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OPPORTUNITIES IN
ASSET MANAGEMENT
MSF Enterprises, LLC

Copyright © 2013 MSF Enterprises, LLC
Table of Contents

Section

Page

Introduction

3

Global Capital Markets

4-12

Evolving Asset Management Industry

13-19...
Introduction
The financial services landscape has been growing substantially since 2008 as wealth management firms,
mutual...
Global Capital Markets

4
Copyright © 2013 MSF Enterprises, LLC
Size of the Global Financial Market
Global Stock of Debt and Equity Outstanding
($ trillion, end of period, constant 2011 ...
Looking at the World
Fund sponsors globally catering to an investor base of public and private
pension funds, sovereign we...
Largest Global Money Managers
Rank

Asset Management Company

Country

AUM (US$bn)

1

US

$3,791.59

2

Vanguard Group

U...
Top 20 Hedge Fund Managers: Past and Present
2001
Rank

Firm

2006

1

Moore Capital Mgmt

$8,000

2

Farallon Capital

$7...
Global Equity and Bond Markets
Size of US IG and HY Corporate Bond Markets

$54.6 Trillion:
Size of Global
Equity Market

...
Alternative Asset Classes
Size of Global Alternatives Market
7
6
Trillions of USD

$6.5 Trillion:
Size of Global
Alternati...
Alternative Asset Classes
Private Equity Assets Under Management

$3.3 Trillion:
Size of Global
Private Equity
Market

Pri...
Registered Investment Companies (RICs)
Total Assets in Mutual Funds,
Closed-End Funds, ETFs and UITs
Closed-End
Mutual fun...
The Evolving
Asset Management Industry

13
Copyright © 2013 MSF Enterprises, LLC
60 Year History of Asset Management

The complex art form of investment management has been evolving for decades, with
mar...
Correlation: Expanding Asset Classes

The Modern Portfolio Theory (MPT) asset base of bonds and equities has only limited
...
Endowment v. Traditional Model
The New Efficient Frontier
50% Hedge Funds
50% Managed Futures

Indexed Performance Compari...
The Endowment Model
•
•

The Endowment Model uses every investable asset class to achieve full
diversification through non...
Endowment Model Allocation
 Endowment Models Feature a 20-60% Allocation to Alternatives

Asset Allocations for Fiscal 20...
Asset Flows and Investor Allocation
Asset Management Industry
Average Net Flows (% of AUM)

 The asset management industr...
Deal Activity

20
Copyright © 2013 MSF Enterprises, LLC
Asset Management Transaction Environment
Asset Management Deals in 2012
Asset Management Transactions
Aggregate Disclosed ...
Asset Management Industry Multiples
Median Trading Multiples for Quoted Fund Managers
LTM P/E

1-Year
Forward P/E

EV / LT...
Asset Management Deal Volume
Transactions AUM by Type

•

•

In terms of
transacted AUM,
2012 volume was
more than 60%
bel...
M&A: Looking Forward
Global Asset Management Transactions (as of 4/30/13)

 After increasing 22% in 2012, asset managemen...
Effects on Valuation
Assumptions
• Asset manager with $15B in AUM experiences 40% decline in asset value
• Expected EBITDA...
Publicly Traded Managers: Performance and Valuation
Relative Performance of Asset Management Firms

Source: Freeman & Co.
...
Building Firm Value
Asset Management firms should focus more on utilizing
fundamental business principles as a guide for o...
Contact
If you would like more information on ways to take advantage
of opportunities in the asset management industry, pl...
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Opportunities in Asset Management

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This presentation evaluates the current state of the asset management industry and takes a look at where it might be expected to go from here. Topics covered include capital flows, the emergence of alternatives and the M&A environment

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Transcript of "Opportunities in Asset Management"

  1. 1. OPPORTUNITIES IN ASSET MANAGEMENT MSF Enterprises, LLC Copyright © 2013 MSF Enterprises, LLC
  2. 2. Table of Contents Section Page Introduction 3 Global Capital Markets 4-12 Evolving Asset Management Industry 13-19 Deal Activity 20-27 2 Copyright © 2013 MSF Enterprises, LLC
  3. 3. Introduction The financial services landscape has been growing substantially since 2008 as wealth management firms, mutual funds, ETFs and alternative investment groups have rallied and returned to pre-financial crisis asset levels. The businesses themselves have become stronger, with better product diversification and improved management teams. Now the industry is in a cyclical pattern where scale, breadth and vision will be the critical factors over the next five years that decide which firms become the next industry bellwethers. Currently, there are 66 publicly-traded asset management firms globally. The largest firms top out in the trillions and scale down to $20B+ in AUM. We suspect that over the next decade we will see the number of publicly-traded firms triple as many larger private firms ($20B+) move toward public structures to create higher valuations and provide succession planning for their managing members. Scale is becoming the most important factor for long-term success in the financial services industry. Money managers not only have to generate returns for their investors, they are now expected to grow and increase the value of the business itself. Necessary components of growing an asset management business include developing new products, designing investment structures to suit a range of investor needs and expanding the firm’s global distribution network. By placing greater emphasis on developing the business as a whole, asset management firms can uniquely position themselves to create long-term value. With that said, firms can no longer be content with reaching $1B in AUM - “$10B and beyond” is the new hurdle to become a major player in the industry. 3 Copyright © 2013 MSF Enterprises, LLC
  4. 4. Global Capital Markets 4 Copyright © 2013 MSF Enterprises, LLC
  5. 5. Size of the Global Financial Market Global Stock of Debt and Equity Outstanding ($ trillion, end of period, constant 2011 exchange rates) $225 Trillion: Size of Global Financial Markets Global AUM (in $T) $58 Trillion: Size of Global Market for Managed Assets Source: McKinsey Institute, BCG Copyright © 2013 MSF Enterprises, LLC 5
  6. 6. Looking at the World Fund sponsors globally catering to an investor base of public and private pension funds, sovereign wealth funds, endowments, foundations, banks, family offices and retail clients are now looking for more cross-border opportunities. Firms from the US, Canada, Europe, MENA, Japan, Asia-Pacific and South America are now in play to create the next global asset management firm. US Russia Europe MENA Asia SE Asia South America South Africa Australia 6 Copyright © 2013 MSF Enterprises, LLC
  7. 7. Largest Global Money Managers Rank Asset Management Company Country AUM (US$bn) 1 US $3,791.59 2 Vanguard Group US $2,215.22 3 State Street Global Advisors US $2,086.20 4 Fidelity Investments US $1,888.30 5 PIMCO US $1,624.35 6 JP Morgan Asset Management US $1,426.40 7 BNY Mellon Asset Management US $1,385.86 8 Deutsche Asset & Wealth Management Germany $1,244.44 9 Prudential Financial US $1,060.25 10 Capital Research & Management Co. US $1,045.57 11 Amundi France $959.79 12 Goldman Sachs Group US $854.00 13 Franklin Templeton Investments US $781.77 14 Northern Trust US $758.94 15 $33 Trillion: Approximate Size of 25 Largest Asset Managers BlackRock Inc. Wellington Management Co. US $757.73 *Rankings as of 12/31/2012 Source: Pensions & Investments Copyright © 2013 MSF Enterprises, LLC 7
  8. 8. Top 20 Hedge Fund Managers: Past and Present 2001 Rank Firm 2006 1 Moore Capital Mgmt $8,000 2 Farallon Capital $7,794 3 $37.9B: Combined AUM of Top 5 Hedge Fund Managers in 2001 Rank AUM [$M] Andor Capital Mgmt Maverick Capital $7,500 AUM [$M] 1 JPMorgan Asset Mgmt $33,087 2 Goldman Sachs Asset Mgmt $32,531 3 Bridgewater Associates 4 5 Citadel Investment Group $7,150 6 Angelo, Gordon & Co. $7,000 7 Soros Fund Mgmt $7,000 Rank Firm AUM [$M] 1 Bridgewater Associates $83,300 2 JPMorgan Asset Mgmt $54,800 3 Brevan Howard Asset Mgmt $40,000 $30,210 4 BlueCrest Capital Mgmt $35,300 D.E. Shaw Group $27,300 5 Och-Ziff Capital Mgmt $31,900 5 Farallon Capital $26,200 6 Man Group $29,600 6 Renaissance Technologies $26,000 7 Baupost Group $26,700 7 Och-Ziff Capital Mgmt $21,000 8 BlackRock $26,635 8 Barclays Global Investors $18,953 9 Winton Capital Mgmt $25,700 $7,500 4 Firm 2013 Pequot Capital Mgmt $6,500 9 Och-Ziff Capital Mgmt $6,050 9 Man Investments $18,800 10 D.E. Shaw & Co. $23,400 10 $245.3B: Combined AUM of Top 5 Hedge Fund Managers in 2013 8 Renaissance Technologies $5,570 10 ESL Investments $17,500 11 Lone Pine Capital $22,000 11 Caxton Corp. $5,500 11 GLG Partners $15,833 11 Renaissance Technologies $22,000 12 Tudor Investment Corp. $14,850 13 Elliott Mgmt Corp $21,500 13 Citigroup Alternative Inv. $14,081 14 Lansdowne Partners $14,000 14 AQR Capital Mgmt $20,300 15 Campbell & Co. $13,600 15 Credit Suisse Hedging-Griffo $19,985 16 Atticus Capital $13,500 15 GAM $19,600 17 Viking Global Investors $19,400 18 Davidson Kempner Capital Mgmt $18,590 19 Farallon Capital Mgmt $18,400 20 Adage Capital Mgmt $18,360 $5,491 Chilton Investment Co. $5,000 14 Duquesne Capital Mgmt $5,000 15 ESL Investments $5,000 16 Highfields Capital Mgmt $5,000 Tudor Investment Corp. $4,946 18 Highbridge Capital Mgmt $4,200 19 Perry Capital $4,137 20 Copyright 2011 MSF Enterprises, LLC Copyright © 2013 MSF Enterprises, LLC HBK Investments 13 17 Source: Institutional Investor, Bloomberg Markets 12 Man Investments $4,000 17 Caxton Associates $13,500 18 Citadel Investment Group $13,400 19 Cerebrus Capital Mgmt $12,800 20 Moore Capital Mgmt $12,500 8
  9. 9. Global Equity and Bond Markets Size of US IG and HY Corporate Bond Markets $54.6 Trillion: Size of Global Equity Market Regional Distribution and Total Market Capitalization of Global Bond Market $99.5 Trillion: Size of Global Bond Market Source: World Federation of Exchanges, Morgan Stanley, Bank for International Settlements, Thomson Reuters, Barclay’s Capital Copyright © 2013 MSF Enterprises, LLC 9
  10. 10. Alternative Asset Classes Size of Global Alternatives Market 7 6 Trillions of USD $6.5 Trillion: Size of Global Alternatives Market CAGR 2005-2011 Alternative Assets: 14.2% Traditional Assets: 1.9% 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 Estimate of Hedge Fund Assets, Net Asset Flows and Number of Funds $2.3 Trillion: Size of Global Hedge Fund Market Source: McKinsey Institute, Managed Funds Association Copyright © 2013 MSF Enterprises, LLC 10
  11. 11. Alternative Asset Classes Private Equity Assets Under Management $3.3 Trillion: Size of Global Private Equity Market Private Equity AUM by Fund Type (as of 9/2012) Source: Preqin Copyright © 2013 MSF Enterprises, LLC 11
  12. 12. Registered Investment Companies (RICs) Total Assets in Mutual Funds, Closed-End Funds, ETFs and UITs Closed-End Mutual funds ETFs2 Funds UITs $2,811 $143 $1 $73 3,526 147 2 72 4,468 152 7 85 5,525 156 16 94 6,846 147 34 92 6,965 143 66 74 6,975 141 83 49 6,383 159 102 36 7,402 214 151 36 8,095 253 228 37 8,891 276 301 41 10,398 297 423 50 12,001 312 608 53 9,604 184 531 29 11,113 224 38 Private Equity AUM by Fund Type 777 of 9/2012) (as 11,832 238 992 51 11,627 243 1,048 60 13,045 265 1,337 72 1 $14.7 Trillion: Size of Global Retail Market Structures 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total3 $3,028 3,747 4,712 5,790 7,119 7,247 7,248 6,680 7,803 8,613 9,509 11,167 12,975 10,348 12,152 13,113 12,979 14,719 1 Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute. The data do not include mutual funds that invest primarily in other mutual funds. 2 ETF data prior to 2001 were provided by Strategic Insight Simfund. ETF data include investment companies not registered under the Investment Company Act of 1940 and exclude ETFs that invest primarily in other ETFs. 3 Total investment company assets include mutual fund holdings of closed-end funds and ETFs. *Source: Investment Company Institute, Strategic Insight Simfund Copyright © 2013 MSF Enterprises, LLC 12
  13. 13. The Evolving Asset Management Industry 13 Copyright © 2013 MSF Enterprises, LLC
  14. 14. 60 Year History of Asset Management The complex art form of investment management has been evolving for decades, with market developments forcing investors to seek out alternative methods to achieve outperformance. 14 Copyright © 2013 MSF Enterprises, LLC
  15. 15. Correlation: Expanding Asset Classes The Modern Portfolio Theory (MPT) asset base of bonds and equities has only limited diversification benefits, particularly given that correlations increase during crisis periods. Asset Class Correlations from 2004 to 2006 (2007 to 2008 in Parenthesis) Traditional MPT Assets Endowment Asset Types (Alternatives))  Increasing the number of asset classes and diversifying investment strategies can reduce portfolio correlation and volatility… *Source: Szado (2009) Copyright © 2013 MSF Enterprises, LLC 15
  16. 16. Endowment v. Traditional Model The New Efficient Frontier 50% Hedge Funds 50% Managed Futures Indexed Performance Comparison: Endowments v. S&P 500 v 60/40 Allocation 45% Hedge Funds 45% Managed Futures 5% Stocks 5% Bonds 50% Stocks 50% Bonds Jun-99 Risk/Return Profile for portfolio with 100% Traditional Assets to 100% Alternative Assets (June 2001-December 2011) Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 *Endowment performance includes Harvard, Yale, Princeton and Stanford, with fiscal year ending June **60-40 allocation composed of 60% SPX and 40% Lehman Brothers/Barclays Aggregate Bond Index, with annual rebalancing  Portfolio drawdowns under the Endowment Model are typically lower in magnitude than drawdowns from traditional asset allocation models. This reduced market sensitivity generally enables alternative asset strategies to outperform traditional strategies over the long-run. *Source: NACUBOCommonfund, Yahoo! Finance Copyright © 2013 MSF Enterprises, LLC 16
  17. 17. The Endowment Model • • The Endowment Model uses every investable asset class to achieve full diversification through non-directional alternative strategies Utilize alternative assets with low expected correlation to the market – – – – Private Equity Firms— • Buyouts of established firms with the long-term goal of generating returns from leverage and increases in operating efficiency; PE may provide limited diversification over equities due to common fundamental links between the asset classes Venture Capital Groups— • Early stage investments that seek to capitalize on high growth opportunities, while taking on greater risk due to operating uncertainty and longer investment horizons Hedge Funds— • Range of strategies that seek to take advantage of special opportunities and exploit inefficiencies in the market, often with the goal of producing absolute returns Real Assets— • Investments with high correlation to inflation that often produce a high current yield, including real estate, natural resources, TIPS and other commodities Endowment Model Advantages Potential Setbacks Increased Diversification Difficult to Access Strategies Reduced Volatility High Cost of Execution Reduced Drawdowns Lack of Liquidity 17 Copyright © 2013 MSF Enterprises, LLC
  18. 18. Endowment Model Allocation  Endowment Models Feature a 20-60% Allocation to Alternatives Asset Allocations for Fiscal 2011 $50-100MM Endowments Cash & Equivalents 3% Cash & Equivalents 7% Alternative Strategies 23% International Equities 18% $1B+ Endowments Domestic Equities 12% Domestic Equities 32% Fixed Income 9% Alternative Strategies 60% Fixed Income 20% International Equities 16% Alternative Allocation for Top Endowments: • Absolute Return 20% • Private Equity 15% • Real Assets 25%  Larger endowments allocate a greater portion of their assets to alternative strategies, yet smaller funds can still benefit from an allocation to alternatives even when the strategy is executed on a smaller scale *Source: NACUBOCommonfund Copyright © 2013 MSF Enterprises, LLC 18
  19. 19. Asset Flows and Investor Allocation Asset Management Industry Average Net Flows (% of AUM)  The asset management industry has experienced a sharp drop in net flows since 2007  At the same time, certain asset classes have demonstrated resilient growth as investors shift allocations Shifts in Investor Allocation Over Time  Investors have steadily reduced allocations to traditional asset classes (“active core”) while dedicating more capital to alternatives and passive investments Source: BCG Copyright © 2013 MSF Enterprises, LLC 19
  20. 20. Deal Activity 20 Copyright © 2013 MSF Enterprises, LLC
  21. 21. Asset Management Transaction Environment Asset Management Deals in 2012 Asset Management Transactions Aggregate Disclosed Deal Value Aggregate AUM Transacted IPOs Total Number of Public Asset Managers MBOs & PE Sponsored Transactions Minority Stake Transactions Cross-Border Transactions Alternative Manager Sales Median Forward P/E Multiple (Publicly Traded Managers in U.S.) Median Run-Rate EBITDA Multiple (Global Private Transactions) 143 $8.5B $1.5T 2 66 29 37 44 48 14.5x 8.8x Total Number of Transactions and Acquired AUM Source: Sandler O’Neill Copyright © 2013 MSF Enterprises, LLC 21
  22. 22. Asset Management Industry Multiples Median Trading Multiples for Quoted Fund Managers LTM P/E 1-Year Forward P/E EV / LTM EBITDA EV / Forward EBITDA 2011 2012 2011 2012 2011 2012 2011 2012 U.S. Traditional Asset Managers 12.4x 15.6x 12.1x 14.5x 6.1x 8.3x 6.1x 7.8x U.S. Alternative Asset Managers 12.1x 9.5x 6.4x 7.7x 10.7x 9.8x 5.4x 7.0x U.K. Traditional Asset Managers 11.0x 14.7x 10.9x 12.0x 6.2x 8.4x 5.8x 7.2x U.K. Alternative Asset Managers 14.8x 15.6x 12.8x 13.0x 7.9x 8.6x 7.4x 6.9x Asset Manager EBITDA Multiple: Range and Average Over Time Traditional Firms – EV to LTM EBITDA Source: Sandler O’Neill, Freeman & Co. Copyright © 2013 MSF Enterprises, LLC Traditional Firms: Artio, BlackRock, Calamos, Cohen & Steers, Eaton Vance, Federated Investors, Franklin Resources, GAMCO, Invesco, Janus, Legg Mason, Manning & Napier, Pzena, Schroders, SEI Investments, T. Rowe Price, Waddell & Reed, Virtus Alternative Firms – EV to LTM EBITDA Alternative Firms: Apollo, Ashmore, Blackstone, Carlyle, Charlemagne, Fortress, KKR, Man Group, Oaktree, Och-Ziff, Partners Group, Polar Capital 22
  23. 23. Asset Management Deal Volume Transactions AUM by Type • • In terms of transacted AUM, 2012 volume was more than 60% below the 2009 peak While down from recession and prerecession levels, transacted AUM is up over 50% from 2010 Alternative Asset Manager Transaction Activity • • Source: Sandler O’Neill Copyright © 2013 MSF Enterprises, LLC M&A for Alternative Asset Managers has not yet returned to pre-recession levels M&A for Funds of Hedge Funds and Private Equity Firms showed strength in 2012 23
  24. 24. M&A: Looking Forward Global Asset Management Transactions (as of 4/30/13)  After increasing 22% in 2012, asset management M&A activity is on track to rise another 12% in 2013  29 transactions have closed in the U.S. in 2013 (as of 4/30)  26% increase from same period 2012 Asset Management Growth Areas •Alternatives •Global and International Strategies •Passive Investments •Retail Alternatives •Solutions Source: Freeman & Co. Copyright © 2013 MSF Enterprises, LLC 24
  25. 25. Effects on Valuation Assumptions • Asset manager with $15B in AUM experiences 40% decline in asset value • Expected EBITDA multiple declines as a result of the drawdown, reducing valuation by 65% • Even with AUM rebounding back to $13B, the business valuations remains 30% below predrawdown levels Worse Case Down Side Start 2013 Cumulative Change Firm AUM $15,000.00 $9,000.00 Average Fees 1.50% -40% 1.50% Cumulative Change Growth Goal $13,000.00 -13.3% 1.50% Revenue $225.00 $135.00 -40% $195.00 -13.3% Expenses $144.00 $86.40 -40% #DIV/0! $124.80 -13.3% #DIV/0! EBITDA $81.00 $48.60 -40% $70.20 -13.3% Margin 36% 36% Multiple (x) 8.3 6.5 -21.7% 7.5 -9.6% EV $672.30 $315.90 -53% $526.50 -21.7% Current  36% Downside Recovery Key Takeaway: Several Factors Determine Valuation • AUM • Stability and diversification of capital sources • Fee structure • EBITDA and EBITDA Margin • Valuation Multiple 25 Copyright © 2013 MSF Enterprises, LLC
  26. 26. Publicly Traded Managers: Performance and Valuation Relative Performance of Asset Management Firms Source: Freeman & Co. Copyright © 2013 MSF Enterprises, LLC 26
  27. 27. Building Firm Value Asset Management firms should focus more on utilizing fundamental business principles as a guide for operations • • • Product Manufacturing • Provide strategies and structures that meet the needs of a wide range of investors • Consider capacity constraints • Separately managed accounts, pooled investment vehicles, ‘40 Act products Operations • Efficiency of operational structure • Leveragability of systems and personnel Distribution • Investors by type and geography • Scalability GOALS: Develop Distribution Channels, Grow AUM, Improve EBITDA, Expand Valuation Multiples Manufacturing Distribution Fund Performance Copyright © 2013 MSF Enterprises, LLC Enterprise Value Operational Efficiency Firm Structure 27
  28. 28. Contact If you would like more information on ways to take advantage of opportunities in the asset management industry, please contact: Michael Fields (303) 847-4649 mfields@msfenterprises.com MSF Enterprises, LLC 717 17th St., Suite 2160 Denver, CO 80202 DISCLAIMER: Securities are offered through Silver Leaf Partners, a member of FINRA, NFA, & SIPC. This communication is for informational purposes only. The information above is not guaranteed as to its accuracy or completeness. If such information is related to a security or product then you are further advised that we do not provide investment counsel thereon nor do we certify such information as complete or accurate. To determine suitability, you must secure, read & understood all relevant information related thereto, conduct a thorough due diligence & seek expert independent counsel, if necessary, prior to investing. We further caution that past performance is not indicative of future results. This communication is confidential & may not be disclosed without permission. If this email is not intended for you, then you have received it in error & you may not distribute or copy it; please let us know of our error by reply email & delete this message & all of its attachments. Every effort is made to keep our network virus free; we have no liability for any damage caused by this transmission. 28 Copyright © 2013 MSF Enterprises, LLC
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