Continuing its series of Q&As relating to investment manager deals, IM Deals received the following feedback from Steve Levitt, Co-Founder and Managing Director of Park Sutton Advisors, LLC, a boutique investment bank that specializes in the financial services industry.
For the past 16 years, Steve has focused on middle-market M&A and strategic advisory work for asset and wealth managers, broker-dealers and fund administrators globally. Prior to founding Park Sutton Advisors, Steve worked at three investment banking boutiques in the financial services sector (Cambridge International Partners, Millenium Associates and Putnam Lovell). He holds a BA in Economics from Stanford University and an MBA in Finance from The Wharton School of the University of Pennsylvania.
IM Deals: What is your view on the state of the M&A market for asset and wealth managers, and what types of firms are in greatest demand at this time and why?
Levitt: When it comes to asset managers, scale, investment performance, capacity, growth potential and asset class are all critical. Most buyers today are seeking best-in-class firms that these buyers, given their marketing and distribution muscle, can help take to the next level. Asset class, investment performance, and size are of particular importance because buyers will pay competitively for those firms that are "winners" and have the best chance at gathering meaningful assets over the next 3-5 years. A buyer interested in a specific asset class is typically focusing on a short list of screened candidates. The M&A options for assets managers not meeting these criteria are much more limited. In terms of the asset classes most in demand today, there is always interest in a broad array of classes but, no surprise, international, global, emerging markets and alternatives managers are hotly sought these days given asset flows in the market.
In terms of wealth management, many buyers are interested in RIAs whose investment approaches (e.g. proprietary investment management, open architecture, hybrid open architecture) can run the gamut. We worked with one RIA last year that received 10 offers from buyers of which at least 5 were competitive. In assessing wealth managers, buyers are most interested in institutionalized businesses of $500 million in assets and up – versus coops of advisors, or little fiefdoms each doing its own thing. Ability to gather net new assets is critical. In our experience, over the past several years, few firms have been able to demonstrate a 5% or greater per annum net new asset growth rate. For wealth managers, stickiness and quality of relationships tend to matter a lot more than these firms' investment performance. Geography greatly matters too; markets such as Texas, Florida, New York, Chicago, and California (both Southern and Northern) are among the hottest. That being said, market leaders in other pockets of wealth around the US, like an Omaha or a Cincinnati, can also garner significant interest. Over the past year there have been fewer RIA deals than many of us would have expected although some of the larger deals (Luminous/First Republic and Atlantic Trust/CIBC) have garnered significant awareness.
IM Deals: What is going on in the fund administration space? With deals like Columbus Avenue Consulting selling a stake to Orangefield, and Butterfield Fulcrum selling to Mitsubishi UFJ, this seems to be an area of consolidation. Why are these deals occurring and what can we expect to see in the year or two to come?
Levitt: Since 2008, we all know that there have been fewer (and smaller) hedge fund launches. In addition, institutional investors are increasingly focused on compliance, risk management, infrastructure and scale. As a result, many asset allocators want their hedge fund managers to be working with a top 25 if not a top 10, or even top 5, administrator operating in multiple jurisdictions around the globe. Thus, it has become much more difficult over the past few years for small (say, under $10-15 billion in AUA) administrators to land the larger prospects. The larger administrators are well aware of this dynamic, and are also very aggressively wooing the large funds working with small administrators to entice them to move — with quite a bit of success. As a result of all this, many small administrators see the writing on the wall and are considering linking up with larger administrators, and we ourselves have advised on quite a few of these situations over the past couple of years. Despite all of this, we do believe that an opportunity will continue to exist for those small administrators whose business models remain focused on friends-and-family clients. No question there will be small funds requiring accounting and book-keeping services who cannot afford to work with larger administrators, and who will work with the smaller administrators which can successfully deliver a high level of service.
IM Deals: If an investment or wealth manager is contemplating a transaction in 12-36 months, are there actions that they can be taking today to prepare for a hoped-for transaction?
Levitt: Few firms are perfect in every way. Owners who are planning a sale in several years time should seek to (honestly) educate themselves on who the likely buyers might be and how these groups would assess their businesses. A diagnostic by an objective third party might be helpful here. By opening their eyes to their firm’s strengths and weaknesses, owners through such exercises can work hard to make their businesses as attractive as possible to suitors. This isn't to say that a firm can or should change whom it is at heart. For instance, a manager of domestic fixed income may not be able to overnight become a successful manager of global fixed income or distressed debt. However, they can work on ways to improve their investment performance, if weak. A wealth manager with tepid net new business growth needs to find ways to accelerate its growth. All of this being said, it is not easy to precisely time the closing date of a transaction. We always advise clients that if they anticipate entering into a transaction over the next few years, they might want to seriously consider doing so when they are at their best, or "have the wind at their back," with as many of those boxes checked as possible.
IM Deals: Last question – buyers complain about participating in "auctions." What is your view here?
Levitt: Buyers view the word "auction" as a dirty word. From the perspective of the seller (and about 2/3 of the time we are representing sellers), the optimal strategic fit is not always self-evident. The seller is likely selling his or her business just once, and it is imperative that they be making a fully-informed decision. Often this means the seller must create a frame of reference and have at least several serious discussions so that they have a basis for comparing their options. Not to mention, some buyers will move at a snail's pace through the M&A process if they are not subject to a specific timeline and aware of their risk of being booted from the process should they not meet certain deadlines. While buyers might not always realize this, we believe that the competitive dynamic really does serve their interest as well because they are best off when the target is agreeing to join their organization upon making an informed decision — versus having no idea of what other real (versus imaginary) options might have existed for them in the marketplace.