Investment sector M&A activity in 2009 will be powered primarily by those in need of capital and those possessing capital resources, rather than strategic deal-making, according to
Investment sector M&A activity in 2009 will be powered primarily by those in need of capital and those possessing capital resources, rather than strategic deal-making, according to Jefferies Putnam Lovell.
Following robust activity in the first six months of 2008, transactions in the latter half of the year dwindled to a near-halt as the credit crunch intensified, according to Are We There Yet?!, a Jefferies Putnam Lovell review of 2008 M&A in the global asset management and financial technology industries.
With the timing of worldwide economic recovery uncertain, historically active buyers will turn into sellers as less-familiar players step into the limelight, according to Jefferies Putnam Lovell.
‘Pure-play asset managers, acting alone and in concert with private equity firms, will increasingly take advantage of this unique situation as commercial banks and insurance companies shed non-core investment businesses to raise capital,’ says Aaron Dorr, a New York-based managing director at Jefferies Putnam Lovell. ‘In asset servicing, we see a wave of consolidation looming, as undercapitalized companies look to divest operations, while small- and mid-sized independents seek shelter within better-capitalized partners.’
Jefferies Putnam Lovell expects transaction structure to take on a significantly greater role in deal completion in 2009, with few buyers willing or able to close cash deals. Asset swaps, joint ventures and complex earnout provisions will become more commonplace. Stock will be used more frequently as acquisition currency.
The changing landscape will provide greater opportunity for buyers with conviction, a longer-term outlook, and ability to raise capital. Large, pure-play asset managers will continue to be natural acquirers given cultural compatibility and the desire to build product capability, client diversity and market share. Better-capitalized international institutions will be increasingly active and cross-border deals will represent a disproportionate share of deal flow as non-US buyers seek to globalize via acquisition at historically low pricing levels.
Asset manager deal pricing will remain depressed as cautious buyers transact with desperate sellers and pursue only the most strategically compelling opportunities. Price dispersion will continue to increase as larger diversified asset managers with true third-party businesses garner significantly greater buyer interest than sub-scale firms without robust investment capabilities and distribution.
Jefferies Putnam Lovell says private equity firms will be active buyers of asset managers in 2009, in some cases partnering with strategic buyers. The pace of their acquisitions will accelerate as the availability of leverage returns.
Traditional long-only asset classes will gain inflows at the expense of alternatives, from the ‘denominator effect’ and a back-to-basics approach among skittish private client investors. Alternatives will continue to play an important role, particularly among institutional investors, and the long-term growth trajectory of alternatives managers remains strong. However, the alternatives sector will be reshaped in 2009 as investors reconsider fee levels, demand more flexible capital lock-up periods, and insist on greater transparency. Increased regulatory oversight will raise the cost of doing business.
Jefferies Putnam Lovell says alternatives transactions will be driven primarily by sellers that otherwise run the risk of folding, unable to generate a profit on shrinking management fees alone. Survivors – with demonstrated infrastructure and risk management – will be well-positioned as sophisticated institutional investors resume inflows. Funds of hedge funds will remain relevant, and strategic buyers will seek to acquire such firms once the broader markets and asset levels stabilize.