Private equity firms' interest in money manager investments is rising in tandem with the managers' increases in assets under management and revenue.
“There'll be more private equity money coming into money managers,” said Ralph F. “Chip” MacDonald III, Atlanta-based partner at law firm Jones Day's financial institutions litigation and regulation practice. He said The Carlyle Group LP was “ahead of the curve” in its $780 million deal for a 60% stake in TCW Group, which closed in February.
Money management firms are “a cash cow” for private equity investors, added Sam Yildirim, partner and U.S. asset management deals leader at PricewaterhouseCoopers LLC, New York. “As long as they do their due diligence and understand the business and price it right, asset management is great. Their assets under management generate revenue, making them great deals for private equity managers.”
“It's an attractive asset class for a lot of reasons,” added Mr. MacDonald. “It's a cyclical asset class, and now's a great time for asset management. Look at the stock prices of publicly traded asset management firms. They're a nice proxy for the market. They've done well, and their assets are going up accordingly.”
“It's a growth business, not a venture business,” said Chris Browne, New York-based managing director at Sandler O'Neill & Partners LP. “Private equity investors aren't seeding startup businesses, unlike health care or technology ... Private equity will always have an interest in asset management as long as asset management is a growth business.”
And there's a lot to like on the money manager side as well, for those who want to maintain investment independence and facilitate management buyouts — things that would be more difficult with a corporate buyer.
“There's a lot of interest in asset management from both private equity and corporate buyers,” said Ms. Yildirim. “Private-equity-backed management buyouts can be very attractive to strong management teams as it involves fewer business disruptions. Generally they do not involve integration, which can represent significant change, key management jobs are safer and management has a stake in the future success of the business through share ownership and/or stock options.”
The timing also is right for many money managers to explore private equity investment, whether for key-man issues, in which founders are contemplating retirement and deciding how to pass on the firm to the next generation, or for a lifeline to a struggling firm.
“Managers can be a victim of their own success if it's a privately owned firm,” said Mr. MacDonald. “How do they monetize the assets and pick a point in time to keep the firm going, but then the next generation can't afford to buy it. That's where private equity firms come in.”
Sources say Janus Capital Group Inc. is a struggling money manager that might benefit from a private equity investment, given its long-term asset decline and plunge in the value of its stock — to $8.91 as of May 10 from $30 in June 2008.
John R. Groneman, Janus' director of investor relations and treasury, said officials would not comment.
Some firms, like TA Associates Management LP, bought stakes in money managers before the 2008-2009 financial crisis, and in those cases, their eight-year investment cycles are at an end. TA Associates' stake in Boston-based quantitative equity firm Numeric Investors LLC is now up for sale.
“The time cycle makes sense for firms to talk about exiting,” said Ms. Yildirim. “But it's not a function of them not liking this sector.”
Money managers' investment strategies are important to private equity firms, Ms. Yildirim said. For equity managers, particularly active managers, outflows into passive strategies might make them less attractive. “Depending on the type of manager, timing is very important, determining when people will come back into these strategies,” she said.
“Private equity firms are being more selective in a post-2008 environment,” said Sandler O'Neill's Mr. Browne. They're not just interested in a track record but in attractive asset classes, more alternatives, more emerging markets, more diversified asset managers. ... You can't be plain vanilla.”
What also matters is the people, Mr. MacDonald said, with, for example, the age of a firm's principals being as important as the overall state of the market.
“You're dealing with a people business, the people who make the money,” he said. “If you're going to invest, the concern is, are the people who took you to the dance going to stay on the dance floor with you?” He also said you can't alienate investment consultants and pension fund clients, among others. “You've got to communicate very well with consultants and pension fund clients,” he said. “You've got to give them some comfort.” n
