Private equity is stepping up its buying binge of asset managers.
In the first half of this year alone, the industry invested more capital than in any year of the past decade on deals to acquire asset management firms. Through July 20, there were 39 deals totaling $13 billion, already $2.6 billion higher than the previous peak in 2021, according to PitchBook data.
For years, asset managers have acquired alternative managers to boost their exposure to alternative investments.
More recently, TPG paid $2.7 billion in May to acquire Angelo Gordon, an alternatives manager with $73 billion in assets. That deal included Angelo Gordon’s $55 billion in private credit assets, which cover direct lending, corporate credit and structured credit, and its $18 billion real estate platform. The result is TPG, a publicly traded firm, expanding its client base and increasing its total AUM to $208 billion.
Many acquisitions aim to tap into more lucrative segments of the market, such as the middle market, in which deals require less leverage than mega-deals. That segment outperformed deals made by mega-funds for three consecutive quarters through Q1, according to PitchBook’s Q1 2023 US PE Middle Market Report.
On July 20, alternative asset manager HighVista Strategies acquired Abrdn‘s US markets business, expanding its reach into the lower middle market.
Other drivers of recent consolidation are diversification and expansion into private credit and other new channels for exposure to more clients.
“Asset management companies are using alliances both as a mechanism for improving their operational efficiencies as well as developing new routes to customers,” said Andrea Guerzoni, EY’s global vice chair of strategy and transactions, in an email.
There was a 13% jump in strategic alliances of asset managers in financial services and other sectors from 2019 to 2022, according to EY.
This year, private credit and secondaries shops are in high demand among asset managers looking for strategic acquisitions. Among notable deals, First Sentier Investors acquired a majority stake in European credit specialist AlbaCore Capital Group in March. In January, Brookfield Asset Management acquired DWS Group, the secondaries unit of Deutsche Bank.
Many asset managers want to be a one-stop shop for LPs, moving from being single-strategy or niche firms to multistrategy asset managers. Blackstone, which got its start as a traditional buyout firm managing $400,000, reached the $1 trillion AUM mark July 20 after spending the past four decades expanding into real estate, credit, infrastructure, growth capital and hedge fund solutions.
“Everyone wants less complexity in life, and I think if you can offer five different types of investments versus one, you’re going to be more competitive,” said Michael Patanella, Grant Thornton national managing partner in asset management.
The backdrop
The wave of consolidation comes amid dampened private market deal flow as firms grapple with limited financing options and the elevated cost of capital.
For asset managers struggling to execute deals, strategic acquisitions offer the potential for higher realization multiples.
PE firms typically gauge the value of their business through some kind of valuation framework, which often incorporates a fee-related earnings value. FRE measures the profitability of a firm based on the recurring revenue it generates from its management fees.
Apollo Global Management uses a valuation framework that incorporates the FRE value, the value of its balance sheet and the value of the cash it predicts it will rake in through fees to generate a fair value for its share price.
Asset managers on average generate FRE of 22x their fee’s current value, according to Greg McGahan, deals partner at PwC. For smaller, more niche players—like a small private credit shop—the FRE is about 20x; for a large, multistrategy asset manager, the FRE is closer to 28x or 29x, he said.
“If you’ve got diversification in the platform, you’re going to get a much higher multiple and much higher valuations,” McGahan said. “So I think what you’re seeing is a lot of these shops that were originally PE shops are expanding. The PE firms are moving to, rather than being called PE, being called diversified asset managers.”
In a period when inorganic growth has been challenging, asset management acquisitions are attractive to a buyer for their relatively stable cash flows through recurring revenue, strong balance sheets and lack of real credit risk such as that associated with other financial services businesses like banks, said Pete Gougousis, a managing director at Alvarez & Marsal Transaction Advisory.
Asset management businesses have a track record of growing through M&A.
“There’s been numerous wealth and asset management platforms that have been backed by PE, gotten an injection of capital and are then able to consolidate deals in the market for lower multiples and reap that benefit once they actually go to exit,” Gougousis said.
Another factor is succession planning. As founders of niche alternative shops reach retirement age, they’re beginning the process of succession planning. These are prime targets for larger corporate acquirers, either through majority or minority transactions, according to McGahan.
Gougousis said the industry consensus is that there will be more consolidation in the next 5 to 10 years.
“We expect that there will be transformational opportunities for the bigger players to consolidate, not dissimilar to what you saw in the banking space in the ‘90s,” he said.
McGahan agrees. “This industry is ripe for continued consolidation.”
Featured image by Daniel Grizelj/Getty Images
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