IPO filings by four U.S. money managers so far this year are setting the stage for what could be the most crowded 12-month calendar for public listings since 2007.
2nd-half rush seen in money manager IPOs
“IPOs are back in favor this year,” and asset managers grappling with liquidity issues or succession issues are among those taking advantage of the market's buoyancy, said Darlene DeRemer, managing partner and head of advisory practice with investment banking boutique Grail Partners LLC, Boston.
Absent two or three years of heavy listings it's tough to talk about a trend, but firms looking to attract successive generations of leadership keep finding reasons to stomach quarterly reporting and compensation package transparency they might otherwise like to avoid, said Benjamin F. Phillips, a partner and director of research for money manager consultant Casey, Quirk & Associates, Darien, Conn.
Manning & Napier Inc., a Fairport, N.Y.-based manager of more than $42 billion in long-only client assets that filed a preliminary prospectus for an initial public offering on July 1, fits that bill. The company's 74-year-old co-founder and chairman, William Manning, holds between 50% and 75% of the firm's equity, according to its latest ADV filing.
The same can be said of Artisan Partners, a long-only manager with $62 billion in assets under management, which filed its preliminary prospectus on April 6. The Milwaukee-based firm's ADV filing lists Chairman Andrew A. Ziegler and his wife, Carlene M. Ziegler, as owners of between 50% and 75% of Artisan's equity, with private equity firm Hellman & Friedman LLC a minority stakeholder as well.
Rounding out the quartet, private equity firm Apollo Global Management, with $67 billion under management, listed its shares on the New York Stock Exchange on March 30, while alternatives firm Oaktree Capital Management, with $83 billion in AUM, filed its preliminary prospectus on June 17.
Investment bankers say The Carlyle Group, the Washington-based private equity giant, is likely to jump on the IPO bandwagon over the next few months, while executives with a number of other firms, including TCW Group, Old Mutual Asset Management and ING Investment Management have raised the prospect of their firms pursuing a public listing in the next few years.
One banker, who declined to be named, said Austin, Texas-based Dimensional Fund Advisors might be mulling an IPO this year as well, but Robert W. Dintzner, a spokesman for that firm, said DFA has “absolutely no plans right now of going public at all.”
Likewise, Turner Investment Partners, which in October 2008 withdrew the IPO application it had filed a year earlier, is showing no signs of dusting off its prospectus. According to spokesman Tucker Hewes, Turner Chief Operating Officer Thomas Trala said the company “has no plans for an IPO.”
According to New York-based investment bank Cambridge International Partners' tally, only five U.S. managers went public during the tumultuous period between 2008 and 2010 — one less than 2007's class of six: Fortress Investment Group, Blackstone Group LP, Pzena Investment Management, Och-Ziff Capital Management, Oaktree and Apollo. Apollo and Oaktree's 2007 listings on Goldman Sachs's Tradable Unregistered Equity OTC market, or GSTrUE, were limited to institutional investors rather than the broader public.
With the recent financial crisis culling banks from the ranks of potential acquirers, IPOs could become a more widely used option for money managers with more than $50 billion to $100 billion in AUM seeking to gain access to liquidity without surrendering their independence, noted John Temple, president of Cambridge International Partners.
Having the currency of a listed stock gives key money management professionals more flexibility in realizing the value their firms are creating than an old-fashioned partnership model does, he said.
A rise in money manager IPOs doesn't strike everyone as good news. Geoffrey H. Bobroff, president of money manager consultant Bobroff Consulting Inc., East Greenwich, R.I., said he's a skeptic, as public listings expose money managers to a range of distractions and influences that can get in the way of focusing on delivering investment returns for clients. That's especially true for smaller firms, he said.
Mr. Bobroff pointed to a July 1 civil action filed by a Janus shareholder, calling on the court to block compensation increases for top Janus executives that shareholders had opposed in an April proxy vote, as an example of such distractions.
Over the past decade or so, money manager IPOs have been relatively rare — especially for long-only managers — and have come in clusters, when the equity market's stars and planets are aligned, market veterans say.
Some investment bankers wouldn't rule out the possibility that this year's pickup in IPOs could reflect, in part, an attempt to take advantage of an opportunity that could prove fleeting. “Whenever the world's smartest money is selling its shares,” that can be taken as a signal that the iron is hot, said one banker who declined to be named.
If so, potential investors in those IPO shares would be well advised to review the history of past listings. For example, at its July 8 close of $17.01, Blackstone's shares remain about 45% below their $31 IPO price, which is only attractive in comparison with the smaller fractions at which the shares of Fortress, Pzena and Och-Ziff are trading.
This time around, investors may be more acutely focused on welcoming “well-rounded” money managers, with multiple sources of earnings, as opposed to those which, however successful, are concentrated in a narrow segment of the market, noted Grail's Ms. DeRemer.
Investors will be looking for a combination of diversity and organic growth that would make money manager IPO candidates attractive as public companies, agreed Aaron H. Dorr, a New York-based managing director, asset manager investment banking, at Sandler O'Neill & Partners.
If that's the case, firms such as Manning & Napier and Artisan could prove attractive even if equity markets stumble. Both firms have enjoyed strong AUM growth as well as solid net inflows over the past decade.
In its prospectus, Manning & Napier reported that its AUM slipped 14% to $16.2 billion in 2008, while equity markets at home and abroad were plunging by 40% or more. Assets have since rebounded, rising 163% to a record $42.6 billion. And from the end of 1999 through the end of 2002, when equity markets were again plunging roughly 40%, the firm's AUM held steady between $6 billion and $7 billion.
Casey Quirk's Mr. Phillips said as more asset managers list their shares, the sector is likely to be “better analyzed and better covered” by Wall Street analysts — setting the stage, potentially, for a virtuous circle. A better informed and more nuanced investor base will make it easier for managers to list their shares, he argued.
Research analysts who cover money management firms say IPOs should add momentum to the asset management sector's growth. While asset management remains a sleeve of broader sell-side coverage of financial stocks, market trends over the coming decade — including the growing focus on retirement savings and the expanding global middle class — should see that segment grow at a far faster clip than other financial industries like banks, noted Craig Siegenthaler, the New York-based analyst heading asset management research with Credit Suisse.
A combination of high organic revenue growth for listed asset managers and continued IPOs, not just in the U.S. but in emerging markets in Asia and Latin America, could make asset management a larger stand-alone focus of market coverage over the next five years, he predicted.
At last count, the 11 constituent firms in the S&P 500 that are either pure asset managers, such as BlackRock Inc., or custody banks with asset management arms, such as Bank of New York Mellon Corp., account for 1.26% of the benchmark index's market capitalization, according to S&P spokesman David Guarino.