Due Diligence for M&A in Asset Management
What makes for a successful M&A transaction in the asset management industry?
During more than a decade of reviewing, analyzing and interviewing asset managers around the world, I have come to the realization that too many transactions in the asset management industry are doomed to disappoint from the outset. Mergers and acquisitions are always announced with great enthusiasm and projection; they are, like most significant endeavors oriented towards the future, executed with a high level of confidence. Where do these transactions go wrong?
From the perspective of the professional buyer of their products, too little time is spent focusing on the “soft elements” of the transaction. The acquirer, through its advisors, rarely pays enough (if any) attention to the bottom up, non-financial or legal aspects of the transaction. The quality of a product(s) and its/their manager(s) is too readily equated with the performance track record and the asset levels in the products. A competitive historic track record is crucial to the sales success of a product but is a fickle indicator of the future – only a qualitative assessment can provide the necessary perspective to know whether the manager has staying power.
Asset management (particularly of the active variety) is a business largely dependent upon the motivation and talent of the teams of investment managers and analysts running the portfolios.Professional buyers and their clients are increasingly focusing on the qualitative aspects of a manager. Cyclicality in manager returns is an issue poorly understood on both sides of the trade and many acquisitions occur at the top.
Relationships between asset managers as the manufacturer of product and distributors (either proprietary or third party) are delicate and built upon an important and nuanced decision making process that is often overlooked. In some cases, post transaction, the unfettered distributor begins to exit post haste. Improperly structured tie up agreements for distribution can lead to crowding at the exit as the date of full detachment nears.
Past performance of specific products is overestimated as too is the correlate forward revenue potential based upon assumptions for asset level targets. An ability to assess a potential merger partner or acquisition target from an “on the ground” perspective is a significant means to increase the potential efficacy of a transaction.