Cohen & Steers is a great example. Marty Cohen and Bob Steers would go to Asia once a quarter to try to raise money from institutional investors there. After they went public, they started getting inbound calls from Asia. So there is a great strategic advantage to being public. There’s a financial advantage because of the pricing. But it’s a pain in the neck to be a public company. …

I think you’ve seen some of the most successful asset managers are private companies and will always be private. That’s both in the long-only and in the alternative space ...

For a hedge fund to become a public company, it has to be a firm that is going to be more open to probably new strategies that haven’t necessarily been a core competency before — scalable strategies, strategies in more liquid markets. The asset managers trade at higher multiples because they can grow faster than other forms of financial intermediation.

So if you want to be a public company, you’re going to have to grow your top of the line consistently at a high rate to achieve a high multiple.

Mr. Bruno: Ron, given your structure as a multiboutique manager, have you seen public valuations affect potential acquisitions?

Mr. O’Hanley: That’s an option that I don’t think the small or midsize players are necessarily thinking about, but certainly the midsize to large are thinking about. There’s always a do-nothing option in most of these cases. Very few are in a situation … (where) they have to do something. So there’s a do-nothing, there’s private equities, there’s public or some kind of a sale to somebody like us.

Part of it goes back to something David said. It really does depend on what the motivations of the sellers are, too. If all the equity is held by one, or a relatively small number of people, you’ve got to figure out a way to unlock that and move it on to the next generation.

If you’ve got a larger firm in a partnership structure, this may be the way to do it. You can't forget that a lot of this really does come down to that these firms started out small. Many started out as partnerships. It’s one thing when they’re small and you bring on a new partner and they buy in at some multiple to book, but it’s very different when they get large. The partners have as much self-interest as they do in seeing the firm perpetuate. I think it’s going to be more at the medium to large level.

Going back to this credit crisis, I actually think the relative value is probably going to go up. Look what’s happened in the last couple of weeks. The sector (not to be in) was financial services. But, if you’re in right, it’s in asset management and I think you’ll probably see that for a while.

Mr. Heaton: Since June 30, the broker-dealers are off 30% to 35%, banks are off 10% to 15%, asset managers are up as an industry group. It’s a flight to quality on the financial services side.

Mr. Pakenham: But that’s also because … the market levels so far have not fallen much, so that their revenues are pretty much intact.

In the European context … London has really established itself as a market for asset managers. When Mercury Asset Management was floated, it was floated with a view to being sold off to the highest bidder … Nine months later it was sold to MLIM. We have that as a pattern. Henderson was acquired by AMP. I think we’ve now got 18 asset management companies of all different sorts, a number of them have come in the last two years to the marketplace.

We could see this as cyclical. I personally think it’s a trend and it reflects the issues about control that go to the heart of the new structure — new in a European context — of asset management companies being capable of holding their own as independent entities and not relying on banks or insurance companies to distribute their products.

Mr. Bruno: Andy, you said you wouldn’t necessarily like to see the IPO option becoming more popular. But if that were to happen, what do you do?

Mr. McLane: The opportunity for us to invest comes about sometimes because a property is for sale and somebody’s going to buy it. We happen to sometimes pay the highest price. Sometimes there’s another reason that we may be successful.

But there are many situations which are the type that you were alluding to, where the option is do nothing. Privately held businesses don’t have to sell to raise capital. It doesn’t take a lot of capital to run a money management business. Mutual-fund businesses take a little more capital, but institutional advisory firms don’t need a lot of capital at all.

The reasons for selling tend to be: sell and pay a capital gain rather than keep taking money out and paying ordinary income taxes; another is some firms (such as ours) will do non-control minority investments. That’s appealing (to managers). “We don’t have to sell the control. We don’t have to sell the whole business.”

So our pitch is, you can have it both ways. You can have a bite at the apple now, sell part of your firm and keep all of your options open later. Sell the whole firm later; go public later.

If there’s an opportunity to go public, that allows the manager to sell a minority interest (and) stay independent. It’s another option to consider, when those markets weren’t available for those smaller and midsize firms or when there just wasn’t a mindset to want to be a publicly held company. It was the middle ground between sell our business to a big corporate buyer or do nothing.

Mr. Bruno: I want to give everybody an opportunity to offer some final closing thoughts. If we’re all sitting at this table a year from now, what’s the M&A story in the money management business?

Mr. Hunt: I think that if we looked back at ’08, we would be saying that it’s been another very good year for the industry. And I think it will be a relatively even better year compared to other areas of financial services.

We’ll be sitting back and looking at, again, a year of pretty good growth. We will be looking at a year of substantially expanded international growth for American firms. And we’ll be looking at very rapid growth in a number of areas that we haven’t touched on as much today.

For example, a lot of the retirement areas are growing exceptionally rapidly. There’s going to be a whole new set of products, offers, guarantees, combinations of insurance and asset management that are going to provide options and opportunities for people as they age that we don’t have now. We’re already seeing a little bit of that. We’ll see, in a way, a lot more movement in bringing those actually out to market.

We’ll also see some big changes in the DC market, which isn’t something that we’ve talked a lot about today. But both driven by the Pension Protection Act as well as some of the underlying fundamentals of that business, we’ll increasingly see newly constructed DC platforms that will give real opportunities to more sophisticated versions of lifestyle and retirement funds — the ability to buy income and a whole series of products within those that we haven’t seen.

Another theme: we will finally see asset management firms waking up to operations and technology, and the importance of investing in that. This has remained kind of a craft business and people haven’t spent as much time on those areas as they probably should.

Now that the firms are getting to a size where there’s real money to be had, I think we’ll look back at ’08 as the beginning of a period in the industry where operations and technology had a front seat with distribution and manufacturing as a really important part of the business.

M&A will remain an important part of the general arsenal toward growth. It would not be on my list of the three most important things that are going to happen within the asset management business. It is not a business that’s truly driven, as I mentioned, by total assets or scale. We will see selected pockets of it, but not something that transforms the landscape nearly as much as the other things that I mentioned.

Mr. Pakenham: We’re going to see a continuation of global, or cross-border, transactions. They’re going to continue to be extremely important. I don’t think there’s any question about that. The distinction between manufacturing and distribution, and even skilled assembly, is going to play a very important factor in driving those transactions … throughout the industry.

The demand for non-correlated alpha is going to be hugely important and that’s going to drive all sorts of opportunities … But the asset management industry is always driven by the level of the assets that it manages. We’ve gone through a very favorable period of stock market growth. In the equity market, we’ve had a huge narrowing of spreads, which have only widened a little bit by historical standards. All of this is going to be dependent on the capital-market benefits themselves because that’s what in the short-term drives margins.

Mr. Fetting: (A year is too short, but) the whole shift away from the U.S. (will drive) more interesting (developments).

I would agree with David, not necessarily deals alone, but kind of product expansion. That’s where the game is really important and I think more and more work is going to be done there.

(In) the short term, I do think that we have some dislocation and actually from this discussion I think some deals are done just because the credit crunch will take some casualties and asset management properties will become available because of that. That’ll be an interesting kind of shakeout, I suspect.

Mr. Heaton: To harp a little more on what David said, I think insurance companies are going to be net buyers … and people will see them as much more value-added strategic partners — as much from a product-structuring as from an asset-gathering angle.

Banks, especially those that have subscale asset subsidiaries focused on the mutual fund business in the U.S., will be net sellers. Cross-border transactions are going to be driven by the European banks first, and potentially insurance companies, looking to combine their subsidiaries with other institutions to build a truly global platform.

We will see a continued trend of minority investments in hedge funds. That’s going to be both from financial players, from these myriad of companies that are being started to potentially try to roll up hedge funds and from the investment banks as well.

And, from a business perspective, you will see more convergence between private equity and hedge funds and … whether that’s going to lead to inorganic combinations rather than just organic diversifications of business models.

Mr. Bruno: So not necessarily one single story?

Mr. Heaton: There’s so much going on under the hood here in the asset management industry that it’s like the deck chairs are being reshuffled again. And you’re going to see a number of trends at play.

When somebody asks me, “So what do you think about this trend of people taking minority interests in hedge funds?” My response is, “People are doing that for somewhere between five and seven different reasons, and they’re investing in somewhere between six or eight different underlying styles. Each of those transactions is, in a sense, unique amongst themselves.”

So it’s tough to put one overarching trend except that insurers (will be) net buyers, banks (will be) net sellers, and creative combinations. And continued minority investments in hedge funds.

Mr. O’Hanley: It’s kind of hard to disagree with anything that anybody said. I would add that I do think you will see the emergence of China, the Middle East and possibly India as buyers here.

I’m not sure it’ll be big transformational deals, but I do believe that you will see, whether it’s minority investments or outright M&A, (that) China and the Middle East will be a much bigger deal than they’ve been in the past.

Mr. Bruno: In the U.S. and—

Mr. O’Hanley: That’s where the skills are. So they’ll be buying U.S. or U.K. firms.

Mr. McLane: The Middle East has already emerged in one area, that being ours. Most of the private-equity minority transactions that have taken place so far have been from the sovereign states in the Middle East.

There a lot of people that I know who think that the … infatuation with hedge funds, plan sponsors funding their money with hedge funds, is going to diminish. I disagree with them.

There’ll be blowups and there’ll be attrition, there’ll be the Sowoods going away, AQR pulling its public offering because it’s taken some hits. But as fast as one has a problem, two more are popping up. It doesn’t take much capital to form an independent stand-alone alternative hedge-fund business. There’ll continue to be net growth in the number of managers that are out there, if you just counted all the names and overall growth for the industry.

The question mark will be how fast the funds of funds continue to grow because they serve a very important purpose, the obvious ones (being) diversification and access. New players to the market find that a way to tiptoe in. But — at least on the institutional side — once they get a taste of it, they like it and they find they can get some access directly to the managers.

What I see is a move away from funds of funds, and the desire to select and get directly into different managers. So there’ll be an important place for funds of funds, but I do wonder if the overall growth rate will slow there.

Mr. Bruno: I appreciate all of you for participating in this discussion. It has been an unbelievably interesting conversation. Thank you for your time.