(Article from Registered Funds Alert, February 2018)
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The underlying motivation for an M&A deal often dictates how the parties will structure the deal. Broadly speaking, M&A deals in the asset management space generally involve one of the following five structures:
- An acquisition of a minority, non-controlling stake in an asset manager;
- An acquisition of a majority or controlling stake in an asset manager by a financial buyer;
- An acquisition of a majority or controlling stake in an asset manager by a strategic buyer;
- Fund adoption; and
- A joint venture.
Each of these structures is designed to accomplish a specific goal, which we discuss in more detail below.
Acquisition of a minority, non-controlling stake
Many investors find value in acquiring a minority, non-controlling stake in an asset manager. Generally, that type of acquisition does not affect the day-to-day operations of the asset manager or the services provided to its clients. In these deals, the investor acquires less than 25% of the voting securities of the asset manager. As discussed in more detail later in this Alert, the 25% threshold is important because the Investment Company Act of 1940, Investment Advisers Act of 1940 and related guidance from the Securities and Exchange Commission and its staff, have established a presumption that an investor “controls” an asset manager when its ownership of that manager exceeds the 25% voting securities threshold.
Minority deals can be completed quickly, largely because they do not result in a new control person of the asset manager. As a result, minority stake deals typically do not require consent from the manager’s clients (i.e., investors in private funds, registered funds or owners of separately managed accounts). Nor do they require any formal action by a board of directors of a registered fund advised by the asset manager. That manager, however, normally would inform the fund’s board of the transaction, particularly where the acquisition is approaching the 25% threshold.
Acquisition of a majority or controlling stake acquisition by a financial buyer
A financial buyer, such as a private equity firm or a conglomerate, may have an interest in acquiring a controlling (greater than 25%) or majority stake of an asset manager. A transfer of a controlling block of an asset manager raises special considerations related to obtaining client consents for assignments of advisory contracts. We discuss those considerations in more detail later in this Alert.
A financial buyer frequently will not seek to change the day-to-day operations of an asset manager. The buyer, however, usually obtains significant governance rights designed to allow the buyer to protect its economic investment. The most common protective rights are consent rights and/or representation on the board of the asset manager (or its parent).
Acquisition of majority or controlling stake acquisition by a strategic buyer
A strategic buyer may be another asset management firm looking to gain scale or complementary expertise. Strategic investors, unlike financial buyers, are likely to take an active role in day-to-day operations of the acquired asset manager.
An acquisition by a strategic buyer of a majority or controlling stake, like that of a financial buyer, raises special considerations regarding client consent for assignments of advisory contracts.
Fund adoption
In a fund adoption, two asset managers may reach an agreement pursuant to which one agrees to transfer the management of a fund to the other. Fund adoptions typically involve registered funds, but occasionally a private fund may be the subject of a fund adoption (and may even be converted to a registered fund in the process).
Joint ventures
Finally, two parties may establish a joint venture to launch a particular fund (or series of funds). The joint venture is in essence a structured form of subadvisory relationship—the joint venture entity generally acts as the adviser to the fund, with one partner providing the investment management and the other partner providing other functions, such as compliance, administrative or distribution support to the endeavor.