MERCER CAPITAL’S VALUE FOCUS » THIRD QUARTER 2012                                                                         ...
MERCER CAPITAL’S VALUE FOCUS » ASSET MANAGEMENT INDUSTRY Market Overview: 2012 Q3                                         ...
MERCER CAPITAL’S VALUE FOCUS » ASSET MANAGEMENT INDUSTRYMergers & AcquisitionsReview: 2012 Q3                             ...
PRSRT STD        5100 Poplar Avenue, Suite 2600                                                                           ...
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Mercer Capital's Asset Management Industry Newsletter | Q3 2012 | Focus: Alternative Asset Managerss


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Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.

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Mercer Capital's Asset Management Industry Newsletter | Q3 2012 | Focus: Alternative Asset Managerss

  1. 1. MERCER CAPITAL’S VALUE FOCUS » THIRD QUARTER 2012 Mercer Capital provides asset managers, ASSET MANAGEMENT trust companies, and investment consultants with corporate valuation, financial reporting valuation, transaction advisory, portfolio INDUSTRY valuation, and related services. Call Matt Crow or Brooks Hamner at 901.685.2120 to discuss your needs in confidence.SEGMENT FOCUS: ALTERNATIVE ASSET MANAGERSThe recent wave of alternative manager IPOs IPO-TO-DATE SHARE PRICE PERFORMANCE TOTAL RETURNS FOR 12 MONTHS ENDED SEPTEMBER 28, 2012has introduced some new players to our index 40.00%of publicly traded hedge funds and PE firms.Carlyle and Oaktree both went public this Spring 20.00%with varied performance records since inception, 0.00%but the discrepancy in returns may be more afunction of deal incentives and strategic pricing -20.00%than underlying fundamentals. In the wake of -40.00%uninspiring track records from OAK and otherpublicly traded alternative asset managers, -60.00%Carlyle deliberately priced its IPO conservatively -80.00%and locked up some of its larger shareholders -100.00%to offer its prospective investors more upside APO BX CG FIG KKR OAK OZMpotential. IPO to date, Carlyle is up 17% while (inchronological order) KKR, Fortress, Blackstone, Alternative Asset ManagersOch-Ziff, Apollo, and Oaktree are down 35%,76%, 54%, 70%, 23%, and 5%, respectively.The subpar shareholder returns for most publicly traded PE firms Bain & Company’s private equity practice. Mr. Sorkin concludesmay be the result of a looming deadline facing many private equity that as a result, “we could see a series of bad deals with even worsefunds that have remained sidelined since the last financial crisis. returns.” According to Richard Peterson, an analyst for S&P CapitalIn a recent New York Times article titled “More Money Than They IQ’s Global Markets Intelligence group, PE firms are paying EBITDAKnow What to Do With,” Andrew Ross Sorkin notes that PE firms multiples of 10.6 this year while many of the most successful dealsare sitting on $1 trillion in cash that if they don’t spend soon, they have transacted at 6x to 8x.may have to return the funds back to their investors – “Nearly $200 The market may not agree with this position as Carlyle hasmillion from funds raised in 2007 and 2008 alone needs to be spent completed the most deals this year, and its stock is up 17% sincein the next 12 months or it must be given back,” writes Sorkin. going public in May. Still, Mr. Sorkin warns that since Apollo, KKR,As a result, many private equity firms are feeling the pressure to Blackstone, and Carlyle are all publicly traded now, it’s possibledeploy client assets in the near future lest they return the cash back that the interests of the public shareholders could diverge from theto investors, thereby foregoing the corresponding management interests of the investors in the buyout funds. The performance offees and performance incentives. Nobody believes they would do CG’s and other PE firms’ recent round of acquisitions should answersuch a thing, which “will likely result in too much capital chasing this question.too few deals throughout 2012,” notes Hugh MacArthur, head of | 5100 Poplar Avenue, Suite 2600, Memphis, Tennessee 38137 » 901.685.2120 (P) » 901.685.2199 (F) »
  2. 2. MERCER CAPITAL’S VALUE FOCUS » ASSET MANAGEMENT INDUSTRY Market Overview: 2012 Q3 ASSET MANAGERS INDEX :: BREAKDOWN BY TYPE As a whole, publicly traded asset managers 150.00 gained roughly 30% for the twelve months ended September 30, 2012, in line with most 140.00 of the major indices. Surprisingly though, our index of money managers underperformed the 130.00 S&P 500 in the most recent quarter, gaining just 120.00 under 4% versus the S&P’s 6%. Asset managers typically outperform the major indices in upward 110.00 trending markets because of their inherent operating leverage and correlation to market 100.00 conditions. One possible explanation for this underperformance is the steady drain of funds 90.00 out of equity and into fixed income products. 1 1 1 12 12 12 12 12 12 12 12 12 /1 /1 /1 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ Morningstar recently reported that investors 1/ /1 /1 /1 1/ 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 10 11 12 added $29.9 billion into taxable bonds while redeeming $16.8 billion from U.S. stock funds in Mutual Funds Asset Managers Alternative Asset Managers September, marking the 17th consecutive month Trust Banks S&P 500 of outflows for domestic equities. Despite the net gain in asset flows, this is a troubling trend for most RIAs that charge higher fees to manage ASSET MANAGERS INDEX :: BREAKDOWN BY SIZE equity funds. 160.00 On the other hand, asset managers may be 150.00 poised for a rally of their own given the propensity 140.00 of retail investors to chase returns and the 130.00 stock market’s 30% gain over the last year. With bond yields at historic lows and equities 120.00 still at reasonable valuations, this would seem 110.00 inevitable unless we’re truly witnessing the “new 100.00 normal” for retail investors’ participation in the 90.00 stock market. One positive trend for equity funds 1 1 1 12 12 12 12 12 12 12 12 12 /1 /1 /1 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ is the year-to-date attraction of $17.3 billion in /1 /1 /1 1/ 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 10 12 11 assets for dividend-focused funds. Investors seem fixated on current income at the moment AUM < $10 B AUM $10 B - $100 B AUM $100 B - $500 B and may start to look to other asset classes as AUM > $500 B S&P 500 Treasury bond yields approach nil.© 2012 Mercer Capital 2
  3. 3. MERCER CAPITAL’S VALUE FOCUS » ASSET MANAGEMENT INDUSTRYMergers & AcquisitionsReview: 2012 Q3 MARKET MULTIPLES AS OF 9/28/12According to RIABiz, year-to-date AUM transacted among Price / Price / Total Totaldomestic managers with over $50 million in assets Trailing Forward Capital / Capital / Ticker EPS EPS AUM EBITDAreached $42.3 billion with only $6.1 billion transacted in TRADITIONAL ASSET MANAGERSthe most recent quarter. “The slowdown of transactions Affiliated Managers Group, Inc. AMG 52.12 13.63 2.01% 14.26 Artio Global Investors, Inc. ART 8.28 nm 0.88% 4.00is disconcerting in regards to the needs of the industry,” BlackRock, Inc. BLK 13.80 11.89 1.05% 10.64says David DeVoe, CEO of San Francisco-based RIA M&A Legg Mason, Inc. LM 23.28 10.82 0.75% 12.93 Pzena Investment Management, Inc. PZN 22.65 14.89 2.57% 10.04firm DeVoe & Co. “Given the demographics of owners in Virtus Investment Partners, Inc. VRTS 4.91 13.46 1.77% 20.12 Westwood Holdings Group, Inc. WHG 22.55 nm 2.23% 14.72the industry, literally hundreds of firms need to be sold Group Median 22.55 13.46 1.77% 12.93over the next several years – just to solve for succession. MUTUAL FUNDSThe longer firms wait to create a succession plan, the AllianceBerstein Investments, Inc. AB nm 12.68 nm nm Calamos Asset Management, Inc. CLMS 17.91 13.94 0.99% 2.00fewer options they have.” Cohen & Steers, Inc. CNS 21.94 16.01 2.92% 12.87 GAMCO Investors, Inc. GBL 18.77 14.42 4.47% 12.39 Epoch Holding Corporation EPHC 22.00 15.61 2.35% 12.26RIABiz notes that most of these recent deals have been INVESCO Ltd. IVZ 15.92 11.96 2.71% 13.24executed by roll-ups and other consolidators looking Franklin Resources, Inc. BEN 14.68 12.63 4.04% 10.10 Diamond Hill Investment Group, Inc. DHIL 15.59 9.57 2.64% 9.98to build assets. DeVoe offers an explanation for this Eaton Vance Corp. EV 17.34 14.30 2.24% 9.46 Hennessy Advisors, Inc, HNNA 17.81 nm 2.25% 9.88phenomenon as well – “Consolidators are able to win Manning & Napier, Inc. MN nm 10.60 0.39% nmnew deals, partially due to their methodical approach T. Rowe Price Group, Inc. TROW 21.24 16.72 2.96% 12.11 U.S. Global Investors, Inc. GROW 61.30 15.72 5.83% 34.08to M&A, which eclipses the potential ‘distraction factor.’ Waddell & Reed Financial, Inc. WDR 16.72 13.01 3.37% 10.02 Federated Investors, Inc. FII 13.52 11.76 0.70% 8.70Although many advisors see the strategic value of M&A, Janus Capital Group Inc. JNS 16.00 14.75 1.52% 8.88only a portion of them have created a well-thought-out Group Median 17.58 13.94 2.64% 10.06plan to execute the transactions, which is ultimately ALTERNATIVE ASSET MANAGERS Apollo Global Management, LLC APO nm 5.06 13.18% 15.11required to keep the deals on track.” Brookfield Asset Management, Inc. BAM 17.34 23.80 nm 9.69 Blackstone Group L.P. BX 89.25 7.00 3.63% nmSome are blaming market volatility and the pending Carlye Group, L.P, CG nm 8.17 0.71% 21.81 Fortress Investment Group LLC FIG nm 7.62 4.77% nmelection for the dearth in transaction activity. Jon Beatty Kohlberg Kravis Roberts & Co. KKR 30.84 6.82 7.67% nm Oaktree Capital Group, LLC OAK nm 9.32 8.91% 7.72of Schwab Advisor Services notes, “the uncertainty in Och-Ziff Capital Mgmt Group LLC OZM nm 7.92 15.20% nmthe markets and the upcoming presidential election has Group Median 30.84 7.77 7.67% 12.40led to a decline in M&A activity this past quarter. While TRUST BANKS Northern Trust Corporation NTRS 17.52 13.86 nm nmnational acquiring firms remain dominant players, RIAs Bank of New York Mellon Corporation BK 11.66 9.43 nm nmas acquirers have been sitting on the sidelines waiting State Street Corporation STT 10.62 9.69 nm nm Group Median 11.66 9.69 nm nmfor the right opportunity.” DeVoe sees other distractions OVERALL MEDIAN 17.43 12.84 2.30% 11.37– “the third quarter had fewer M&A transactions thanone would expect for an industry of over 10,000 firmsand RIA owner demographics. Given that there has been Financial Institutions Group, notes that the persistently low interestno significant change in the key drivers for M&A during rate environment and corresponding margin challenges, coupled withthe last year, the slowdown is consequently the result of advisors weak asset growth and declining ROEs, have led many banks to seekbeing distracted by other issues. Anecdotally, I’ve also seen advisors non-depository institutions like RIAs with higher yielding assets andwho are too busy with growth and some who continue to seek higher growth opportunities. Revenue diversification and deal economies arevaluations.” other obvious motivations. For RIAs, banks can be a good source of capital and cross-selling opportunities. Still, Mr. Wiant acknowledgesRBC Capital Markets sees another potential source for RIA acquisitions that tougher regulatory scrutiny, lack of familiarity in new assetmoving forward. In a recent presentation titled “Banks’ Growing Interest classes, and dependence on selling owners to stay on and operate thein Non-Depository Businesses,” Jerry Wiant, Co-Head of RBC’s U.S. subsidiary are potential obstacles for getting deals done.© 2012 Mercer Capital 3
  4. 4. PRSRT STD 5100 Poplar Avenue, Suite 2600 AUTO Memphis, Tennessee 38137 U.S. POSTAGE PAID Memphis, TN VALUE FOCUS » ASSET MANAGEMENT INDUSTRY Segment Focus: Alternative Asset Managers Third Quarter 2012 Market Overview Third Quarter 2012 M&A ReviewABOUT VALUE FOCUS: ASSET MANAGEMENT INDUSTRYMercer Capital’s Value Focus is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies,and investment consultants. Each issue highlights a market segment: 1st quarter: Mutual Fund Companies, 2nd quarter: Traditional AssetManagers, 3rd quarter: Alternative Asset Managers, and 4th quarter: Trust Banks. To see past issues of Value Focus, visit under the Knowledge Center section of our website.ABOUT MERCER CAPITALAs one of the largest valuation firms in the United States, Mercer Capital provides asset managers, trust companies, and investment consultants withcorporate valuation, financial reporting valuation, transaction advisory, portfolio valuation, and related services.Matt Crow, ASA, CFA Brooks Hamner, CFAPresident Senior Financial Analyst901.322.9728 hamnerb@mercercapital.comMercer Capital is a business valuation and investment banking firm serving a global client base. Business valuation services are provided for a widevariety of needs, including but not limited to corporate valuation services, tax compliance, litigation support, financial statement reporting compliance,and employee stock ownership plans. Our clients range from public to private, from smaller companies to large multi-nationals in a broad range ofindustries, as well as numerous governmental agencies. In addition, Mercer Capital provides investment banking and corporate advisory servicesincluding sell-side and buy-side merger & acquisition representation, fairness opinions, solvency opinions, business interest and securities valuation,among others. Copyright © 2012 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Value Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary publication, visit our web site at