A weekly update on issues important to the Investment Management industry
Smaller public RIAs started and ended 2016 as a pack, but for about eight months performance was anything but similar. In what I can best describe as a wild ride to a close finish, at one point in July of 2016 Cohen & Steers (CNS) was up nearly 40% while Virtus Investment Partners (VRTS) was down over 30%. Seventy point divergences don’t happen very often, especially considering that, by Christmas of last year, the same spread narrowed to less than eight points.
Hardly a week goes by that we don’t get asked what we think are optimal qualities of an RIA merger partner. Answering that always feels a little like giving dating advice: different partners suit different partners. No one disputes that the industry is ripe for consolidation, but there’s no easy way to “swipe-right” on a target company’s ADV, and it’s pretty unlikely that sec.gov is going to have its own version of Tinder anytime soon. Nevertheless, in honor of today’s holiday, here are a few thoughts on what to think about when considering a merger partner.
In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the particular risks and opportunities of a given investment management firm is fundamental to developing a valuation. If you haven’t already, read our whitepaper covering this balancing act in this week’s post.
Investment strategies that screen for environmental, social, and governance criteria (ESG) is a still developing product niche that has, until recently, been more about talk than action. The pitch is that investing in businesses that demonstrate broad-based corporate responsibility provides a pathway to management teams who think long term, mitigate risk, and lead their industries. The beauty of an investment product like ESG is client stickiness.
Despite a rocky year for asset manager valuations, sector M&A was still strong. Total transactions were down about 10% from 2015 while aggregate deal value increased close to 20%. Several themes from the prior year also persisted as wealth management acquisitions remained robust and banks continued to play a pivotal role on both the buy-side and the sell-side.
A quick glance at year-end pricing of publicly traded asset managers reveals a continued skid in cap factors for mutual fund providers offset by some multiple expansion for traditional and alternative asset managers.
All three publicly traded trust banks (BNY Mellon, State Street, and Northern Trust) outperformed the market in 2016, continuing their upward trajectory over the last few years but still lagging the broader indices since the financial crisis of 2008 and 2009. Placing this recent comeback in its historical context reveals the headwinds these businesses have been facing in a low interest rate environment that has significantly compressed their money market fees and yields on fixed income investments.
Happy New Year 2017! Here are this past year’s 5 most popular posts from the RIA Valuation Insights Blog.
Over the past decade, we have been retained by several investment funds to assist them in responding to formal and informal SEC investigations regarding fair value measurement of portfolio investments. Reflecting back on those engagements yields a couple observations and reminders for funds and fund managers as they go through the quarterly valuation process.
As the second part to last week’s blogpost, the following section from Jay Wilson’s forthcoming book on FinTech describes ways to think about the valuation of robo-advisors, including some real world examples of technology based investment management platforms that transacted.
Despite the potential for FinTech innovation within wealth management, significant uncertainty still exists regarding whether these innovations will displace traditional wealth management business models. In this two part blogpost, excerpted from our new book on FinTech forthcoming from Wiley in early 2017, we look at the potential of Robo-Advisors and offer some thoughts on valuation.
As inspiration for fair deals and perfect swaps, we looked into Midland State Bancorp’s recent acquisition of Sterling National Bank’s trust department. From what we’ve read about the deal, it appears both parties walked away with what they wanted.
As difficult it is to imagine a valuable car such as the Ferrari 250GT SWB that we feature in this post being forgotten, what we see more commonly are forgotten buy-sell agreements, collecting dust in desk drawers. Unfortunately, these contracts often turn into liabilities, instead of assets, once they are exhumed, as the words on the page frequently commit the signatories to obligations long forgotten. So we encourage our clients to review their buy-sell agreements regularly, and have compiled some of our observations about how to do so in the whitepaper. We hope this will be helpful to you; call us if you have any questions.
Though probably not as historic as Plymouth landing or even the Eddie Murphy comedy, Henderson’s purchase of Denver RIA Janus Capital last month is a rare sign of confidence in active managers that have been losing ground to passive investors for quite some time. The era of ETFs and indexing has dominated asset flows for quite some time, so this transaction seems to counter the recent trend.
The purpose of this blog is to consider the implications of the election for the investment management industry, which is no easy feat. The Trump campaign was generally heavy on rhetoric and light on policy details. The investment management industry rarely came up, other than when Trump suggested that he would advocate taxing carried interest returns as ordinary income. He never mentioned, for example, the DOL’s Fiduciary Rule, which is set to phase in three months after the inauguration. The clearest indication of what a Trump presidency means to financial services, so far, appears to be its impact on the banking industry.
As we do every quarter, we take a look at some of the earnings commentary of pacemakers in asset management to gain further insight into the challenges and opportunities developing in the industry. Some of the trends this quarter include the Department of Labor’s Fiduciary Rule, passive management favoritism, and industry consolidation.
Barring some extraordinary circumstance, in one week Hillary Clinton will be elected the 44th president of the United States. Her election will mean a lot of different things to a lot of different people, but since this blog is called RIA Valuation Insights, we’ll narrow the focus of this outlook on her upcoming term as president to the possible impact on the investment management community.
Banks looking to diversify their revenue stream with investment management fee income would be well advised to study TriState Capital’s acquisition-fueled buildout of its RIA, Chartwell. The Pittsburgh depository started with an internal wealth management arm, bought $7.5 billion wealth manager Chartwell Investment Partners in early 2014, picked up the $2.5 billion Killen Group in late 2015, and last week announced the acquisition of a $4.0 billion domestic fixed income platform strategy from Aberdeen Asset Management.
Maybe the recent trend has nothing on Rocky Balboa or Gordon Bombay, but the past few months have been promising for most publicly traded RIAs. Relatively stable market conditions and better than expected earnings are the likely culprits for the group’s “comeback,” which has the overall index up 13% since February.
Just a few days ago, the largest publicly traded hedge fund, Och-Ziff Capital Management Group, agreed to pay $413 million to settle federal charges that it disbursed more than $100 million in bribes to African government officials. Even before this announcement, the hedge fund industry was in quite the slump.
After a steady build up since the end of the credit crisis, it appears that 2016 is going to be marked as the year when the venture capital industry lost momentum, although not for a lack of investors. The birth rate of new unicorns has slowed considerably since their 2015 baby-boom, even as the VC market remains dominated by tremendous inflows of capital in late-stage companies. Money has continued to pour in as riskier VC investments are still expected to outperform listed alternatives due to volatile public markets, higher multiples, low interest rates, and the less-than-stellar performance of the global economy. The source of new capital has changed, however, as the venture industry saw a marked increase in nontraditional investors – including pension plans, hedge funds and mutual funds.
Earlier this month, Mercer Capital had the pleasure of helping sponsor the Southern Capital Conference, an annual gathering of venture capital and private equity GPs, as well as the LPs who invest with them. If you believe everything you read about this segment of the investment community, you might expect a fair amount of groaning from the General Partners, with private equity managers under pressure to improve performance, negotiate fees, and increase transparency. The reality was very different.
On balance, 2016 could be a record year for asset manager transactions both in terms of deal count and collective volume. While this may be a stretch given the number of distressed sales during the financial crisis, a continuation of the current trend is certainly achievable.
When firms of similar size join forces to get a bigger footprint, solve leadership issues, stop advisors from competing with each other, etc. – realizing those benefits is the easy part. The hard work happens because different firms have different histories, and different histories create different cultures. Blending cultures can be awkward, as in MOEs (mergers of equals). This guest post, by Jeff Davis, provides a checklist of dos and don’ts for MOEs that will ring true in the investment management community.
