(Article from Registered Funds Alert, February 2018)
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The asset management industry[1] experienced a notable increase in M&A activity in the past few years. According to industry publications, 2015, 2016 and 2017 have shown a sustained increase in the number of publicly announced asset management M&A deals. PwC’s Deal Insights for 2017 reported that there were 50 asset management deals announced in each of 2015 and 2016, and 48 in 2017 (up from 34 in 2013). Additionally, M&A activity in the wealth management sector, often with larger asset managers as the buyers, has surged, with 83 deals announced in 2015, 69 announced in 2016 and 80 announced in 2017 (compared to 41 in 2013).
A variety of factors contribute to the elevated levels of asset management M&A in recent years. One key driver of deal activity is the economic recovery in the wake of the 2008/2009 financial crisis. As markets recover, valuations increase. Those increasing valuations create favorable conditions for private equity owners to sell positions in their asset manager portfolio companies and may prompt other managers to consider seeking an outside investor or sale.
Another important driver has been the fee pressure felt by traditional registered active fund managers due to regulatory incentives and other factors that have promoted passive management. Many of these active fund managers may be motivated to seek economies of scale—either as buyers or as sellers—to reduce costs. The importance of scale is also a significant reason for the dramatic increase in transactions involving smaller wealth managers.
Yet another driver is the desire by alternative asset managers to establish footholds with retail investors. Some of those managers have found partners with retail distribution connections and have either launched joint ventures or entered into adviser/subadviser relationships, both of which often involve or lead to an M&A-type transaction.
In this edition of our Registered Fund Alert, we take a deep-dive into the legal issues surrounding M&A activity in asset management. We first discuss typical asset management deal structures. We then turn to some of the most important considerations for evaluating an asset management deal. Next we review how parties to the transaction can protect against deal jumping. Finally, we analyze the ever-important topic of preserving the portability of performance track records for asset managers.
[1] Including investment managers in the retail, private equity, BDC and institutional spaces.