European banks hit wall on asset manager divestitures

European money manager divestitures are running into such high hurdles that the number of deals is now at its lowest level since the 2008-2009 financial crisis.

In the year ended June 30, only nine deals were announced, according to data from Sandler O'Neill & Partners LP, New York. In comparison, 18 were announced during the year earlier period, and 25 in previous years.

European banks — which need to raise capital and meet regulatory demands — are among the most likely to sell non-core assets including their money management businesses. However two stumbling blocks exist: “the quality of businesses; and, as a result, the valuation expectations vs. the market reality,” said Aaron Dorr, New York-based managing director and head of asset management investment banking at Sandler O'Neill.

With less willing buyers around, sources said, more banks might begin to consider selling their asset management businesses in pieces, rather than a package deal.

Potential sellers are “waiting for a nice deal to see what a successful transaction might fetch,” said Benjamin F. Phillips, partner at money manager consultant Casey, Quirk & Associates LLC, Darien, Conn. “Whatever the result, it will either unlock or freeze future deals.”

Two prominent deals could be announced in a matter of weeks, according to sources familiar with the transactions. Private equity manager Carlyle Group is negotiating to buy TCW Group Inc. from Societe Generale Group. And Beijing-based private equity companies Hony Capital Co. Ltd. and GCS Capital are in final talks to acquire Dexia Asset Management, which is owned by Dexia SA and had to be sold as part of the conditions of a Franco-Belgiangovernment bailout.

One source warned: “I wouldn't bet on (either deal) just yet.”

Rabobank — the owner of Robeco Group, a fund manager with about $226 billion in assets under management — also has been shopping for a buyer.

“Absolutely there's been an expectation that more banks will need to sell (their asset management businesses) to bolster capital,” said Baber Din, director in the investment management M&A team at Deloitte LLP, London. But “so far, practically none of the big ones have completed.”

Divestitures may be more easily done in bite-size pieces, which would attract a larger pool of potential bidders, sources said.

Sean Healey, chairman and CEO at Boston-based Affiliated Managers Group Inc., said his company is actively searching for acquisition opportunities in Europe. However, he's not after the consolidated bank-owned managers, but rather the specialist teams within them — particularly in alternatives such as hedge funds and private equity. “We're looking for the hidden gems,” he said in an interview.

“It's all about risk,” Mr. Dorr said, “whether it's an individual or a corporate entity, (buyers) are worried about the decision they make today and its impact over the next one or two years. This is reflected in the pricing and the structuring of the transaction. They're much more comfortable writing a check for $200 million compared to $1 billion.”

Credit Suisse Group, for example, is seeking buyers for two U.S.-based private equity businesses — a customized fund investment unit that has raised about $25 billion and a secondary fund division that has raised about $11 billion.

Bank-owned stakes in hedge funds are also potentially attractive, sources said. However, many hedge funds “are coming off a bad 2011, which wasn't a banner year,” said Jonathan Little, partner at Northill Capital LLP, London, which invests in specialist managers. “They might wait until next year, when they're performing better to get a better price.”

Although market conditions remain difficult, a sustained resolution of the eurozone crisis could lead to “a big equity rally next year,” Mr. Little added. Therefore some sellers are asking, “Do I really want to sell now? And the answer is no.”

“Bolt-on” deals — involving buyers looking for “specific capabilities that are highly differentiated” — are expected to become more prevalent globally, Casey Quirk's Mr. Phillips said.

“This is a longer-term trend; 100% acquisitions have definitely been on the wane,” he added. “The issue is not that there is a lack of buyers, but that there's a lack of quality sellers.”

Asset managers are seeking geographic or product diversification globally, driving demand for specialist capabilities, said Shaun McNamee, London-based partner at PricewaterhouseCoopers LLP's financial transactions services division.

However, buyers are much more focused on vendor due diligence in the current environment.

“The level of market uncertainty means that vendors need to really demonstrate the value of the businesses they're selling,” Mr. McNamee said.

In some cases, bank-owned firms are also “more difficult to disentangle,” Mr. Little said.

Earlier this year, Deutsche Bank's attempt to sell its asset management business failed following “a very public and hurried process,” according to a second-quarter asset manager transaction review published by Sandler O'Neill. “The early announcement of a winner for the entire business was cut back to the sale of one affiliate, RREEF, before the entire negotiation was terminated.”

Trying to sell any large money managers in this environment will be difficult, Mr. Phillips said. “They're big and complicated. Many have relied on a distribution channel that is no longer really there.”

In addition, the number of natural buyers in Europe has dwindled. “European trade buyers are not looking to do any transformational or logistically complex deals right now,” Mr. Din of Deloitte said.

However, both Asian and North American buyers increasingly are competing to acquire European asset managers. “This is part of the general interest in financial services from Asia,” Mr. Din said.

“With a rising middle class in China, asset management capability is very attractive. In addition, (both U.S. and Chinese buyers) are probably finding that it's a relatively good time to be doing an economic transaction in asset management if it makes strategic sense.”