A difficult match

There are plenty of buyers and sellers in asset management but, like the US's warring political parties, they appear to be having entirely different conversations that show little sign of meeting in the middle.

The experience of Deutsche Bank is a case in point. The German financial institution, like several of its peers in Europe, gave serious thought to the utility of its asset management business, itself the product of a series of deals. Following a strategic review, bids were invited, and a putative €2bn price tag mooted.

The unit, which has more than $400bn in assets under management, attracted plenty of initial interest, but when it came to putting an actual price on the table this year, the list of bidders dwindled rapidly.

Deutsche Bank wanted to sell the entire arm in one piece, even though there were few buyers interested in the underperforming combination of institutional accounts, insurance assets and Rreef, an alternative property investor.

After strategic bidders, such as State Street, JP Morgan and Ameriprise dropped out, Deutsche Bank was left with three interested buyers: Macquarie, the Australian bank looking to expand; Power Corporation of Canada, a mutual fund company for whom the US asset management businesses would be a good fit with Putnam Investments, the money manager it purchased in 2007 for $3.9bn; and Guggenheim Partners. Guggenheim is a business that has acquired everything, including its name, from the famous foundation for which it also manages money. But its tactics illustrate the problem sellers, such as Deutsche Bank, face.

The two entered into exclusive negotiations in March, after Guggenheim put in a large bid for the whole business that Macquarie and Power Corp had no interest in trying to match, according to people familiar with the situation.

However, two months later Deutsche Bank announced that it was now in exclusive negotiations just for Rreef, which some had considered the most attractive asset all along.

Some bankers put the fraught process down to Deutsche Bank's decision to use its own mergers and acquisitions team. "You never want your employer as a client, they don't listen and you can't fire them," says one. However, the difficulties also reflect the broader environment and insiders point to a Deutsche management change in March that contributed to a reassessment.

Banks, contemplating new regulations for the amount of capital they must hold, are among the chief sellers of asset management businesses as they consider what banking will look like in the post-financial-crisis world, and conclude it does not involve investing money for clients.

Yet 2011 was the worst year for global dealmaking in asset management for five years, both in terms of value and volume, according to PwC, the accounting and consulting firm.

In 2009, large deals were completed swiftly, at attractive prices. For instance, Ameriprise snapped up Bank of America's asset management arm, Columbia, for $1.2bn, a price now seen as a bargain.

Three years on, however, and banks, particularly those in Europe, do not appear to be in a hurry to sell. Both Italian bank Unicredit, and its Spanish counterpart Santander, have considered the sale of their asset management businesses but then thought better of it. Societe Generale said last year that TCW, its US asset management arm, was not for sale

"There is simply too much of a disconnect between the price that sellers expect for these businesses and what buyers are willing to pay," says Denis Bastin, a consultant to asset managers.

. . .

Part of this reflects the market environment, as money managers simply are not valued as highly as they used to be. The world has changed after a 30-year bull market in which it was an asset manager's job to beat whatever rising benchmark he or she was judged against.

Now that choosing which asset classes to be invested in is far more important than the composition of the assets within a particular sector, asset management has become far tougher. Investors now prefer to put their money into cash products, or bonds, that offer lower margins than actively managed equities.

The shift has also coincided with disruption to the business by exchange traded funds, and the move to individual defined-contribution pension schemes, rather than the big pots of defined-benefit pension money of the past.

In US mutual funds, for instance, industry fee levels barely changed even as the business grew from $200bn to $12tn in assets.

Valuations have dropped. In 2005, buyers were willing to pay more than 25 times net earnings, according to PwC, but now prices are far more likely to be in the 10-15 times range. In the second half of last year, the median multiple of earnings before interest, tax, depreciation and amortisation was a lowly eight times, down from around 13 times before the financial crisis.

Sellers may not have caught up with the new reality, particularly European banks where a captive client base is of little use except to a direct competitor to whom they would least like to sell.

But bankers expect plenty of activity should the economic outlook become less uncertain, and there are still areas of interest at a smaller scale.

The boutiques continue to add smaller "shops" to their platforms, for instance the recent purchase of a controlling interest in the high-performing Yacktman Funds by the Affiliated Managers Group, which has been a persistent acquirer of mid-sized investment management firms.

Collateralised loan obligation managers are in demand as a revival in the business appears possible: the $11bn of new CLO issuance this month is already more than that completed in the whole of 2011. With that in mind, Apollo, the listed alternative manager, completed a deal for Stone Tower, a $22bn CLO manager, in April for an undisclosed sum.

"There is a tremendous war for talent," says Kevin Quirk of Casey Quirk, a consultant to asset managers. "That war means a lot of people are using the volatility in the business to pick up good talent. They'll look at smaller transactions and teams, picking up individuals to really build their business organically, rather than doing transformational transactions."

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