A weekly update on issues important to the Investment Management industry
Earlier this month, Matt Crow and I attended the BNY Mellon / Pershing RIA Symposium in San Francisco. The conference was well attended, and the presentations were excellent despite the constant drone of fair wage protesting outside the hotel venue. For this post, we’ve elected to summarize some of these presentations and their potential implications for your business.
Asset manager M&A was robust through the first three quarters of 2018 against a backdrop of volatile market conditions. Several trends which have driven the uptick in sector M&A in recent years have continued into 2018, including increasing activity by RIA aggregators and rising cost pressures. Total deal count during the first three quarters of 2018 increased 45% versus the same period in 2017 and total disclosed deal value was up over 150%. In terms of both deal volume and deal count, M&A is on pace to reach the highest levels since 2009.
Alternative investment managers took off in the wake of the financial crisis when investors flocked to risk mitigating strategies and uncorrelated asset classes; however, during 2015 and 2016 these businesses floundered against a backdrop of strong equity market performance. Alt managers bounced back in 2017, and over the last twelve months, have continued to perform well. Despite improving performance over the last two years, the industry continues to face a number of headwinds, including fee pressure, expanding index opportunities, and relative underperformance.
During the recent market cycle, asset managers have benefited from global increases in financial wealth driven by a bull market in most asset prices. These favorable trends in asset prices have masked some of the headwinds the industry faces, including growing consumer skepticism of higher-fee products and regulatory overhang.
Like all founder-led companies, RIAs can benefit from the entrepreneurial zeal of the men and women who started them. Unfortunately, that same appetite for risk-taking can lead to reckless behavior, and the identification of a founder with a namesake enterprise can complicate succession planning. In any event, the risk associated with a founder-led RIA can lead to extreme results: taking advantage of a moon-shot opportunity, or a business that’s lost in space.
Despite the relatively high level of financial sophistication among RIA buyers and sellers, and broad knowledge that substantial portions of value transacted depends on rewarding post-closing performance, contingent consideration remains a mystery to many industry M&A participants. Yet understanding earn-outs and the role they play in RIA deals is fundamental to understanding the value of these businesses, as well as how to represent oneself as a buyer or seller in a transaction. We offer this whitepaper to explore the basic economics of contingent consideration and the role it plays in negotiating RIA transactions.
With last week’s release of the 2018 InvestmentNews Compensation & Staffing Study, trends in pay and performance expectations are making the rounds in the RIA community. Even though we are a valuation firm, we are often asked to weigh in on compensation matters, as officer pay and firm value are typically intertwined.
Since their launch in 1993, exchange traded funds (ETFs) have steadily attracted assets from mutual funds and active managers that have struggled to compete on the basis of performance and overall tax efficiency. Now many industry observers believe that the same may very well happen to ETFs with the recent rise of direct index investing (DII). For this week’s post, we look into the pros and cons of DII and the implications for the investment management industry.
After watching the price of trading drop for decades, it wasn’t so surprising when J.P. Morgan announced that it would offer free online trading for certain investors last month, but when $2.5 trillion manager Fidelity Investments announced they were going to be offering two “free” index funds, the industry rocked on its heels. Is this the next leg down for pricing of investment management, a publicity stunt by Fidelity, or something else altogether?
Recent challenges at Och-Ziff and Hightower highlight the struggles RIAs face in transitioning the business to the next generation of management. Size doesn’t alleviate this problem and may actually exacerbate it for some asset managers. In this week’s post, we explore what went wrong in these instances and what you can do to avoid a similar fate.do to avoid a similar fate.
