A weekly update on issues important to the Investment Management industry
Last week, Affiliated Managers Group (ticker: AMG) announced the completion of its investment in three alternative asset managers – Capula Investment Management LLP, Mount Lucas Management LP, and Capeview Capital LLP. This post discusses this transaction against the dim alternative asset management market environment.
Brexit’s full impact on the market is still to be determined, but a quick review of asset manager pricing reveals a valuation gap with the broader equity market that opened over the past twelve months, got much worse in June, and even accelerated over the past week. Sifting through the noise at quarter end, we pose, if market valuations in the industry are getting a haircut, what does that mean?
Black swan events and the very nature of the asset management business illustrate the importance of contingent consideration in RIA acquisitions for prospective buyers. The volatility associated with equity managers means AUM and financial performance can swing widely with market conditions, so doubling down on a one-time payment for an RIA can be extremely risky, particularly at high valuations. Of course, the market can just as easily pivot in the buyer’s favor after the deal closes, but gaining Board approval for such gambles is an exercise in futility if insurance is available in the form of contingent consideration.
Our quarterly summary of analyst calls is as revealing as usual, as pacemakers in the asset management sector review this quarter’s performance and how it may shape the year ahead. Madeleine Harrigan highlights four RIA market trends discussed by expert analysts.
Year-end 2015 closed out a quarter of elevated market volatility and falling asset prices in the traditional asset management industry. The year was marked by a rising flight to passive strategies and overall falling net inflows that pressured margins, causing many managers to take a hard look at their expenses and compensation structures going into 2016. Looking ahead, traditional asset managers are also facing headwinds from a slowdown in the global market, and a subdued (but cautiously optimistic) outlook at home. As we did last quarter, we take a look at pacemakers in the traditional asset management industry and outline four key themes we believe are expected to define 2016.
The Global Investment Performance Standards (GIPS®) were adopted by the CFA Institute in 1999 and are widely accepted among the international investment management industry. GIPS are a set of ethical principles based on a standardized, industry-wide approach that apply to investment management firms and are intended to serve prospective and existing clients of investment firms. While compliance by investment firms is voluntary, many investors consider GIPS compliance to be a requirement for doing business with an investment manager. Alternative managers have lagged behind the industry in claiming compliance with GIPS, but changes in the industry suggest GIPS compliance is becomingly increasingly important.
Tri-State Capital Holdings, Inc. (traded on the Nasdaq as TSC) bought The Killen Group, a $2.5 billion manager of the Berwyn mutual funds, for about six times EBITDA. More specifically, TSC paid Killen $15 million cash up front (based on trailing EBITDA of $3.0 million), plus an earn-out paying 7x incremental EBITDA (which could add another $20 million to the transaction price). So, best case scenario for Killen is for them to deliver about $6 million in EBITDA and get paid $35 million (!).
The International Private Equity and Venture Capital Valuation (IPEV) Guidelines were developed in 2005 to set out recommendations on best practices in the valuation of private equity investments. The IPEV Board is made up of leading industry associations from around the world, including the National Venture Capital Association (NVCA) and the Private Equity Growth Capital Council (PEGCC) in the United States. In October 2015, the IPEV Board published draft amendments to the existing guidelines that, if approved, will go into effect at the beginning of 2016.
Investment managers who expected the Square IPO to settle the debate on high private equity valuations have been, so far at least, thoroughly disappointed. Square, Inc. went public on November 17 at just $9 per share and opened debate in a venture community wary of high valuations on whether or not investment terms can compensate for high prices. In other words, do special investor provisions designed to protect late round investors from frothy PE valuations do more harm than good? In our last post on IPOs, we discussed the current imbalance between the public and private markets, in which an exuberance of private equity capital has driven up private valuations and created a dislocation between the privately established value of the firm and the publicly achieved value available at IPO. As a consequence of this phenomenon, IPO activity fell to new lows in the third quarter, as 16% of IPOs downsized their debuts. Square is one of a growing number of companies resorting to equity protections in order to attract late-stage investors, often at the expense of employees and earlier investors.
As the dust settles in the aftermath of the third quarter, we take a look at several earnings calls from pace makers in the RIA industry. Changes in the character of the financial markets is driving change in firm business models, and out of this we see a few common themes that we expect will play a role in shaping the industry going forward.
Sometimes the fear of a thing is worse than the thing itself, and being haunted by proposed regulations may indeed turn out to be worse than compliance. The horror show of FinCEN may turn into a series with multiple episodes. In this post, we examine this proposed regulation and its implications.
Last week brought the news that PE firm Hellman & Friedman acquired a controlling interest in mega wealth manager Edelman Financial. Edelman is headed by radio-show personality Ric Edelman and manages about $15 billion for over 28,000 clients. While terms of the deal were not officially disclosed, the Wall Street Journal reported the transaction valued Edelman at a number north of $800 million, a nice pickup on Edelman’s going private deal in 2012, which transacted the company at $263 million. The financial press was practically hyperventilating over the price last week, but a little analysis on the number reveals pricing that is more normal than most would imagine.
On April 29th, 2015, Simmons First National Corporation.(NASDAQ ticker: SFNC), announced it has entered into an asset-purchase agreement to acquire Ozark Trust and Investment Corporation (OTIC) and its wholly owned subsidiary, the Trust Company of the Ozarks (TCO), a Registered Investment Advisor (RIA) headquartered in Springfield, Missouri. The Trust Company of the Ozarks administers over $1 billion in client assets for over 1,300 clients with a 16% AUM compound annual growth rate. Simmons First National Corporation has agreed to a purchase price of $20.7 million, with a consideration of 75% stock and 25% cash. The deal is to close in quarter 3 of 2015. Unlike most acquisitions of closely held RIAs, the terms of the deal were disclosed via a conference call and investor presentation; the details of which are outlined here.
