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Money Management

Managers targeting alternatives firms

Pace of M&A reaching levels not seen in past 10 years

Domonkos L. Koltai noted the especially high demand for stakes in real estate managers.

Updated with correction

Traditional money managers' buying spree among alternative investment firms has reached a pace not seen since before the global financial crisis.

Driven by a shrinking base of institutional investors, those investors' big swings to passive management and fee pressure on traditional strategies, money managers' keen appetite for the higher fees private market strategies can add to the bottom line has only intensified, sources said.

Alternative investment management deal activity in 2017 hit its highest level since 2008, with 67 transactions, a 40% increase from the 48 purchases in 2016, said investment bank Sandler O'Neill & Partners LP in its recently released 2017 asset manager transaction review.

Real estate, private equity, private credit, direct lending, infrastructure and other private market managers running specialized or differentiated strategies such as multiasset credit continue to receive maximum attention from large ​ asset management buyers even as the deal books for traditional active management sellers gather dust, the Sandler O'Neill report showed.

"Buyers will continue to look to acquire in-demand, specialist capabilities less likely to be cannibalized by passive strategies," the report's authors said, noting "without specialized investment capabilities, strong performance track records and a clear growth trajectory, sellers will have difficulty finding buyers at attractive valuations."

Private equity control

The most significant increase in alternative investment acquisitions was for control stakes of private equity companies, which doubled to 28 deals in 2017 from the prior year, Sandler O'Neill said in its report.

"Buyers looked not only to more generalist private equity firms as acquisition targets, but also to specialist managers to expand existing private equity capabilities," the report's authors wrote, pointing by way of example to notable deals such as the acquisition by the C$135.5 billion ($107.9 billion) British Columbia Investment Management Corp., Victoria, of a majority ownership stake in European private debt manager Hayfin Capital Management LLP, with $9 billion under management.

Another interesting move in 2017 was New York-based BlackRock (BLK) Inc. (BLK)'s acquisition of First Reserve Corp. Energy Infrastructure Funds, with $3.7 billion under management.

BlackRock also created a long-term private equity strategy and seeks to raise $10 billion from pension funds such as the $231.6 billion California State Teachers' Retirement System, West Sacramento, which established a 2% interim target and a 5% long-term target to long-term private equity in November.

BlackRock managed $6.29 trillion as of Dec. 31.

Demand also is high for real estate managers by traditional managers because "the strategy is well-established and buyers are interested in liquid real estate investments in the form of (real estate investment trusts) and illiquid direct property acquisition as well as real estate debt," said Domonkos L. Koltai, a partner in investment bank PL Advisors, New York.

Analysis of data for 42 alternative investment acquisitions in 2017 and year-to-date Feb. 15 provided by PL Advisors showed 14 deals for real estate managers, including:

  • Mitsui & Co.'s acquisition of a 20% stake in CIM Group, which manages $19 billion in real estate and infrastructure;
  • a 40% stake in $11.1 billion European real estate manager Tristan Capital Partners by Candriam Investors Group, a subsidiary of New York Life Investment Management International;
  • the acquisition of GLL Real Estate Partners GmbH, with $8.7 billion under management, by Macquarie Infrastructure and Real Assets, a division of Macquarie Group; and
  • PATRIZIA Immobilien AG's purchase of Rockspring Property Investment Managers LLP, with $8.9 billion under management.

High demand

Money managers have been building their private market capabilities through acquisition for years, but transaction activity in 2017 was up because of high demand from asset owners for these strategies.

"M&A activity for private market managers isn't new, but it's increasing as managers seek to add capability to meet the needs of underfunded corporate and public pension funds for yield," said Davis Walmsley, partner-investment management at manager consulting firm Greenwich Associates, Stamford, Conn.

"Investors are seeking higher returns from alternative investment strategies like private equity, real estate and credit. Over the past five years, there's been a big migration by large multiasset managers from a product orientation to a client-focused solutions approach. Having more investment capabilities in-house broadens the solutions spectrum," Mr. Walmsley said.

Traditional money managers also are looking to private market investment approaches to pump up their fee income because they've lost active management fees as asset owners continue to increase the passive portion of their portfolios.

"Fee pressure is everywhere but less so in private markets and traditional managers are seeking ways to add those capabilities," said Kevin P. Quirk, principal at Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn.

"These firms offer a unique angle on investment management, and multiasset managers are finding the alternatives investment universe to be a good place to look for investment strategy capabilities that will enhance their profitability," Mr. Quirk said.

Still filling gaps

Money managers like Morgan Stanley (MS) Investment Management Inc., New York, which has been building a full spectrum of alternative investment approaches over the past 20 years, and BlackRock (BLK) — which sources referred to as a "serial acquirer" — still actively seek to fill gaps in their investment lineups.

Morgan Stanley, for example, acquired mortgage lender Mesa West Capital LLC, Los Angeles, in September 2017 because the company is "dedicated to partnering with clients to deliver differentiated investment solutions that fit their needs, and Mesa West is viewed as a business to round out our real estate and private credit suite of ... offerings on our global alternatives platform. We continue to actively focus on opportunistic M&A where we can accelerate growth and add value," said Lauren Bellmare, a Morgan Stanley spokeswoman, in an email.

Morgan Stanley managed $482 billion as of Dec. 31.

The confluence of intense investor demand for alternative investment strategies, a pool of highly motivated buyers and a willingness on the part of specialty managers to sell full or partial ownership stakes in their firms is spurring deal activity, said Ted J. Gooden, partner at specialist asset management investment bank Berkshire Capital Corp., N.Y.

"These deals are at the center of what's going on in the investment management industry now," he said, noting the acquisition environment is ripe for deals now because the universe of the best-qualified private markets managers is small.

"There are only 50 real estate managers that count, only 50 private credit managers that count and between 20 and 30 infrastructure managers that matter, and competition is high to buy a stake of any size in these firms." Mr. Gooden said.

Alternative manager buying spree
The largest alternative manager M&A transactions since January 2017, in reverse chronological order. Dollar amounts are in U.S. billions.
AcquiredType of managerAUM%
Tristan Capital PartnersReal estate$11.19 40%New York Life 2/12/18
GLL Real Estate PartnersReal estate$8.67 100%Macquarie2/12/18
Idinvest PartnersPrivate equity$8.40 70%Eurazeo2/5/18
AEA InvestorsPrivate equity$10.00 MinorityRDV Corp.1/26/18
Cerberus Business FinanceDirect lending$14.00 MinorityDyal Capital Partners12/24/17
Rockspring Property Investments ManagersReal estate$8.91 100%Patrizia Immobilien AG12/19/17
PCCPReal estate$6.80 25%AMP Capital12/18/17
TRIUVA Kapitalverwaltungs-
gesellschaft MBH
Real estate$11.51 100%Patrizia Immobilien AG12/11/17
Internos Global InvestorsReal estate$3.25 100% Principal Global Investors12/1/17
Rhone GroupPrivate equity$5.92 30%Eurazeo11/29/17
Cole CapitalReal estate$7.60 100%CIM Group11/14/17
Central Fund of Canada Ltd.Real assets$3.45 100%Sprott Asset Mgmt.11/14/17
HastingsInfrastructure$9.67 100%Northill Capital11/3/17
Sparinvest Property InvestorsReal estate fund of funds$1.18 100%Patrizia Immobilien AG10/20/17
NewStar FinancialDirect lending$7.30 100%First Eagle Holdings/GSO Capital Partners10/17/17
RCP AdvisorsPrivate equity fund of funds$3.80 100%P10 Holdings10/6/17
Mesa West CapitalReal estate$5.00 100% Morgan Stanley (MS) Inv. Mgmt.9/29/17
CenterSquare Investment Mgmt.Real assets$9.00 100%MBO/Lovell Minnick9/20/17
Lionstone PartnersReal estate$5.40 100%Columbia Threadneedle Investments9/20/17
Dynamic CreditDirect lending$9.54 25%Aegon 9/6/17
The Townsend GroupReal estate$14.50 84%Aon PLC9/1/17
HeitmanReal estate$32.40 50%MBO8/3/17
Fifth Street Finance Corp. /Fifth Street Senior Floating Rate Corp.Credit$4.00 100%Oaktree Capital Group7/14/17
Leonard Green & PartnersPrivate equity$23.50 <15%Blackstone Strategic Capital Holdings7/6/17
Atalaya Capital Mgmt.Direct lending$2.50 20%Dyal Capital Partners6/28/17
Caledon Capital Mgmt.Infrastructure$6.66 100% CBRE Global Investors6/12/17
Energy Capital PartnersInfrastructure$11.90 MinorityDyal Capital Partners5/16/17
Riverstone HoldingsPrivate equity$4.30 12%Petershill (GS)5/4/17
Accel-KKRPrivate equity$4.30 <10%Petershill (GS)5/2/17
Adveq Holding AGPrivate equity fund of funds$7.00 100% Schroders 4/20/17
Stockbridge Capital GroupReal estate$10.90 48%Gryphon (CITIC subsidiary)4/12/17
The Riverside Co.Private equity$5.00 >10%Parkwood LLC4/12/17
TPG Special Situations PartnersCredit/CLO$20.00 10%Dyal Capital Partners4/11/17
Sound Point CapitalCredit/CLO$11.50 MinorityDyal Capital Partners4/4/17
NXT CapitalDirect lending$3.10 MinorityAflac3/31/17
European Capital Fund Mgmt.Direct lending$0.74 100%LGT Capital Partners3/3/17
CIM GroupReal estate$19.20 20%Mitsui & Co.2/20/17
Akina PartnersPrivate equity fund of funds$2.60 100%Unigestion2/8/17
First Reserve Corp. Energy Infrastructure FundsInfrastructure$3.70 100% BlackRock (BLK)2/1/17
HayfinDirect lending$9.0 MajorityBritish Columbia Investment Mgmt. Corp.1/31/17
ArcLight CapitalPrivate equity$8.90 MinorityPetershill/Wafra Investment Advisory Group1/13/17
American Capital Middle Market BusinessCredit$20.00 74%Ares Capital Corp.1/3/17
Source: PL Advisors