Q&A – Charlie Ruffel of Kudu Advisors

May 23, 2013

Continuing its series of Q&As relating to investment manager deals, IM Deals received the following feedback from Charlie Ruffel, Managing Partner of Kudu Advisors, LLC, a boutique investment bank that operates in the investment management and securities services sectors.

Charlie comes to M&A from an unusual background, having built a pioneering information and research company that focused on the institutional asset management and back office/processing industries. At his prior firm, Charlie published influential research in areas as diverse as pension risk-transfer, 401(k) services, prime brokerage and mutual fund administration. He subsequently developed a reputation as someone with a keen sense of what trends were shaping the business.  He has since leveraged that expertise into a growing M&A practice, crowning 2012 with one of the largest deals in the asset management space, the sale of a majority stake in $35 billion (AUM) Strategic Investment Group to private equity fund Friedman Fleischer & Lowe.  Kudu acted as the sell-side advisor to Strategic.  A South African by birth, Charlie was educated at Cambridge University, and holds a masters degree from Columbia University.

IM Deals:  You don't see a very bright future for traditional 'long-only' asset managers. Why?

Ruffel:  There will always be a bright future for long-only managers that can consistently deliver alpha. The problem is that very few can. And asset-owners have worked out that there are more efficacious ways of getting beta than through long-only active managers.

IM Deals:  What trends do you see shaping the asset management space in the next five years?

Ruffel:  What is reshaping asset management is the shifting priorities of asset 'owners', in other words those institutions like pension funds that control large pools of assets.  'De-risking' strategies are the one side of that coin; alternative investments are the other. Over and above that is the secular trend towards investment outsourcing, signified by the growth and success of groups like Strategic Investment Group.

IM Deals:  In terms of M&A, which sectors in asset management do you see as being the most active in the immediate and longer-term future and why?

Ruffel:  Money managers rarely die – and deals are not that common, or at least not as common as one might expect. Lots of long-only equity managers are just going to fade away. Most of the deals are going to take place in the ETF and asset allocated solutions space, in investment and insurance outsourcing, and in alternatives.

IM Deals:  You have a background in information and research. What motivated you to get into investment banking?

Ruffel:  I felt that my understanding of what asset managers actually do could be a differentiator.  There are investment bankers – highly successful ones, I might add – who have never spent a day with an asset-owner. I also liked the idea of picking and choosing my clients. The investment banking business model could also use a few tweaks: The transaction is, of course, paramount, but so is the relationship aspect with the client. I'd like to see the latter get more emphasis.

IM Deals:  Alternative asset managers have seen increasing flows from big pension plans. What's behind this trend and how is it impacting M&A in the sector?

Ruffel:  What's behind the trend is that the best alternative strategies can offer better risk-controlled paths to alpha – or, for that matter, to beta. That is what institutional investors are looking for. But successful alternative asset managers on the whole see little reason to sell, so M&A even in that space is subdued.

IM Deals:  How important is retirement to the institutional asset management space? Will it be a driver in the future for particular types of managers and for related M&A activity?

Ruffel:  In my view, the retirement business is central to what happens next. Successful asset managers need to figure out a way to sell into the defined contribution marketplace, and that is easier said than done. Believing that defined benefit plans will be around for another generation make sense if you're an LDI [Liability Driven Investing] player, but not for any other type of asset manager. But delusions die hard.

IM Deals:  What is the current environment for fundraising in different parts of the investment management industry, and how is the AUM-gathering environment affecting the thinking of players in the M&A market?

Ruffel:  Great product matters, but great distribution matters absolutely. At the end of the day that is why strategic investors are preferred buyers for asset management firms: They can bring real distribution power to the table.

IM Deals:  What changes are occurring in businesses ancilliary to the investment management industry, like administrators and other service and technology providers, and what impact is this having on deal activity?

Ruffel:  FinTech is a good space to be in, right now. There are a lot of creative start-ups and boutiques, and in time the best of them will be snapped up by consolidators like the custody banks. Just as in asset management, you need distribution.


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