A weekly update on issues important to the Investment Management industry
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.
The closest we get to detective work at Mercer Capital is when we’re jointly retained to resolve a shareholder disagreement over a buy-out. Whether we’ve been court-appointed or mutually chosen by the parties to do the project, we’ve done enough of these over the years to learn that the process matters as much as the outcome. In this post, we discuss our process for handling such engagements.
Despite talented people, carefully developed business plans, and the best of intentions, not every partnership goes well, and some of those that don’t go well don’t end well either. When a partner leaves an investment management practice, the potential for a major dispute over the buy-out usually looms. Internally, at our firm, we sometimes refer to these situations as “business divorces”, even though the consequent acrimony often exceeds that of a marital dissolution. Here are a few mistakes we’ve seen others make, in the hopes that you read this and don’t do the same.
A recurring problem we see with buy-sell agreements are pricing mechanisms that are out of date. Keeping the language in your agreement up to date is important, but the most reliable way to avoid some unintended consequence of your buy-sell agreement is to have a pricing mechanism that specifies a regular valuation of your RIA’s stock. An annual valuation accomplishes a number of good things for an investment management firm, but the main one is managing expectations.
The subtitle of Chris Mercer’s original book on buy-sell agreements is “Ticking Time Bombs or Reasonable Resolutions?” Implicit in this title is that parties to buy-sell agreements too often discover the painful implications of the question never asked. I think about this every time we work on a dispute resolution project involving a buy-sell disagreement. In particular, I think about one of the first ones that I worked on, where maybe there was no disagreement, but should have been.
If an asset manager’s buy-sell agreement is going to specify reasonable expectations for the value of the firm, what are they? We think there are at least four elements that should be clearly stated in each buy-sell agreement to ward off costly ambiguity.
This post launches a series on buy-sell agreements, specifically as they pertain to RIAs. Buy-sell agreements are peculiar contracts between shareholders with a very specific purpose: to provide for the transition of ownership and liquidity in a business, usually in case of a specific event. Outside of a particular event, buy-sell agreements usually sit on a file server or in a desk drawer, and no one thinks about them, until a need arises to pull out the agreement – at which point no one can think about anything else.
Some of our recent musings on mutual fund outflows and multiple contraction may actually have positive implications for RIA deal-making in 2016 and beyond. The maturation of the mutual fund industry and active fund managers will likely spur consolidation and buying opportunities for those looking to add scale. With valuations and market caps down over the last eighteen months or so, the affordability index has gotten a lot better for many of these businesses.
So far this month, the sports world has seen two incredible streaks finally come to an end – Golden State suffered its first regular season home defeat in 54 games, and Real Madrid snapped FC Barcelona’s 39 game unbeaten run in last weekend’s Clasico match-up. Both teams are still poised to retain their respective NBA and La Liga titles this year and break numerous records in the process, assuming their top producers continue their recent form. One streak that remains, albeit less reportedly, is passive funds’ dominance over their active counterparts over the last year.
From a valuation perspective, it appears that alternative asset managers fared the best in Q1. However, closer inspection reveals a bleak quarter for the publicly traded hedge funds and private equity firms in our alternative asset manager index.
2015 was a peak for private equity, but as 2015 unfolded, so did a growing imbalance between the public and the private markets. In this post, we consider recent trends and wonder – what’s next for VC?
Many times, conflicts with shareholders are unavoidable and are the natural bi-product of ownership transition and firm evolution. In these instances, a carefully crafted buy-sell agreement (“BSA”) can resolve these disputes in a fair and equitable manner (from a financial point of view) if the valuation process avoids common pitfalls. In this post, we discuss these pitfalls and how to keep your buy-sell agreement free of surprises.
Investment management is a talent business, and that talent commands a substantial portion of firm revenue which often exceeds the allocation to equity holders. While there is no perfect answer as to what an individual or group of individuals should be compensated in an RIA, we can look to market data and compensation analysis, measured against the particular characteristics of a given investment management firm’s business model, to make reasonable assumptions about what compensation is appropriate and, by extension, what level of profitability can be expected.
A tradeoff in an investment management firm’s business model is that of compensation expense versus profit margin. Compensation is almost always the largest expense on an RIA’s income statement and, of course, has a direct impact on net income. In light of that, we consider two business models and the effect on value.
As the Baby Boomer generation continues to age toward retirement, many “founder-centric” asset management firms face the prospect of internal succession. The recent book “Success and Succession,” by David W. Bianchi, Eric Hehman, Jay Hummel, and Tim Kochis, is written from the perspective of three individuals who have experienced successful ownership transitions. The book provides some interesting insights into the logistical, financial, and emotional process that internal succession entails through colorful accounts of past triumphs and train wrecks.
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.
Much like Porsche discovered fifty years ago, many banks are responding to regulatory changes by opting for a hybrid model that pairs trust and wealth management operations with traditional banking. The advantages of banks developing their investment management operations are pretty easy to see: it produces a more stable and diverse revenue stream, it provides more touch points for customer relationships, and it can substantially improve a bank’s return on equity.
Of course, opportunity is a two way street, and banks looking to venture into investment management, especially by acquisition, typically encounter a couple of major obstacles: balance sheet dilution and culture clash. Both of these challenges arise from the main difference between traditional banking and asset management. Whereas banking is asset heavy and personnel light, asset management requires not much of a balance sheet, but plenty of expensive staffing. It’s a significant difference that can only be managed head on.
Last week, Brooks Hamner and I spoke at Bank Director’s Acquire or Be Acquired Conference in Scottsdale about how banks can build value through their trust and wealth management businesses. Our session got a great response, probably because we were some of the only speakers offering the banking community some hope. How then do you ensure that a trust not become an earnings-dilutive cauldron of liability?
In this post, we have included the slide-deck from our presentation, “Valuing a Trust & Wealth Management Franchise” from Bank Director’s 2016 Acquire or Be Acquired conference. Even with the present market instability, banks have an interesting opportunity to expand their financial services while diversifying their revenue streams with asset management. We sense some growing demand for sophisticated trust services, and a lot of RIAs in the wealth management space see banks with existing trust departments as a complementary environment to sell into.
This post provides some brief thoughts about five topics, posed as questions, that can make or break the value of RIAs. These topics have longer term and more strategic implications than the day-to-day fluctuations in capital markets, and while equity research may be more fun, these are more reliably lucrative.
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.
Despite the recent uptick, we believe the backlog of available deals remains fairly robust given the four year pause in transactions from 2009 to 2013 and the aging demographics of many investment management firms. The real threat to deal making would be a longer, more pronounced downturn or continued volatility in the equity markets that would crater AUM levels and investor confidence.
A quick look at year-end pricing of publicly traded asset managers reveals a continued skid in multiples for traditional RIAs and mutual funds with modest advancement for the alternative managers and trust banks.
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 (!).
