The auditing giant KPMG says in a recent report on merger and acquisition activity in the alternative asset management world that there was a dip in activity in this space in 2015, that there was a rebound “to more normalized levels†in 2016, and that the momentum off of that rebound continues in 2017, which saw 18 M&A transactions in the first quarter alone.
Private equity managers were the most frequent target of these deals, followed by the managers of hedge funds and funds of hedge funds (those two distinct classifications tied for second).
The report opens with a reference to “bar-belling.†As an investment strategy this refers to the inclusion in a single portfolio of both safe and risky (sometimes of both very safe and very risky) assets and asset classes. Bar-belling as a trend has fueled consolidation in the asset management industry.
From Both Sides Now
Traditional managers not only want into the alternatives world, they want into the illiquid part thereof, hence the interest in the PE side. They want to expand their own operations into new products and services, acquire talent, improve their own economies of scale, increase their geographical footprint, and of course boost their returns.
So, on the other side, what are the seller’s motivations? KPMG sees them this way: succession planning, the access to new distribution channels, growth of capital, response to competitive and fee pressures, the monetization of franchise value, investment in firm infrastructure, and retention of control.
The reference to succession planning brings to mind a very human side of the business. Individual successful entrepreneurs are often unhappy with the notion of winding down their funds after an investing career. They want their work to amount to a lasting legacy. As the KPMG paper says, “a sales transaction (including minority stake sales) can help enable generational transition and broaden the ownership structure.â€
