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Money manager M&A transaction value skyrockets in 2014

2 huge deals responsible for big increase over 2013

John Temple
John Temple said the U.S. market was a big part of the M&A action.

Money manager merger and acquisition transaction value in the U.S. tripled to $16.9 billion in 2014 from the previous year.

The jump was helped significantly by two big deals, data from investment banking firm Cambridge International Partners Inc. show.

The $6.25 billion paid by TIAA-CREF to acquire Nuveen Investments Inc. and the $2.7 billion paid by the London Stock Exchange to acquire Russell Investments, combined accounted for more than half of the $16.9 billion in transaction activity involving the acquisition of U.S.-based money managers.

The two transactions also are the first in the U.S. to exceed $1 billion since 2011, when Neuberger Berman management agreed to pay $1.2 billion to buy out the Lehman Brothers Holdings estate's residual ownership.

But even without those two deals, M&A activity involving U.S.-based targets still had the highest transaction value in the past five years; the other closest year was $7.7 billion in 2012.

When it comes to number of deals, however, the year was relatively flat. Cambridge data show there were 79 deals involving the purchase of U.S. firms in 2014, up from 78 in 2013.

Deals involving acquisition of non-U.S. firms was a different story, Cambridge found. Non-U.S. deal transaction value in 2014 was $16.2 billion, down slightly from $16.6 billion in 2013. The number of transactions also dropped, to 90 in 2014 from 110 the year before, Cambridge found.

The total number of worldwide deals, at 169, was down from 188 in 2013.

Attention on U.S. market

Cambridge President John Temple, based in New York, said a lot of attention was being focused on the U.S. market. Cambridge found the number of cross-border acquisitions of U.S. money managers doubled in 2014, to 16 with an aggregate value of $3.9 billion, from eight deals with an aggregate value of $630 million.

Mr. Temple said the reason was the U.S. economy was growing faster than in other countries, making U.S. money managers more attractive targets.

On a global basis, Mr. Temple said investment management transactions accounted for 1% of overall M&A activity in 2014, a sign the money management industry is recovering from the depths of the financial crisis, but still wasn't back to pre-crisis levels.

He said Cambridge research shows investment management transaction volume generally peaks at around 1.5% of total M&A activity in boom years and falls to as low as 0.5% in downturns.

Taking an optimistic view, Mr. Temple said, “Six years after the financial crisis, it is perhaps reassuring that the industry's transaction volume, at 1% of all M&A, is still signaling that the market upturn has further to run.”

For private equity firms, however, there was no more waiting for a full recovery — 2014 was a year of exits from investments made in money management firms for vintage year 2006 to 2008 funds.

Mr. Temple said Cambridge's M&A review found that private equity exits in 2014 “accounted for a remarkable (30%) of the year's global transaction volume, far exceeding new investments by private equity and in stark contrast to the last few years in which private equity has been a consistent net investor.”

The biggest deal of 2014 involved Chicago-based Madison Dearborn Partners LLC's sale of Nuveen Investments.

Madison Dearborn borrowed heavily as part of its leveraged buyout of Nuveen in 2007. The financial crisis hit and more than $4.3 billion of that debt needed to be refinanced in 2008, after borrowing costs soured.

Mr. Temple said it was interesting that the $6.25 billion enterprise value paid by Madison Dearborn Partners in 2007 was the same amount for which Nuveen was sold last year.

Sources said institutional investors who invested in the original deal received a small single-digit percentage profit.

“Given the unfortunate timing and high price of 16 times EBITDA paid in the original transaction, it can be counted as quite an achievement that investors reportedly exited with a small return,” Mr. Temple said.

He said the return came from Nuveen growing assets under management to $221 billion from $116 billion during the period and increasing earnings before interest, taxes, depreciation and amortization to $522 million from $387 million, not from the multiple received in the recent sale, which was down 25% at 12 times EBITDA.

As part of the deal, purchaser TIAA-CREF agreed to assume $4.5 billion in debt.

“In general, private equity last year was happy just to recover its money on 2006-2008 vintage fund investments, many of which have struggled to reach pre-crisis asset levels,” Mr. Temple said.

Also among those deals was American Beacon Advisors Inc., which was acquired in 2008 by TPG Capital and Pharos Capital Group LLC and sold to Estancia Capital Management LLC and Kelso & Co. in 2014. Mr. Temple said American Beacon's AUM in November was $57 billion, below the $62 billion held by the company when it was sold in 2008.

Another example is Asset Allocation & Management Co., Chicago, a fixed-income manager of insurance company assets. Mr. Temple said the company had $17.2 billion in assets under management when it was purchased in 2007 by private equity firm Stone Point Capital. The money manager reported $16.4 billion in AUM in November when its sale to Securian Financial Group was announced.

The purchase prices of the two private equity deals were not disclosed, but the lack of asset growth would have depressed the price, Mr. Temple said.

Aggressive acquirer

As for new private equity investments, Mr. Temple said Warburg Pincus LLC, New York, stands out as the most aggressive acquirer of money management firms in 2014.

Warburg Pincus purchased a majority stake in European exchange-traded products manager Source UK Services Ltd., which has grown to $15 billion in AUM in five years; the firm also invested $700 million in China Huarong Asset Management Co. Ltd., one of China's largest asset managers and its biggest manager of bad loans. He said CHAM is expected to issue an initial public offering in 2015.

But what would have been the biggest deal of 2014 for Warburg Pincus and one of the biggest of the year overall is still in the works.

Mr. Temple said Warburg Pincus and General Atlantic LLC, another private equity firm based in Greenwich, Conn., are in exclusive negotiations to provide financing for a deal that would see Italian banking giant UniCredit SpA sell its money management subsidiary, Pioneer Global Asset Management SpA, to Santander Asset Management.

In 2013, Warburg Pincus had teamed up with General Atlantic to buy 50% of Santander Asset Management in the fourth-largest transaction of that year.

Money managers remain a target of private equity firms because operating margins can be very good, ranging from the high 20% to more than 40% in some cases, said Donald Putnam, a San Francisco-based managing partner of investment bank Grail Partners.

“Private equity firms are attracted to money managers because of their high margins and their ability to coverage leverage,” Mr. Putnam said.

The second-biggest money management M&A deal of 2014, however, did not involve a private equity firm. It was insurer Northwestern Mutual Life Insurance Co.'s sale of Russell Investments to London Stock Exchange Group for $2.7 billion.

That deal was expected to spur another transaction. LSE purchased Russell to expand its indexing business; the fate of Russell's $250 billion-plus investment management and investment consulting businesses was less than clear.

After the June 2014 purchase was announced, LSE officials said they would undertake a review of Russell's non-index-businesses to see how they fit into the overall organization. The remarks spurred speculation that a sale was almost certain.

But Mr. Putman gives such a deal only a 50-50 chance of happening.

He said that while most LSE officials favor the sale, there is a small but influential group that favors keeping the investment management and consulting groups, and the issue has yet to be resolved.

Most active

U.K.-based Man Group PLC, the publicly traded hedge fund group, wins the prize for being most active in cross-border 2014, knocking on the door of a couple hundred mostly U.S.-based managers and announcing the purchase of four of them by year end, Mr. Temple said.

“This follows a decision to remake Man Group as a broad-based institutional money manager following the collapse of its lucrative guaranteed products business and a period of underperformance by its core managed futures division AHL,” Mr. Temple said.

He said the four money management firm acquisitions gave Man different capabilities.

He said the purchase of Numeric Holdings LLC in Boston, with close to $15 billion in assets under management, gives Man the institutional multiproduct platform it wanted in the U.S. The purchases of the hedge funds-of-funds units of Merrill Lynch Alternative Investments and Pine Grove Asset Management LLC extends Man Group's existing hedge funds-of-funds activity in Europe.

The latest purchase — of collateralized loan obligation manager Silvermine Capital Management in Stamford, Conn., announced just before Christmas — will boost the credit capabilities of Man, Mr. Temple said. n

This article originally appeared in the January 12, 2015 print issue as, "M&A transaction value skyrockets in 2014".