Fitch Ratings predicts more selective M&A deals at asset managers
There is likely to be an increase in small, selective M&A (merger & acquisition) deals at European asset managers as these firms seek to diversify their product lines and expand their distribution capabilities, according to Fitch Ratings.
This forecast comes as Man Group announced its acquisition of Pine Grove, a $1 billion US-based credit focused fund of hedge funds, while the firm confirmed it was in talks about buying Numeric Holdings, a $13.9 billion quant-focused investment fund in Boston.
“I do not believe there will be many mega deals in the near future, although the acquisition of Scottish Widows Investment Partnership by Aberdeen Asset Management was an exception. I think there will a growth in small-scale, bolt-on deals as asset managers in the Fitch universe are generally not burdened by debt levels and they are cash rich and holding surplus capital, which otherwise would have to be returned to shareholders if it is not used,” said Denzil De Bie, director at Fitch.
The Volcker Rule, which is forcing banks to spin-out proprietary trading divisions is also providing ample opportunities for asset managers. “A lot of banks are being forced to disinvest from proprietary trading and these teams could be picked up by asset managers,” he said.
Man Group’s acquisition of Pine Grove was not a transformational deal, he added. Nonetheless, the deal will bolster Man Group’s US footprint, Assets under Management (AuM) and reduce its reliance on Europe and Asia. In addition, it would help Man Group diversify its investment strategy. "The on-going discussions with Numeric Holdings are significant for Man Group as it would add impressive assets to its existing AuM," said De Bie.
Man Group has been expanding its multi-manager business for several years now. In 2012, it acquired FRM, an $8 billion fund of hedge funds. The deal with Pine Grove and prospective deal with Numeric Holdings would also enable it to reduce its dependency on AHL, the $12.5 billion managed futures fund, which like many other trend-following funds has suffered from underperformance and investor outflows. A number of trend following managers have struggled to make sense of the markets as Central Banks continue to pump capital into the financial system thereby reducing volatility while interest rates continue to be at near zero levels. However, AHL has reported profits this calendar year.
Man Group has suffered redemptions over the last few years and presently manages $55 billion, a far cry from its $71 billion peak when it acquired GLG in 2010. In 2012, Manny Roman succeeded Peter Clarke as chief executive officer at Man Group. This followed a tumultuous year, which saw widespread redemptions, a halving of the company’s share price and relegation from the FTSE 100. There was even speculation by analysts at UBS in 2012 that Man Group was a ripe target for a take-over with Blackrock and Franklin Templeton being identified in the report as potential bidders.
Since Roman’s ascent, Man Group has been aggressively cost-cutting and making senior management changes. “The stress which Man Group endured in 2012 was because it adopted an old business model that was not working. Since then, management has changed and new business heads have been bought in and the company is being managed efficiently,” commented De Bie.