European banks still in sell mode

European financial institutions, traditionally the dominant owners of money management businesses on the Continent, also are at the heart of current M&A activity, according to bankers and analysts.

“I think the bank-owned asset management paradigm is now dead — if a bank is going to continue to own an asset manager it will seek to reassure clients and staff that the company is actually run as an independent,” according to Kevin J. Pakenham, managing director in the financial institutions group at Jefferies International Ltd., London. “The (financial) crisis ... proved not only that banks are poor at managing their own balance sheets, but also that they are not much good at managing a (people-oriented) business like asset management. M&A in the sector is reflecting these new perceptions.”

In the latest M&A development, UniCredit Group's plan to “consider options” including a sale of its money management subsidiary Pioneer Investments was put in doubt when CEO Alessandro Profumo abruptly resigned in September amid controversy surrounding the Libyan government's 7.6% stake in the firm. Mr. Profumo was replaced by Deputy CEO Federico Ghizzoni on Sept. 30.

However, according to a company statement in response to questions: “UniCredit and its advisers are currently carrying out a thorough strategic review of Pioneer Investments. ... The strategic review process is continuing despite the change in the UniCredit leadership team.”

“Asset management is, and will remain, an important part of UniCredit's client portfolio, and it is a priority that the outcome of this review provides UniCredit with the highest quality asset management possible,” the statement said.

According to several analysts who cover UniCredit, the company will likely proceed to consider a sale of Pioneer or merger with an existing manager. Pioneer had e185 billion ($251 billion) in assets under management as of June 30.

“No matter who the new CEO is, it won't change the fact that Pioneer is not big enough in the current (asset management) landscape,” said Ronny Rehn, banking analyst who covers UniCredit at Keefe, Bruyette & Woods Inc. based in London. “It lacks scale.”

UniCredit — Italy's largest financial institution — is among several European banks considering a sale of their money management subsidiaries. Others include ING Groep NV, the parent company of ING Investment Management, which has about e376 billion ($513 billion) in assets under management globally, and ING Real Estate Investment Management, the world's largest real estate manager. Bank of Ireland, the parent company of Bank of Ireland Asset Management, is also putting its money management business on the auction block. BIAM has about e25 billion in assets under management, mostly on behalf of institutional investors.

In the case of Bank of Ireland and ING, both parent companies were forced to sell off assets as part of the restructuring requirements for receiving government bailout packages during the crisis. UniCredit, on the other hand, is looking to improve its core Tier 1 capital ratio, a key measure of a bank's financial health. Intesa Sanpaolo SpA, Italy's second-biggest bank, is also planning to raise its core Tier 1 ratio with an initial public offering of Banca Fideuram SpA, its predominantly retail asset management subsidiary with about e70 billion in assets. However, the bank has not yet set a time frame for the IPO because of “unfavorable market conditions,” according to a company announcement earlier this year.

“The asset management M&A environment in Europe is quite fertile, and we expect that to persist,” said Steve Smit, executive vice president and head of State Street Corp.'s global services business in the U.K., Middle East and Africa based in London. He is also co-author of “The Changing Shape of European Investment Management,” a report published by State Street in September.

Some banks needed to sell their assets to raise capital, including Barclays PLC's 2009 sale of Barclays Global Investors to BlackRock Inc. and Royal Bank of Scotland's 2010 divestiture of its fund-of-funds business to Aberdeen Asset Management. But others are also reconsidering the money management business because of broader investment trends toward “barbell” asset allocations, with cost-effective beta on one side and high-alpha strategies on the other, according to State Street's report. As a result, midtier managers such as those now on the auction block increasingly are being squeezed out of the market and are seeking benefits of scale through such deals.

“Asset management is not always viewed as the source of low-risk profitable growth that it was before the financial crisis,” according to the State Street report.

But the conditions that helped bank-owned asset managers thrive during good times might also render them less attractive to potential buyers, according to bankers and analysts. Distribution ranks as a top concern, because bank-owned managers are more dependent on the parent companies for asset inflows, according to one adviser who has worked with private equity companies on European asset management M&A transactions.

“Distribution is very much dependent on the bank's own strategic direction, which is a tricky problem from the buyer's point of view,” said the adviser, who asked not to be named.

UniCredit officials, for example, have attempted to solve this issue by offering to continue to distribute funds through their banking branches following any deal for Pioneer, sources said. Some U.S. managers set on widening their global footprint are considering Pioneer, including State Street, Federated Investors Inc. and Ameriprise Financial Inc., which already owns London-based Threadneedle Asset Management Ltd., said sources who declined to be named. (State Street — in a bid to diversify its passive business with acquisitions that would strengthen its active capabilities — is also considered a front-runner to acquire BIAM, sources said.)

Another option for Pioneer is to merge with a bank-owned manager with strong distribution channels, sources said. French investment banks Natixis and BNP Paribas, both of which already have money management subsidiaries, have expressed interest in a merger with Pioneer, according to several sources. Any such deal likely would be structured similar to a 2009 transaction that created Amundi, which combined the asset management businesses of Credit Agricole SA and Societe Generale, according to sources familiar with the matter.

“Banks don't necessarily have to give up their core strength, which is selling products,” Mr. Rehn of KBW said. “What they're giving up is managing the assets, which is very different and is related to scale and efficiency. That's something banks are reconsidering — the business of managing assets.”

Some bank-owned managers suffered from weak performances relative to their peers who operate more independently, sources said. At BIAM, for example, clients have been fleeing since before the financial crisis because of a combination of performance and structural problems such as a high rate of management turnover. Assets under management halved in the past five years, according to sources.

Because bank-owned managers can benefit from their parent companies' client relationships, the managers haven't had to work as hard to build their own businesses, according to bankers and analysts. An exception is ING Real Estate Investment Management, which is viewed as a “true third-party asset management business” and “a structurally attractive business over the long term,” sources said. The real estate manager, which is run separately from ING IM, has about e71 billion in assets. Among managers considering the real estate business of ING IM are AXA Real Estate Investment Management — the second-largest real estate manager globally — BlackRock and Ameriprise Financial, according to sources.

“The problem is, these managers aren't necessarily interested in (ING IM),” said one banker who asked not to be named. “I think (ING) may end up splitting the asset management business to sell as piecemeal.”

Another option is an initial public offering for both ING REIM and ING IM — together or separately, sources said.

Officials at ING, BIAM, Natixis, BNP Paribas, Federated Investors, Ameriprise Financial, State Street and BlackRock declined to comment. Officials at AXA IM did not respond to requests for comment by press time.