THE CAMBRIDGE COMMENTARY

A Review of M&A Activity in the Investment Management Industry During 2017

January 1, 2018

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CAMBRIDGE INTERNATIONAL PARTNERS provides top‐ quality M&A advisory services to the global investment management industry. We use our two‐plus decades of specialist experience and contacts to find, develop and structure lasting corporate relationships for our clients.

We have over 25 years of experience providing transactional and related advice to the investment management industry. While based in New York, a significant portion of our business is derived from cross‐border or foreign transactions. Our extensive calling program keeps us current with managers and financial institutions globally.

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John H. Temple David W. Abbott President Managing Director (212) 829‐8292 (212) 826‐8293 [email protected] [email protected]

Richard H. Haywood, Jr. Managing Director (212) 826‐8294 [email protected]

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A Review of M&A Activity in the Investment Management Industry During 2017

Strong equity markets and synchronized equity purchases, accounting for about growth in major economies characterized 20% of global transaction volume and 2017. International1 and US2 equities had three of the top ten – Stone Point Capital total returns of 25.0% and 21.8% and KKR acquiring Focus Financial respectively in the year. This favorable Partners, TA Associates’ buyout of Old economic climate helped mitigate but did Mutual Wealth’s Single Strategy Business, not reverse the secular headwinds being Annual Transaction Volume3 faced by the asset management industry ($ in billions) globally. Of these, the shift to passive $35.0 $33.0

management and concomitant fee $30.0 pressure among active managers remains $25.6 $26.3 $25.0 $16.1 $23.6 the most severe, but rapid changes in the $22.2

regulatory environment and the inevitable $20.0 $13.3 increase in regulatory costs have also $11.6 $14.1 $15.0 played a part. 3 $16.6 $10.0 $16.9 Not surprisingly, therefore, 2017 $12.0 $13.0 $5.0 $11.4 transactional activity, which was broadly $5.6 comparable to the last few years, $0.0 2013 2014 2015 2016 2017 continued to be driven by consolidation, both in asset management and, for Annual Transaction Count3 somewhat different reasons, in wealth 250

management. Indeed, seven of the top ten 207 transactions reflected a consolidation 200 188 178 theme, even more than the five out of ten 169 171 101 in 2016, with the Standard Life – Aberdeen 150 110 82 72 Asset Management merger leading the 90 way. Bank divestitures continued to be a 100 theme particularly outside the US, with

sales by Banco BPM in Italy, ANZ and 50 106 96 99 Westpac in Australia, Citigroup in Mexico 78 79

and Société Générale in China. Themes of 0 consolidation and divestiture attract 2013 2014 2015 2016 2017 private equity so it was not surprising that Non-US Target US Target 2017 was another strong year for private

1 MSCI EAFE ND 3 Transactions involving managers with more than $200 million under management 2 S&P 500 TR

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Top Ten Investment Management Transactions of 2017 (All amounts in US$)

Amount AUM % Paid Target ($bn) Acq’d Purchaser ($mn) Strategic Rationale Aberdeen Asset 383.6 100% Standard 4,670 Coming off several years of outflows caused by the Management Life industry’s shift to passive investments and Aberdeen, UK overexposure to emerging markets, Aberdeen combines with Standard Life in a no‐premium merger to form Europe’s second largest asset manager. Fortress 69.6 100% SoftBank 3,300 In a bold move typical of Chairman Masayoshi Son, Investment Group Group SoftBank extends its interests into asset management New York, NY by offering a 39% premium to buy Fortress Investment Group. Focus Financial 110.0e 70%e Stone Point 1,400e The success of Focus Financial Partners’ consolidation Partners Capital and of private wealth management firms is demonstrated New York, NY KKR by the $2 billion valuation achieved in its third refinancing by private equity. Guggenheim 36.7 100% Invesco 1,200 Invesco pays up for Guggenheim's ETF business, 60% Investments' ETF of whose assets are in smart beta products, Business reinforcing its market position as second in smart New York, NY beta and fourth in the global ETF business. Aletti Gestielle 21.1 100% Anima 810 Banco BPM, formed from the merger of Banco Milan, Italy Holding Popolare and Banca Popolare di Milano at the beginning of 2017, sells its asset management business to Anima, an independent asset manager in which it holds a 14.3% stake. Old Mutual Global 34.3 100% TA 800 Old Mutual’s plan to liquidate takes another step Investors’ Single Associates forward with the divestiture to private equity of the Strategy Business and Single Strategy business of Old Mutual Wealth, led by London, UK Management famed investor, Richard Buxton.

OnePath Pensions 18.7 100% IOOF 770 The unusually named IOOF (originally International and Investments Holdings Order of Odd Fellows) becomes Australia's second Sydney, Australia largest wealth advisor as Australia and New Zealand Banking Group exits the wealth management business. Sentry 15.0 100% CI Financial 615 CI Financial underscores its position as the leading Investments independent asset manager in the Canadian market Toronto, Canada by acquiring Sentry Investments, one of the largest independent fund groups left in Canada. ETF Securities' 17.6 100% WisdomTree 610 WisdomTree moves up to ninth in the global ETF Exchange Traded ranking with this acquisition of Europe's leader in Commodities exchange traded commodities. London, UK Riverstone 27.2 12%e Petershill 500e Goldman Sachs’s Petershill Fund continues its push Holdings Fund into private equity by buying a slice of this successful New York, NY (Goldman energy‐focused private investment platform. Sachs) e: Indicates estimate

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and the Petershill Fund’s minority SoftBank, HNA and Nippon Life making big investment in private equity manager, investments. Riverstone Holdings. Last but by no means least was the Acquisitions to build market share in continuing – and accelerating – passives, and in smart beta in particular, consolidation seen in private wealth resulted in three major transactions, two management during the year. This was of which were also cross‐border particularly true in the US where a purchases by US managers, Invesco and combination of factors resulted in a record WisdomTree, of European firms. number of independent RIAs selling to Meanwhile, cross‐border activity by consolidators, other RIAs and regional and foreign managers buying into US asset community banks. management was up substantially, with

ALL EYES ON A HIGHLAND FLING

In the biggest transaction of 2017, Following the announcement of the Standard Life and Aberdeen Asset Henderson – Janus merger by only a few Management, both based in Edinburgh, months, the Standard Life – Aberdeen combined to form the second largest asset announcement caused a frenzy of merger manager in Europe. Mimicking the discussions in boardrooms around the Henderson – Janus deal announced the industry. Active managers, both previous year, no premium was paid and independent and institutionally owned, the merged group is headed by co‐CEOs, were forced to confront the prospect of one drawn from each company. As with rapid consolidation in the industry as a Henderson – Janus, incremental revenue response to the shift to passive investing. synergies through complementary After all, if the famously independent CEO investment capabilities and greater global of Aberdeen Asset Management, Martin distribution, and reduced unit costs Gilbert, was prepared to accept a no‐ through increased scale were cited as the premium merger, surely every asset principal strategic benefits. manager should reconsider its competitive position. The results of all Nevertheless, the combination was widely these discussions, though, have been less viewed as defensive as both firms had than impressive, with no further suffered recent outflows – Standard Life’s significant combinations announced to flagship Global Absolute Return Strategy date. One reason is undoubtedly the had suffered poor performance while difficulty in finding a dance partner Aberdeen was overexposed to poorly‐ sufficiently complementary that cost performing emerging markets. Cost savings might be expected to exceed savings are projected at £200 million revenue losses, but another has been the annually, which is 10.9% of the combined steadily advancing equity markets which cost base. have helped to mask continuing outflows

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from active managers. Indeed, Standard shows no slow‐down in the heavy Life Aberdeen’s first trading statement outflows of the prior year.

PASSIVE CONTINUES TO MAKE INROADS

It is not necessary to look further than based, or smart beta, ETFs where pricing Vanguard’s expected net inflows of $350 is higher, and where Invesco’s resulting billion in 2017 for confirmation that 19.9% market share is within sight of passive management continues to make iShares’ market leading 21.0%. inroads. Driven by reasons of cost and risk control, it is not a trend we expect to For WisdomTree, the largest specialist reverse anytime soon. sponsor of exchange traded products, there also could only be one answer so its In retail markets, BlackRock’s iShares, acquisition of Europe’s leading exchange Vanguard and State Street are estimated to traded commodities business owned by have 71% of the global ETF market ETF Securities was no surprise, between them, and pricing on market cap particularly given its reluctance to trade weighted index funds has become brutal. lower fees for market share in the US For example, iShares Core S&P Total US market. Stock Market ETF now has an expense ratio of just three basis points. As a result, These investments did not come cheap: other managers are left with the Invesco had to pay $1.2 billion, or close to unenviable dilemma of whether to 20 times run‐rate operating income, for compete in this rapidly growing but scale‐ the Guggenheim ETF business while driven business or to focus on making WisdomTree paid $611 million, or 15.7 their active management business as times run‐rate margins, for its European passive‐proof as possible. exchange traded commodities business.

For Invesco, given its early bet on ETFs These valuations may have seemed too through its 2006 purchase of rich for Franklin Resources which, as an PowerShares, the answer was to be active manager that has suffered four expected: buying a European firm, Source, years of outflows, capitulated late in 2017 with $18 billion of specialist ETFs, and a by launching 16 of its own single‐country US firm, Guggenheim Investments’ ETF ETFs at nine basis point expense ratios. business with $36.7 billion under Meanwhile, Legal & General Investment management. These purchases confirmed Management, already a heavyweight in Invesco’s position as the fourth largest passive investing with a $430 billion index provider of ETFs globally, although its business, also entered the ETF business for market share remains a modest 4.6%. the first time with the acquisition of ETF More importantly, however, both Securities’ exchange traded platform Invesco’s purchases focused on factor‐ called Canvas.

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HARD ASSETS ARE FLAVOR OF THE YEAR

For active managers looking for segments also acquired a pan‐European real estate of the market resistant to passive manager, Internos Global Investors. In the substitution, hard assets have been an US, Aon Group purchased 75% of important place to be, particularly given Townsend Group and Columbia‐ the projected anemic returns for stocks Threadneedle (Ameriprise) acquired and bonds. Given this, BNY Mellon’s sale Lionstone Partners. of $9 billion AUM real estate and infrastructure manager, CenterSquare Minority private equity investments in Investment Management, to Lovell alternative managers continued unabated Minnick Partners and management, may in 2017 with Dyal Capital Partners seem inconsistent except that it was not an (Neuberger Berman) and Petershill Fund exit but rather a rationalization, (Goldman Sachs) making three such eliminating overlapping capabilities in its investments apiece. multi‐boutique structure. Investor money has been flowing into the 2017 also saw BlackRock acquire the First private debt asset class ever since bank Reserve Energy Infrastructure Funds, and credit dried up following the Global Blackstone and Brookfield acquire energy Financial Crisis and transactions involving infrastructure managers, Harvest Fund these specialist managers have now also Advisors and Center Coast Capital risen, even as the average management fee Advisors, respectively. Another MLP has dropped to a decade low. In the largest manager, Tortoise Investments, was such transaction, British Columbia purchased by Lovell Minnick Partners, Investment Management, acquired a marking its second investment in hard majority stake in Hayfin Capital asset managers in 2017, and providing the Management, the $8.8 billion AUM seller, Mariner Holdings, with a handsome London‐based private debt manager, from profit to reinvest in the expansion of its its initial private equity and institutional Mariner Wealth Advisors business. In investors. Meanwhile, Marshall Wace also Australia, Westpac sold the international achieved a partial exit, merging its business of global infrastructure manager, transatlantic private debt business, MW Hastings Management, to London‐based Eaglewood, into Pollen Street Capital. Northill Capital. Private equity was not just exiting, however, as Dyal Capital Partners made Likewise, the number and volume of real minority investments in TPG Sixth Street estate manager transactions increased Partners and Atalaya Capital Management. substantially. In Europe, Patrizia Strategic buyers of private debt included Immobilien, a publicly‐traded real estate LGT Capital Partners buying European manager, made three acquisitions almost Capital Fund Management and Aegon doubling its assets under management to acquiring 25% of Dynamic Credit. €38.3 billion. Principal Global Investors

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ASIAN BUYERS COME TO THE FORE IN THE US

Among technology investors, Masayoshi involvement with TCW by delegating Son of SoftBank and its $100 billion Vision general account assets to TCW to manage Fund are legendary, investing at a and by selling TCW products through breakneck pace in companies that are Nippon’s domestic Japanese investment expected to underpin the global shifts to management arm, Nissay Asset be brought on by artificial intelligence and Management. In that context, a purchase the Internet of Things. However, Masa’s of only 24.75% seems like a small next ambition is not limited to tech investments step but it does achieve two other as he also has long‐term plans to become objectives – enabling management to one of the world’s biggest asset managers. become the largest shareholder bloc in Given this, SoftBank’s purchase of TCW while allowing private equity publicly‐traded alternatives manager, investor, Carlyle, to reduce its ownership Fortress Investment Group, for a 39% from 60% to 31.2%. It also highlights the premium to the pre‐announcement price success of TCW’s 2010 acquisition of $23 does not look so surprising. It is certainly billion AUM fixed income manager, a huge win for Fortress shareholders, who MetWest, for $300 million, a price we have seen its share price decline from an estimated at the time was about five times IPO price of $35 in early 2007 to about $5 revenues, in conjunction with the forced in the last few years on the back of a exit of TCW’s CIO, Jeffrey Gundlach. Today, disappointing recovery from the Global that price looks cheap with 83% of TCW’s Financial Crisis by its private equity and $192 billion being in US fixed income hedge funds. As a footnote, Fortress’s assets and both its CEO, David Lippman, traditional fixed income manager, Logan and its fixed income CIO, Tad Rivelle, Circle Partners, used the change in control coming from MetWest. as an opportunity to find a new home for itself at MetLife. While Logan Circle had While Japanese institutions have long tripled in size in the seven years of been buyers of stakes in US asset Fortress ownership, there was little managers, albeit not usually at the level commonality between the businesses or seen in 2017, Chinese buyers are a more their objectives. As part of MetLife, where recent phenomenon. Foreshadowed by 80% of assets under management are Huatai Securities purchase of AssetMark in internal, Logan Circle can significantly 2016, there were four such investments enhance the scale and competitiveness of announced in 2017. Two of the purchases the Group’s third party institutional were announced by the controversial business. Chinese conglomerate, HNA, taking a two‐ step 24.9% stake in OM Asset Management By contrast to Masa’s rapid‐fire approach and, together with RON Transatlantic, to acquisitions, Nippon Life’s purchase of a agreeing to buy Anthony Scaramucci’s minority stake in TCW was a model of 45% stake in his fund‐of‐hedge‐fund, caution. Beginning in July 2014, Nippon SkyBridge Capital (the latter deal is in Life had gradually expanded its strategic limbo, awaiting approval of the Committee

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on Foreign Investment in the United balanced mandates for a similar client States). profile as Guardian in Canada, namely retail wrap intermediaries, institutions HNA has been at the forefront of Chinese and private clients. conglomerate offshore purchasers, announcing 80 deals totaling more than More generally in cross‐border activity, $40 billion in under three years. However, the number and volume of transactions lenders have become nervous that this inwards into the US was similar to 2016 at expansion has been too rapid and that the 15 and an estimated $4.9 billion whereas Group may be overleveraged. These outward cross‐border transactions concerns are exacerbated by an opaque increased substantially to 13 and an ownership and corporate structure. estimated $3.0 billion, a level last seen in Chinese regulators have also taken steps 2014. The WisdomTree and Invesco to slow the rapid growth of these European ETF business purchases conglomerates on concerns that they accounted for one‐third of this volume could pose a systemic risk to China’s with TA Associates’ purchase of the single economy. strategy business of Old Mutual Wealth and BlackRock’s purchase of the asset The third largest contingent after Japanese management business of Citibank’s and Chinese buyers of US managers was Mexico subsidiary, Citibanamex, the Canadians. Apart from US manager accounting for much of the remainder. purchases by CIBC and Brookfield Asset BlackRock has stated its ambition to Management discussed elsewhere in this become a full solutions provider in key letter, publicly‐traded Guardian Capital markets around the world and this purchased 70% of Alta Capital transaction is a big step forward in that Management in Salt Lake City. Alta direction in Mexico. manages $3.2 billion of US equity and

BANKS CONTINUE TO EXIT ASSET MANAGEMENT

With the exception of the Canadians, banks minority shareholding. Down‐under, globally have been steadily exiting the Australia and New Zealand Banking Group asset management business ever since the (ANZ) sold its advice‐led wealth Global Financial Crisis, and 2017 was no management business, OnePath Pensions exception. Many of these divestitures and Investments, to Melbourne‐based were to competitors seeking consolidation IOOF confirming IOOF’s number two spot savings. In Italy, the third largest bank, behind AMP in this segment of the market. Banco BPM, sold its mutual fund group, In both cases, the selling banks have Aletti Gestielle, to Italy’s largest entered into long‐term distribution independent asset manager, Anima, in agreements with the buyers. Also in which Banco BPM already had a 14.3% Australia, Westpac sold another 19% of BT

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Investment Management to institutional sold its 49% ownership in Fortune SG to a investors, leaving it with just 10% that it private equity buyer, Warburg Pincus. In intends to sell in the second half of 2018, the US, UMB Financial reversed course and and also sold part of its infrastructure sold its Scout and Reams investment business. In Mexico, as previously boutiques, having tried unsuccessfully to discussed, Citigroup’s subsidiary, stem outflows for several years. They will Citibanamex, sold its asset management be combined into Raymond James’ business while in China, Société Générale Carillon Tower Advisors.

CONSOLIDATION ACCELERATES IN US PRIVATE WEALTH

The pace of consolidation in the US private Focus Financial Partners in 2017, just a wealth management sector continued to month before Focus itself announced the accelerate in 2017. Whether this was purchase of SCS. Perhaps the best primarily a cyclical phenomenon as the indication of the success Focus is enjoying industry entered the ninth year of a bull can be seen in the $2 billion valuation it market, or a secular trend driven by achieved in its latest refinancing by private demographics, technological change and equity. the introduction of the DOL’s fiduciary rule, is not clear but, either way, the We have also seen another consolidator, number of transactions has been rising HighTower Holding, become a more fast. A third explanation is that the significant purchaser of RIAs as a result of consolidation pick‐up is being driven by its planned shift away from an initial the acquisitiveness of a single company, strategy of primarily funding breakaway Focus Financial Partners. Its website broker teams. In April, it made its largest reported eight acquisitions during the purchase to date, acquiring WealthTrust, a year while its affiliates reported a further holding company with ten underlying ten, accounting in aggregate for 40% of all managers and $6.4 billion under US wealth management transactions. management, bringing its total AUM to $46 While most of these acquisitions are in the billion. Later in the year, HighTower sold one to three billion AUM range (with a minority stake to private equity firm, affiliate acquisitions generally smaller), Thomas H. Lee Partners, providing the acquisition of SCS Financial, an ultra‐ liquidity to some early investors and high net worth firm in Boston, stands out advisers and providing fuel for further as an anomaly with its $16.5 billion under growth. management. The connection turns out to be private equity firm, Stone Point Capital, 2017 saw the creation of aggregator, which had purchased a minority stake in Wealth Partners Capital Group, a spin‐off SCS in 2012 and then together with KKR, from AMG Wealth Partners. WPCG announced the purchase of a majority of launched with the acquisition of minority

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stakes in EP Wealth Advisors and MAI Number of US Wealth Management Transactions* Advisors, and the receipt of AMG’s 60 minority interest in Forbes Family Trust. 49 Wealth Partners will use these three firms 50 45 as platforms for future acquisitions of 38 40 smaller firms. 34 30 27 Transactions 30 25 of Excluding the private equity refinancings 21 18 of Focus Financial and HighTower, there 20 15

were two other notable private wealth Number transactions in the US. In July, CIBC and its 10

US wealth management division, Atlantic 0 Trust, announced the acquisition of 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Geneva Advisors in Chicago for up to $200 million – this following the completion of *Traditional RIAs with at least $200 million of primarily high‐net‐ CIBC’s purchase of The Private Bank, also worth separate account portfolios under management in Chicago, the month before. In addition to building local market share, a consolidating acquisition like this expands On a smaller scale, regional and the acquiror’s product and service offering community banks continued to be buyers which can offset pressure to cut fees. The of RIAs in their footprint with purchases other notable transaction was the by Associated Banc‐Corp, Fifth Third, First recapitalization of Rockefeller & Co. as Midwest, Meridian Bank and Peapack‐ Rockefeller Capital Management under the Gladstone Financial. leadership of Gregory Fleming and financed by the private equity fund of All this buying interest in private wealth hedge fund manager, Viking Global RIAs has inevitably had an impact on Investors. Greg, most recently President pricing and we have seen a marked firming of Morgan Stanley Wealth and Asset of multiples being paid in this segment of Management, has ambitions to grow the market – as much as a 20% increase for Rockefeller from $16.2 billion of assets larger firms. under management and advisement to over $100 billion in five years.

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OUTLOOK FOR 2018

The US asset management industry has business, will likely be two of the biggest had a huge lift in the fourteen months deals of 2018. since the Presidential election with market prices up over 40%4. Undoubtedly a large Targeted acquisitions of smart beta firms, part can be attributed to the expectation of of managers able to outperform their the corporate tax cuts which became a index, and of active managers sheltered reality on December 20 with the from the shift to passive will remain of President’s signing of the Tax Cuts and interest. Transactional activity in non‐ Jobs Act. After such a run, in the ninth year traditional asset classes such as of a bull market, it is difficult not to be infrastructure, real estate, private debt concerned about what comes next, and private equity will remain strong, and, especially given signs of frothiness possibly, we may even see increasing exemplified by frenzied cryptocurrency interest in hedge fund managers who buying, Renaissance art selling for $450 recovered in 2017 from a long period of million or, for market watchers, growth underperformance. beating value by 16.6 percentage points5 while the yield curve continues to flatten. In private wealth, where client stickiness makes integration much easier to execute From a transactional perspective, and where regulatory changes in the US however, 2017 was not a frothy year, and Europe are driving consolidation, we being very much in line with preceding anticipate the number of transactions to years. This reflects buyer caution in the increase steadily. Private equity appetite face of industry headwinds and the for this segment has been whetted by prior difficulty in getting asset management successes on both sides of the pond so consolidations to pencil out. This is likely there will likely be no shortage of capital to to remain true in 2018, whether markets roll up the industry. rise or fall. Divestitures are likely to continue, providing opportunities for full Our best wishes to you all for a prosperous integration consolidations or for multi‐ 2018. boutique or private equity purchases when full integration is not practicable. Such is the case with the expected sale of £28 billion AUM Hermes Investment Management in the UK by BT Pension Scheme where the press reported four bidders in mid‐December. This transaction, together with an expected IPO of Deutsche Bank’s asset management

4 Dow Jones US Asset Manager Index 5 Russell 1000 Growth less Russell 1000 Value in 2017

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