After big TIAA-CREF-Nuveen deal, boomlet predicted in fund manager mergers

With two deals in the bank this week, industry watchers see more on the way, with alternatives shops likely top targets

Apr 17, 2014 @ 12:07 pm

By Trevor Hunnicutt

In the wake of the biggest merger in the asset management business in five years, industry watchers say there are more to come.

“I think you'll see a 'boomlet' in mergers-and-acquisition activity over the next 12 months,” said Ben F. Phillips, partner at Casey Quirk & Associates, a consultancy that advises on asset management deals. “The pricing gap between bidders and askers has narrowed.”

In a deal that analysts said makes TIAA-CREF a more feasible competitor to top-tier mutual fund companies like The Vanguard Group Inc. and Fidelity Investments, the money manager said Monday that it had agreed to acquire Nuveen Investments Inc. for $6.25 billion from a group led by private-equity firm Madison Dearborn Partners.

The acquisition, which would create a new top-20 mutual fund manager, is the largest transaction in the asset management business since 2009, when BlackRock Inc. acquired Barclays Global Investors and the iShares exchange-traded funds in a deal valued at $13.5 billion.

Then, on Wednesday, Victory Capital Holdings Inc. said it had agreed to acquire Munder Capital Management in an all-cash deal, creating a firm with $37 billion in assets, including $16.5 billion in house-brand mutual funds. Funds managed by private-equity firm Crestview Partners are among the investors financing the deal. Terms were not disclosed

Fund company analysts and M&A consultants said the stage is set for more deal making as the cash flow and long-term growth potential of asset managers whets the appetite of banks, insurers and other fund companies.

Nuveen's distribution muscle and its affinities with broker-dealers and financial advisory firms were two reasons for TIAA-CREF's interest.

TIAA-CREF, a major retirement-plan servicer for nonprofit organizations such as universities and hospitals, managed $569 billion, including $73 billion in mutual funds, as of last month, according to Morningstar Inc.

But its strongest distribution channel is retirement plans, such as the 403(b) accounts used by employees of nonprofit and governmental organizations to save for retirement.

Advisory firms and broker-dealers give fund companies access to the assets of more wealthy mom-and-pop investors. And a theme in future deals is likely to be the acquisition of firms with strong relationships with advisory firms and broker-dealers, said Mr. Phillips.

“Retail is where most of the organic growth will come from over the next five to 10 years,” he said.

More specifically, as alternative investments continue to make their way into retail distribution channels through vehicles such as liquid-alternatives mutual funds and, potentially, exchange-traded funds, asset managers are likely to seek acquisitions to add that capability.

“Today, where you're going to see more mergers-and-acquisition activity is in the alternatives field where the major players are seeking expertise in relatively unusual areas,” said Burton J. Greenwald, a fund consultant who works with Franklin Templeton Investments. “That's a special product area that's growing rapidly and requires a very narrow expertise.”

Affiliated Managers Group Inc., for instance, last month bought a minority stake in EIG Global Energy Partners, an alternatives firm focused on energy-related companies.

In a conference call Thursday, Laurence D. Fink, chairman and chief executive officer of BlackRock Inc., the world's largest money manager, said that even some relatively new alternatives funds have been able to draw assets quickly in this market as investors seek new ways to hedge risk or deliver other outcomes.

There was nearly $162 billion in assets in 429 alternative mutual funds at the end of February, up nearly 40% from last year, according to Morningstar. The products offer access to hedge-fund-style portfolio management strategies, often engineered to limit volatility or investment risk factors while delivering competitive returns.

Mr. Phillips agreed that firms with strengths in alternatives are in high demand. He also said asset managers are seeking investment expertise in credit, global investments and multiasset allocation.


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