Key Takeaways
AUM alone is a poor proxy for value. Two firms with the same AUM can generate very different revenue and EBITDA depending on fee rates, margins, and product mix.
The quality and durability of AUM matter as much as the quantity. Asset class, liquidity, client retention, net flows, and revenue visibility all affect the risk and sustainability of future cash flows.
Product mix can materially influence valuation through growth and profitability. Strategies with stronger growth prospects, better operating leverage, and more durable economics may support higher valuations even if they represent less total AUM.
Assets under management is probably the most visible measure of scale in the investment management industry. It is also one of the easiest measures to misinterpret.
Consider three hypothetical investment managers, each with $10 billion of AUM. One primarily manages low-fee passive equity strategies. Another specializes in actively managed fixed income. The third manages private-market strategies with longer-duration capital and the potential for performance-based fees.
All three firms manage the same amount of money. They almost certainly are not worth the same amount.
The reason is straightforward: AUM is an input into the economics of an investment management firm, not the economics themselves. What ultimately matters for valuation is the cash flow generated by those assets, the durability of that cash flow, its expected growth, and the risk associated with realizing it.
That makes product mix an important, and sometimes overlooked, consideration in the valuation of investment management firms.
Start with the Fee Rate
The most obvious distinction between different pools of AUM is what the manager gets paid to manage them.
We have written previously about the shortcomings of AUM-based valuation rules of thumb. In that example, two firms each managed $1 billion. One realized a 100 basis point fee and operated at a 25% EBITDA margin, generating $2.5 million of EBITDA. The other realized a 40 basis point fee with a 10% EBITDA margin, producing just $400,000 of EBITDA.
Same AUM. Very different economics.
Product mix often explains much of this difference. Passive products generally compete heavily on price. Traditional active strategies may support higher fee rates, depending on asset class, performance, and distribution. Specialized mandates and alternative strategies may command still higher fees, sometimes coupled with performance-based compensation.
AUM growth therefore does not necessarily translate proportionately into revenue growth. A manager that is gaining assets in lower-fee products while losing assets in higher-fee strategies could report rising total AUM while experiencing flat—or even declining—revenue.
For valuation purposes, knowing that AUM increased is only the beginning. The more important question is: what kind of AUM increased?
Revenue Durability Matters Too
Fee rates alone do not determine the quality of an asset base.
Two strategies with identical management fees can still have very different valuation characteristics if one has substantially more durable assets than the other. The liquidity offered to clients, the structure of the investment vehicle, historical redemption patterns, client concentration, and the source of new assets can all influence the reliability of future revenue.
A daily-liquid strategy experiencing persistent outflows presents a different risk profile from a strategy supported by more stable institutional mandates or longer-duration capital. Likewise, a private-market manager with committed capital may have greater visibility into future management fees, although that visibility comes with its own fundraising, deployment, performance, and realization risks.
The relevant valuation question is not merely what the assets earn today, but how likely those earnings are to persist.
This is one reason the industry's continuing debate over active and passive management has valuation implications. As we discussed in “Can Active Management Survive a Bear Market?”, active managers have faced fee pressure, competition from passive products, ETF competition, and the risk of continued outflows.
More recently, we noted in “Flows Are Back. Active Isn’t Dead. But Don’t Pop the Champagne Just Yet.” that flows have become increasingly selective, with investors rewarding particular asset classes, strategies, and structures rather than active management indiscriminately.
That selectivity matters when assessing the quality of a manager's AUM.
Product Mix Influences Growth
Product mix also shapes a firm's growth prospects.
A strategy operating in a shrinking category may be highly profitable today but have limited opportunities to attract new assets. Conversely, a manager positioned in an expanding category may have a much longer runway for growth even if current profitability is more modest.
But, as we discussed recently in “Organic Growth Is the New Scarcity Premium,” not all growth deserves the same valuation treatment. Market appreciation, acquisitions, advisor recruiting, and internally generated net flows each tell a different story about the underlying enterprise.
The same is true at the product level.
If a firm's legacy strategy is experiencing net redemptions while a newer strategy is rapidly attracting assets, consolidated AUM may conceal a significant shift in the economics of the business. Whether that shift is positive depends on the fee rate, margin, retention characteristics, capacity, and scalability of the growing product.
Analyzing product-level flows can therefore provide substantially more information than looking at firmwide AUM alone.
Margins Complete the Picture
Higher-fee AUM is not necessarily more valuable if servicing those assets requires proportionately higher expenses.
Some investment strategies require larger investment teams, specialized technology, expensive data, additional compliance infrastructure, or significant distribution spending. Others can accommodate substantial incremental AUM with relatively little additional cost.
The interaction between fee rates and expenses determines the incremental profitability of asset growth.
This is particularly important in an industry where scale can produce meaningful operating leverage. As we observed in “Growing Pains,” certain overhead expenses are relatively fixed, allowing additional revenue to expand margins even amid some fee pressure. But those benefits vary considerably depending on the firm's product set and operating model.
A scalable strategy with a moderate fee rate could therefore be more valuable than a higher-fee strategy with significant incremental servicing costs.
Once again, the AUM figure alone does not tell you much.
From AUM Quantity to AUM Quality
None of this means that AUM is irrelevant. AUM remains one of the primary operating metrics for investment managers because it drives revenue and provides important information about scale, market position, and client adoption.
But valuation requires looking through the headline number.
When evaluating the quality of an investment manager's AUM, we would generally want to understand:
realized fee rates by strategy and client type;
historical and expected net flows;
client and product concentration;
the liquidity and expected duration of the asset base;
product-level margins and operating leverage;
investment performance and capacity constraints;
distribution capabilities and sources of new business; and
the expected growth or contraction of the underlying product categories.
Two managers with identical AUM may look very different after considering these factors.
Ultimately, investment management firms are not valued because they oversee a certain number of dollars. They are valued for the cash flows those assets are expected to generate.
AUM tells you how much capital is being managed. Product mix tells you much more about what that capital may actually be worth to the manager.
About Mercer Capital
Mercer Capital is a valuation firm organized according to industry specialization. Our Investment Management Team provides valuation, transaction, litigation, and consulting services to asset managers, wealth managers, independent trust companies, broker-dealers, private equity firms and alternative asset managers, and related investment consultancies.