January turmoil has “sharpened the argument for the convergence of traditional and alternative asset management”: Report

Putnam Lovell released its annual survey of asset management M&A this month.  This 45 page document is packed with useful information and is a must-read if you follow the paradigm-shifting going on in this industry.  Here are some highlights…

When you were a kid, did you ever say you wouldn’t do something “for all the money in the world?”  Well, we now you know exactly how much that is.  According to the report, there was $68 trillion in major capital pools worldwide in 2006, and Putnam Lovell’s “most conservative forecast” shows this amount rising to almost $110 trillion by 2012.

The report shows that last year saw another leap in M&A transactions involving alternative asset managers.  There were 76 transactions – up from 60 in 2006.  However, alternative managers’ proportion of all asset management transactions remained stable at around one-third. 


For all the excitement surrounding the future of the hedge fund business, though, EBITDA multiples for alternative manager transactions remained roughly the same as those for transactions involving traditional asset managers.  Naturally, their higher fee structure meant that alternative managers were sold for a higher multiple of AUM, but the market seemed to attach the same level of future EBITDA growth to both types of firms in 2006.


The fastest-growing revenue source for the asset management industry is forecast to be “performance-based fees” with “alternatives management” close behind.  Assuming, for a moment, that an “enlightened” hurdle-rate is used to calculate performance fees (i.e., a hurdle rate based on an appropriate beta benchmark), then it would appear the industry is moving quickly toward a “fee for alpha” model. 


In conclusion, Putnam Lovell predicts even more blurring of the lines between alternative and traditional asset management in 2008…

“Alternative asset managers will account for a record proportion of deals in 2008. Depressed equity markets have sharpened the argument for the convergence of traditional and alternative asset management. Long-only players will step up their search for long/short skills. Alternative firms, looking to dampen the revenue volatility from performance-based fees, will seek more asset-based fees to improve earnings quality.”

This is just a quick sample of some of the things that jumped out to us in the report.  Although the asset management industry is levered to global capital markets, one particular aspect of the industry still makes it the envy of many others.  As Putnam Lovell points out…  

“The credit crisis highlighted fund management’s critical advantage: an ability to generate high, and recurrent, cash flows from a thin balance sheet.”

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