Credit woes may spur money management selloffs

The credit crunch could leave some money management subsidiaries available for mergers and acquisitions as large financial firms start to shed all or part of their asset management businesses to raise capital.

Buyers likely will be smaller money managers, possibly alternative investment firms looking to round out the strategies they offer or others that need to boost their back-office or distribution capabilities, industry experts said.

“Any dislocation in the markets creates opportunities,” said Kevin Quirk, partner at Casey, Quirk & Associates LLC, Darien, Conn. “At the same time, firms in a bit more of a distressed position will look to partner with someone else.”

Officials at large asset management firms have spotted opportunities. In February, Marna Whittington, chief operating officer of Allianz Global Investors, Munich, said in an interview that the credit crunch has created attractive buying opportunities and that Allianz officials are “quietly looking” for acquisitions. She declined subsequent comment for this article.

Laurence Fink, chairman and chief executive of BlackRock Inc., New York, said in an earnings call April 16 he expects to see dramatic consolidation in the investment management business as companies “look to embellish their capital through other sales of their asset management business or contributions into their asset management business,” he said. Calls requesting additional comments were not returned.

“There are buyers that have an opportunity to take advantage of firms that are struggling, particularly in the alternative space,” said Erika Cramer, managing director and partner at Silver Lane Advisors, New York, an M&A investment bank and strategy consulting firm.

She added that the credit crunch has prevented some alternatives firms from leveraging deals the way they did in the past. On the other side of the equation, alternatives companies that were not hurt by the crunch are in a good position to pick up the more traditional assets being sold off by larger firms, she said.

The first quarter 2008 has been a busy one for money management M&A, with 53 deals announced, the highest number during the first three months of any year, according to data from investment bank Jefferies Putnam Lovell, New York, a division of Jefferies & Co. The acquired assets under management totaled $704.6 billion, with a combined disclosed deal value of about $9.6 billion.

Donald Putnam, managing partner in the San Francisco office of merchant bank Grail Partners LLC, said he expects a number of acquisitions to be announced this year. “Sellers will be getting out of anything less than $150 billion (in assets under management) with a strong national brand,” Mr. Putnam said. “Buyers will be consolidating for scale and striving for product synergy.”

Deals are likely to be smaller than in recent years because small portions of businesses are being parceled out, as opposed to entire firms merging, and because financing for much larger deals is tougher to find.

“I don't think you're going to have big asset managers merging with other big asset managers,” said Paul Kraft, partner in the Boston office of accounting firm Deloitte & Touche LLP, who focuses on financial services industries.

He expects to see more consolidation among smaller and midsize firms that seek to develop their back office, expand their product lineup, or tap into another firm's distribution channels.

Investment bankers are keeping mum about what firms have asset management units on the selling block.

“It may be a bit early” to see these deals announced, said Paul Holt, president and co-founder of investment bank Cambridge International Partners Inc., New York. “The lead time on these transactions is six to nine months,” he said.

Fortis Investments' recently announced sale of 50% of its business to Ping An Insurance (Group) Co., Shenzhen, China's second largest life insurance company, for €2.15 billion ($3.33 billion) is an indication of what's to come.

“That was both a strategic move and important in helping Fortis raise capital for its participation in the ABN AMRO (deal),” Mr. Holt said of Fortis' acquisition of ABN AMRO Asset Management. Strategically, it helps expand the firm's reach in the Chinese markets, he said. Officials at Fortis, the asset management subsidiary of Brussels-based Fortis SA, could not be reached for comment.

(Fortis was part of a consortium, which included the Royal Bank of Scotland Group PLC, Edinburgh, and Banco Santander Central Hispano SA, Madrid, that acquired ABN AMRO Holding NV. Fortis paid €24 billion for ABN's global asset management business and the Dutch consumer banking unit.)

Firms looking to raise capital or focus on their core competency will shed assets, as illustrated by American Airlines' parent AMR Corp.'s announced sale of American Beacon Advisors, its money management unit, said D.J. Neiman, associate analyst at William Blair & Co., Chicago, who follows publicly traded asset management firms.

In late April, AMR, Fort Worth, Texas, announced it will receive $480 million from the sale of American Beacon, a firm with $62 billion in assets, to Lighthouse Holdings Inc., Chicago, set up by private equity firms Pharos Capital Group LLC, Dallas, and TPG Capital LP, Fort Worth.

“Asset management is not exactly a core part of running an airline,” Mr. Neiman said.

Contact Raquel Pichardo at [email protected]