Small deals were big story in '10

Updated with correction

The blockbuster divestitures that dominated money manager merger-and-acquisition activity in 2009 gave way to a raft of smaller deals in 2010, driven by globalization and the continued blurring of lines between traditional and alternative investments.

The year saw a pickup in the number of deals, while both deal value and assets under management changing hands dropped dramatically as sales by financial conglomerates looking to shore up their balance sheets in the wake of the 2008 market crisis subsided.

Freeman & Co. LLC reported 227 money management-related M&A deals for the latest year, up 27% from 2009. But combined assets under management in those deals came to $711 billion, down from $4.7 trillion in 2009 and less than half of last year's biggest deal: BlackRock Inc.'s purchase of Barclays Global Investors, and its $1.5 trillion in AUM.

Cambridge International Partners, which only tallies deals where money management operations account for more than 50% of an acquired firm's revenue, reported 177 deals for the latest year, up slightly from 174 deals in 2009. Combined deal value, meanwhile, tumbled to $18.1 billion, from $35.2 billion the year before.

Despite the mixed results, investment bankers insist the latest vital signs for M&A activity point to improved health for the industry. Forced divestitures accounted for six of the 10 biggest deals in 2009 but only two of last year's crop — Brussels-based KBC Bank's sale of its European private banking arm to Mumbai-based Hinduja Group and Paris-based BNP Paribas Group unit Fortis Bank's sale of Artemis Investment Management to Beverly, Mass.-based Affiliated Managers Group, said John Temple, a managing director with New York-based investment bank Cambridge.

And with the move offstage by distressed sellers came “the return of the strategic buyer” to the market in 2010, Mr. Temple argued.

That buyer, apparently, was increasingly looking overseas and eager to offer both traditional and alternative investment capabilities.

The transactions of the past year reflect “fundamental changes in the way investors are demanding their money be managed,” noted David Heaton, a managing director with Morgan Stanley & Co.'s investment banking division in New York.

“Everywhere you see a huge shift toward interest in liquid, transparent and uncorrelated products,” with a growing preference for global over local, and the relaxation of constraints on managers, driving strategic discussions, said Mr. Heaton.

Convergence between traditional and alternative managers was a growing theme in 2010, agreed Benjamin F. Phillips, a partner and director of research for money manager consultant Casey, Quirk & Associates, Darien, Conn. Increasingly, successful asset management will demand that all the skill sets offered separately in years past by traditional and alternative managers be brought together, said Mr. Phillips, predicting “more convergence deals in 2011.”

Freeman & Co.'s tally showed a record 102 deals in 2010 involving investments in alternative managers, topping long-only deals, at 85, for the first time, said Eric C. Weber, a managing director and chief operating officer with the New York-based M&A advisory and strategic management consulting firm.

Among Cambridge International's list of top 10 deals by value in 2010, Man Group's purchase of hedge fund investor GLG Partners came in second, at $1.8 billion, with Royal Bank of Canada's acquisition of credit alternatives firm BlueBay Asset Management in fourth place, at $1.5 billion; Affiliated Managers Group's $890 million buy of private equity firm Pantheon Ventures was good for fifth place and Credit Suisse's purchase of multistrategy hedge fund firm York Capital Management was in sixth place at $630 million.

As that smattering of bigger deals suggests, convergence isn't limited to traditional managers acquiring alternatives capabilities. “Both sides are looking across the fence” in an effort to diversify their businesses, and alternative managers are among the most active, particularly private equity firms that are either listed or thinking of going public, noted Aaron H. Dorr, managing director of the financial institutions group with New York-based Jefferies & Co.

Two December announcements — private equity firm Apollo Global Management's plan to buy a 40% stake in the holding company of hedge fund-of-funds manager Lighthouse Investment Partners, and Carlyle Group buying a 55% stake in hedge fund manager Claren Road Asset Management — are examples of that trend, bankers said.

Those aggressive efforts to diversify are likewise leading alternatives firms to buy traditional money management businesses, as when publicly listed hedge fund-of-funds firm Fortress Investment Group announced in February it would acquire long-only bond shop Logan Circle Partners, noted Cambridge's Mr. Temple.

Still, even though Cambridge International's data found a record 49% of U.S.-based deals involving the acquisition of an alternatives firm in 2010, with interest in non-traditional strategies likely to grow, Mr. Temple said regulatory uncertainties probably padded the amount of alternatives-related transactions over the past year.

Mr. Phillips, meanwhile, said while he sees the convergence theme continuing to pick up steam — as larger alternatives firms increasingly seek stronger, more institutional distribution platforms — the melding of businesses with different approaches to managing money will remain “very difficult to pull off.”

Globalization was another major theme investment bankers gleaned from the year's deal activity. Mr. Temple noted that for a second year in a row Canadian firms, which emerged relatively unscathed from the recent financial crisis, were among the ranks of buyers in top 10 deals, with Scotiabank's $2.3 billion purchase of DundeeWealth at the top of Cambridge International's list for the year, and Royal Bank of Canada's fourth-place BlueBay buy.

But two deals with Asian-based buyers also figured in Cambridge's top 10: Hinduja Group's $1.7 billion acquisition of KBC European Private Bankers, and Hanwha Securities' $360 million purchase of Prudential Investment & Securities, Prudential Financial's business in Asia.

In other activity, Religare Enterprises Ltd., a New Delhi-based financial services firm, made two investments in U.S.-based alternatives firms this year: Landmark Partners, a Simsbury, Conn.-based private equity and real estate fund-of-funds firm and Northgate Capital LLC, a Danville, Calif.-based private equity fund-of-funds firm.

Some bankers predict buyers from emerging markets with strong capital reserves will sport a higher profile in M&A activity over the coming years. “Asia will be a big focus in 2011,” predicted Casey Quirk's Mr. Phillips, with heavyweight firms in the U.S. and Europe looking to establish local operations there but also with insurers and banks in countries such as India and China becoming increasingly active globally.

Morgan Stanley's Mr. Heaton pointed to Tokyo-based ORIX Corp.'s November purchase of a stake in New York-based multistrategy and hedge fund-of-funds manager Mariner Investment Group; Blackstone's September buy of a 40% stake in Brazilian alternative asset manager Patria Brasil and the October purchase by J.P. Morgan Asset Management unit Highbridge Capital Management of a majority interest in Gavea Investimentos, another Brazilian alternatives firm, as examples of global convergence.

Investment bankers remain upbeat about expected activity in 2011. Cambridge's Mr. Temple noted that an increase in deal value to $8.1 billion in the fourth quarter, from $2.9 billion in the third quarter, reflects growing confidence as global equity markets rebounded in recent months. He predicted that confidence will lead to more strategic deals.

Freeman's Mr. Weber said he expects a continued pickup in alternatives-related deals, as money managers strive to meet growing client demand for infrastructure and compliance capabilities. He also predicted growing activity from private equity investors in money management firms who'll be looking to exit a number of investments that have been on hold due to the market's turmoil in recent years.

Mr. Phillips said the coming year's crop of deals could be fewer in number, but bigger and better structured, as money managers struggle to figure out the best way to achieve an alignment of interests in the more complicated firms they're melding.