Opportunities in Asset Management

OPPORTUNITIES IN
ASSET MANAGEMENT
MSF Enterprises, LLC

Copyright © 2013 MSF Enterprises, LLC

Table of Contents

Section

Page

Introduction

3

Global Capital Markets

4-12

Evolving Asset Management Industry

13-19

Deal Activity

20-27

2

Introduction
The financial services landscape has been growing substantially since 2008 as wealth management firms,
mutual funds, ETFs and alternative investment groups have rallied and returned to pre-financial crisis
asset levels. The businesses themselves have become stronger, with better product diversification and
improved management teams. Now the industry is in a cyclical pattern where scale, breadth and vision
will be the critical factors over the next five years that decide which firms become the next industry
bellwethers.
Currently, there are 66 publicly-traded asset management firms globally. The largest firms top out in the
trillions and scale down to $20B+ in AUM. We suspect that over the next decade we will see the
number of publicly-traded firms triple as many larger private firms ($20B+) move toward public
structures to create higher valuations and provide succession planning for their managing
members.
Scale is becoming the most important factor for long-term success in the financial services industry.
Money managers not only have to generate returns for their investors, they are now expected to grow
and increase the value of the business itself. Necessary components of growing an asset management
business include developing new products, designing investment structures to suit a range of investor
needs and expanding the firm’s global distribution network. By placing greater emphasis on developing
the business as a whole, asset management firms can uniquely position themselves to create long-term
value. With that said, firms can no longer be content with reaching $1B in AUM - “$10B and
beyond” is the new hurdle to become a major player in the industry.

3

Global Capital Markets

4

Size of the Global Financial Market
Global Stock of Debt and Equity Outstanding
($ trillion, end of period, constant 2011 exchange rates)

$225 Trillion:
Size of Global
Financial Markets

Global AUM (in $T)

$58 Trillion:
Size of Global
Market for
Managed Assets

Source: McKinsey Institute,
BCG

5

Looking at the World
Fund sponsors globally catering to an investor base of public and private
pension funds, sovereign wealth funds, endowments, foundations, banks, family
offices and retail clients are now looking for more cross-border opportunities.
Firms from the US, Canada, Europe, MENA, Japan, Asia-Pacific and South
America are now in play to create the next global asset management firm.

US

Russia

Europe

MENA

Asia
SE Asia

South
America

South
Africa
Australia

6

Largest Global Money Managers
Rank

Asset Management Company

Country

AUM (US$bn)

1

US

$3,791.59

2

Vanguard Group

US

$2,215.22

3

State Street Global Advisors

US

$2,086.20

4

Fidelity Investments

US

$1,888.30

5

PIMCO

US

$1,624.35

6

JP Morgan Asset Management

US

$1,426.40

7

BNY Mellon Asset Management

US

$1,385.86

8

Deutsche Asset & Wealth Management

Germany

$1,244.44

9

Prudential Financial

US

$1,060.25

10

Capital Research & Management Co.

US

$1,045.57

11

Amundi

France

$959.79

12

Goldman Sachs Group

US

$854.00

13

Franklin Templeton Investments

US

$781.77

14

Northern Trust

US

$758.94

15

$33 Trillion:
Approximate Size
of 25 Largest Asset
Managers

BlackRock Inc.

Wellington Management Co.

US

$757.73

*Rankings as of 12/31/2012

Source: Pensions &
Investments

7

Top 20 Hedge Fund Managers: Past and Present
2001
Rank

Firm

2006

1

Moore Capital Mgmt

$8,000

2

Farallon Capital

$7,794

3

$37.9B:
Combined AUM of
Top 5 Hedge Fund
Managers in 2001

Rank

AUM [$M]

Andor Capital Mgmt
Maverick Capital

$7,500

AUM [$M]

1

JPMorgan Asset Mgmt

$33,087

2

Goldman Sachs Asset Mgmt

$32,531

3

Bridgewater Associates

4

5

Citadel Investment Group

$7,150

6

Angelo, Gordon & Co.

$7,000

7

Soros Fund Mgmt

$7,000

Rank

Firm

AUM [$M]

1

Bridgewater Associates

$83,300

2

JPMorgan Asset Mgmt

$54,800

3

Brevan Howard Asset Mgmt $40,000

$30,210

4

BlueCrest Capital Mgmt

$35,300

D.E. Shaw Group

$27,300

5

Och-Ziff Capital Mgmt

$31,900

5

Farallon Capital

$26,200

6

Man Group

$29,600

6

Renaissance Technologies

$26,000

7

Baupost Group

$26,700

7


$21,000

8

BlackRock

$26,635

8

Barclays Global Investors

$18,953

9

Winton Capital Mgmt

$25,700

$7,500

4

Firm

2013

Pequot Capital Mgmt

$6,500

9


$6,050

9

Man Investments

$18,800

10

D.E. Shaw & Co.

$23,400

10

$245.3B:
Combined AUM of
Top 5 Hedge Fund
Managers in 2013

8


$5,570

10

ESL Investments

$17,500

11

Lone Pine Capital

$22,000

11

Caxton Corp.

$5,500

11

GLG Partners

$15,833

11


$22,000

12

Tudor Investment Corp.

$14,850

13

Elliott Mgmt Corp

$21,500

13

Citigroup Alternative Inv.

$14,081

14

Lansdowne Partners

$14,000

14

AQR Capital Mgmt

$20,300

15

Campbell & Co.

$13,600

15

Credit Suisse Hedging-Griffo $19,985

16

Atticus Capital

$13,500

15

GAM

$19,600

17

Viking Global Investors

$19,400

18

Davidson Kempner Capital
Mgmt

$18,590

19

Farallon Capital Mgmt

$18,400

20

Adage Capital Mgmt

$18,360

$5,491

Chilton Investment Co.

$5,000

14

Duquesne Capital Mgmt

$5,000

15

ESL Investments

$5,000

16

Highfields Capital Mgmt

$5,000

Tudor Investment Corp.

$4,946

18

Highbridge Capital Mgmt

$4,200

19

Perry Capital

$4,137

20

Copyright 2011 MSF Enterprises, LLC

HBK Investments

13

17

Source: Institutional Investor,
Bloomberg Markets

12

Man Investments

$4,000

17

Caxton Associates

$13,500

18

Citadel Investment Group

$13,400

19

Cerebrus Capital Mgmt

$12,800

20

Moore Capital Mgmt

$12,500

8

Global Equity and Bond Markets
Size of US IG and HY Corporate Bond Markets

$54.6 Trillion:
Size of Global
Equity Market

Regional Distribution and Total Market Capitalization of Global Bond Market

$99.5 Trillion:
Size of Global
Bond Market

Source: World Federation of
Exchanges, Morgan Stanley,
Bank for International
Settlements, Thomson
Reuters, Barclay’s Capital

9

Alternative Asset Classes
Size of Global Alternatives Market
7
6
Trillions of USD

$6.5 Trillion:
Size of Global
Alternatives
Market

CAGR 2005-2011
Alternative Assets: 14.2%
Traditional Assets: 1.9%

5
4
3
2
1
0
2005

2006

2007

2008

2009

2010

2011

Estimate of Hedge Fund Assets, Net Asset Flows and Number of Funds

$2.3 Trillion:
Size of Global
Hedge Fund
Market

Source: McKinsey Institute,
Managed Funds Association

10

Alternative Asset Classes
Private Equity Assets Under Management

$3.3 Trillion:
Size of Global
Private Equity
Market

Private Equity AUM by Fund Type (as of 9/2012)

Source: Preqin

11

Registered Investment Companies (RICs)
Total Assets in Mutual Funds,
Closed-End Funds, ETFs and UITs
Closed-End
Mutual funds
ETFs2
Funds
UITs
$2,811
$143
$1
$73
3,526
147
2
72
4,468
152
7
85
5,525
156
16
94
6,846
147
34
92
6,965
143
66
74
6,975
141
83
49
6,383
159
102
36
7,402
214
151
36
8,095
253
228
37
8,891
276
301
41
10,398
297
423
50
12,001
312
608
53
9,604
184
531
29
11,113
224
38
Private Equity AUM by Fund Type 777 of 9/2012)
(as
11,832
238
992
51
11,627
243
1,048
60
13,045
265
1,337
72
1

$14.7 Trillion:
Size of Global
Retail Market
Structures

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Total3
$3,028
3,747
4,712
5,790
7,119
7,247
7,248
6,680
7,803
8,613
9,509
11,167
12,975
10,348
12,152
13,113
12,979
14,719

1

Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute. The
data do not include mutual funds that invest primarily in other mutual funds.
2

ETF data prior to 2001 were provided by Strategic Insight Simfund. ETF data include investment companies not registered
under the Investment Company Act of 1940 and exclude ETFs that invest primarily in other ETFs.
3
Total investment company assets include mutual fund holdings of closed-end funds and ETFs.

*Source: Investment Company
Institute, Strategic Insight
Simfund

12

The Evolving
Asset Management Industry

13

60 Year History of Asset Management

The complex art form of investment management has been evolving for decades, with
market developments forcing investors to seek out alternative methods to achieve
outperformance.

14

Correlation: Expanding Asset Classes

The Modern Portfolio Theory (MPT) asset base of bonds and equities has only limited
diversification benefits, particularly given that correlations increase during crisis periods.
Asset Class Correlations from 2004 to 2006 (2007 to 2008 in Parenthesis)

Traditional
MPT Assets

Endowment
Asset Types
(Alternatives))

 Increasing the number of asset classes and diversifying investment strategies
can reduce portfolio correlation and volatility…

*Source: Szado (2009)

15

Endowment v. Traditional Model
The New Efficient Frontier
50% Hedge Funds
50% Managed Futures

Indexed Performance Comparison:
Endowments v. S&P 500 v 60/40 Allocation

45% Hedge Funds
45% Managed Futures
5% Stocks
5% Bonds

50% Stocks
50% Bonds

Jun-99

Risk/Return Profile for portfolio with 100%
Traditional Assets to 100% Alternative Assets
(June 2001-December 2011)

Jun-01

Jun-03

Jun-05

Jun-07

Jun-09

Jun-11

*Endowment performance includes Harvard, Yale, Princeton and Stanford, with
fiscal year ending June
**60-40 allocation composed of 60% SPX and 40% Lehman Brothers/Barclays
Aggregate Bond Index, with annual rebalancing

 Portfolio drawdowns under the Endowment Model are typically lower in
magnitude than drawdowns from traditional asset allocation models. This
reduced market sensitivity generally enables alternative asset strategies to
outperform traditional strategies over the long-run.
*Source: NACUBOCommonfund, Yahoo! Finance

16

The Endowment Model
•
•

The Endowment Model uses every investable asset class to achieve full
diversification through non-directional alternative strategies
Utilize alternative assets with low expected correlation to the market
–

–

–

–

Private Equity Firms—
• Buyouts of established firms with the long-term goal of generating returns from leverage
and increases in operating efficiency; PE may provide limited diversification over equities
due to common fundamental links between the asset classes
Venture Capital Groups—
• Early stage investments that seek to capitalize on high growth opportunities, while taking
on greater risk due to operating uncertainty and longer investment horizons
Hedge Funds—
• Range of strategies that seek to take advantage of special opportunities and exploit
inefficiencies in the market, often with the goal of producing absolute returns
Real Assets—
• Investments with high correlation to inflation that often produce a high current yield,
including real estate, natural resources, TIPS and other commodities

Endowment Model Advantages

Potential Setbacks

Increased Diversification

Difficult to Access Strategies

Reduced Volatility

High Cost of Execution

Reduced Drawdowns

Lack of Liquidity
17


Endowment Model Allocation
 Endowment Models Feature a 20-60% Allocation to Alternatives

Asset Allocations for Fiscal 2011
$50-100MM Endowments
Cash &
Equivalents
3%

Cash &
Equivalents
7%
Alternative
Strategies
23%

International
Equities
18%

$1B+ Endowments
Domestic
Equities
12%

Domestic
Equities
32%

Fixed Income
9%
Alternative
Strategies
60%

Fixed
Income
20%

International
Equities
16%

Alternative Allocation for
Top Endowments:
• Absolute Return 20%
• Private Equity 15%
• Real Assets 25%

 Larger endowments allocate a greater portion of their assets to alternative
strategies, yet smaller funds can still benefit from an allocation to alternatives even
when the strategy is executed on a smaller scale
*Source: NACUBOCommonfund

18

Asset Flows and Investor Allocation
Asset Management Industry
Average Net Flows (% of AUM)

 The asset management industry has
experienced a sharp drop in net flows
since 2007
 At the same time, certain asset classes
have demonstrated resilient growth as
investors shift allocations

Shifts in Investor Allocation Over Time
 Investors have
steadily reduced
allocations to
traditional asset
classes (“active
core”) while
dedicating more
capital to
alternatives and
passive
investments

Source: BCG

19

Deal Activity

20

Asset Management Transaction Environment
Asset Management Deals in 2012
Asset Management Transactions
Aggregate Disclosed Deal Value
Aggregate AUM Transacted
IPOs
Total Number of Public Asset Managers
MBOs & PE Sponsored Transactions
Minority Stake Transactions
Cross-Border Transactions
Alternative Manager Sales
Median Forward P/E Multiple (Publicly Traded Managers in U.S.)
Median Run-Rate EBITDA Multiple (Global Private Transactions)

143
$8.5B
$1.5T
2
66
29
37
44
48
14.5x
8.8x

Total Number of Transactions and Acquired AUM

Source: Sandler O’Neill

21

Asset Management Industry Multiples
Median Trading Multiples for Quoted Fund Managers
LTM P/E

1-Year
Forward P/E

EV / LTM
EBITDA

EV / Forward
EBITDA

2011

2012

2011

2012

2011

2012

2011

2012

U.S. Traditional Asset Managers

12.4x

15.6x

12.1x

14.5x

6.1x

8.3x

6.1x

7.8x

U.S. Alternative Asset Managers

12.1x

9.5x

6.4x

7.7x

10.7x

9.8x

5.4x

7.0x

U.K. Traditional Asset Managers

11.0x

14.7x

10.9x

12.0x

6.2x

8.4x

5.8x

7.2x

U.K. Alternative Asset Managers

14.8x

15.6x

12.8x

13.0x

7.9x

8.6x

7.4x

6.9x

Asset Manager EBITDA Multiple: Range and Average Over Time
Traditional Firms – EV to LTM EBITDA

Source: Sandler O’Neill,
Freeman & Co.

Traditional Firms: Artio, BlackRock, Calamos, Cohen & Steers, Eaton
Vance, Federated Investors, Franklin Resources, GAMCO, Invesco,
Janus, Legg Mason, Manning & Napier, Pzena, Schroders, SEI
Investments, T. Rowe Price, Waddell & Reed, Virtus

Alternative Firms – EV to LTM EBITDA

Alternative Firms: Apollo, Ashmore, Blackstone, Carlyle,
Charlemagne, Fortress, KKR, Man Group, Oaktree, Och-Ziff, Partners
Group, Polar Capital

22

Asset Management Deal Volume
Transactions AUM by Type

•

•

In terms of
transacted AUM,
2012 volume was
more than 60%
below the 2009 peak
While down from
recession and prerecession levels,
transacted AUM is up
over 50% from 2010

Alternative Asset Manager Transaction Activity

•

•

Source: Sandler O’Neill

M&A for Alternative
Asset Managers has
not yet returned to
pre-recession levels
M&A for Funds of
Hedge Funds and
Private Equity Firms
showed strength in
2012

23

M&A: Looking Forward
Global Asset Management Transactions (as of 4/30/13)

 After increasing 22% in 2012, asset management M&A activity
is on track to rise another 12% in 2013
 29 transactions have closed in the U.S. in 2013 (as of 4/30)
 26% increase from same period 2012

Asset Management Growth Areas
•Alternatives
•Global and International Strategies
•Passive Investments
•Retail Alternatives
•Solutions
Source: Freeman & Co.

24

Effects on Valuation
Assumptions
• Asset manager with $15B in AUM experiences 40% decline in asset value
• Expected EBITDA multiple declines as a result of the drawdown, reducing valuation by 65%
• Even with AUM rebounding back to $13B, the business valuations remains 30% below predrawdown levels

Worse Case
Down Side

Start 2013

Cumulative
Change

Firm AUM

$15,000.00

$9,000.00

Average Fees

1.50%

-40%

1.50%

Cumulative
Change

Growth Goal
$13,000.00

-13.3%

1.50%

Revenue

$225.00

$135.00

-40%

$195.00

-13.3%

Expenses

$144.00

$86.40

-40%
#DIV/0!

$124.80

-13.3%
#DIV/0!

EBITDA

$81.00

$48.60

-40%

$70.20

-13.3%

Margin

36%

36%

Multiple (x)

8.3

6.5

-21.7%

7.5

-9.6%

EV

$672.30

$315.90

-53%

$526.50

-21.7%

Current



36%

Downside

Recovery

Key Takeaway: Several Factors Determine Valuation
• AUM
• Stability and diversification of capital sources
• Fee structure
• EBITDA and EBITDA Margin
• Valuation Multiple

25

Publicly Traded Managers: Performance and Valuation
Relative Performance of Asset Management Firms

Source: Freeman & Co.

26

Building Firm Value
Asset Management firms should focus more on utilizing
fundamental business principles as a guide for operations
•

•
•

Product Manufacturing
• Provide strategies and structures that meet the needs of a wide range of investors
• Consider capacity constraints
• Separately managed accounts, pooled investment vehicles, ‘40 Act products
Operations
• Efficiency of operational structure
• Leveragability of systems and personnel
Distribution
• Investors by type and geography
• Scalability

GOALS: Develop Distribution Channels, Grow AUM, Improve EBITDA, Expand Valuation Multiples
Manufacturing

Distribution

Fund Performance

Enterprise
Value

Operational
Efficiency

Firm Structure

27

Contact
If you would like more information on ways to take advantage
of opportunities in the asset management industry, please contact:

Michael Fields
(303) 847-4649
mfields@msfenterprises.com

MSF Enterprises, LLC
717 17th St., Suite 2160
Denver, CO 80202

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