MONEY MANAGERS COME IN AT LEAST 28 FLAVORS: CONSOLIDATION FOSTERS DIVERSITY, STUDY SHOWS

The asset management industry has more types of competitive business models now than ever before, according to “Beyond the Hype,” the seventh annual strategy report by Investment Counseling Inc.

“The choice of sustainable business models is increasing, not decreasing” according to the report, due in part to the merger frenzy in the financial services industry.

Consolidations, a strong market and robust industry profits conspire to prevent the emergence of a single model for success in the industry, the report states: “The superior corporate strategy often lies in deciding what not to do.”

The review was written by Chas Burkhart, president of West Coshohocken, Pa.-based Investment Counseling, along with senior consultant David Silvera and analyst John O’Shea. It examines the variety of ways investment management firms can structure their business.

The ‘grow-or-die’ philosophy advocated by many in the industry has contributed to the rise in valuations, as “firms fear having their competitive choices made for them in this heightened assembly period,” the report says.

everybody’s not a star

It might seem like an ideal seller’s market, but not every firm is regarded as premium property, according to the report. Much of the buying activity has been driven by employee-owned firms that wanted to sell part or all of the firm for strategic reasons.

In fact, the traditional distinction between a financial and strategic buyer is fading. The report outlines the acquirers of today:

Financial investors, such as the venture capitalists and buyout groups, offer creative structures but don’t get involved with the seller’s business.

Investment management holding companies provide some liquidity to the sellers. These transactions usually are structured around revenue or profit-sharing models. An important part of this model is the autonomy granted the affiliates.

But a new category of holding company might come from recent changes at the industry’s prototypical holding company, United Asset Management Corp. in Boston.

Until recently, UAM affiliates wanting the parent company’s help in promoting a product found it costly UAM reduced that cost at yearend. It also began rewarding affiliates for retaining and acquiring new client assets rather than rising revenue.

It even has begun providing marketing assistance to the Campbell Group, which lost its entire $1.3 billion portfolio at the end of 1997. UAM executives continue to support the timber investment affiliate, they say, because it has good long-term prospects for profitability.

relatively few deals

The asset management holding companies lost ground last year as a percent of total acquisition activity. The most active acquirers in investment management mergers and acquisitions last year were the banks, trust companies and their affiliates, with about two dozen deals.

Employee-owned, unaffiliated public companies made about 15 acquisitions, according to the study, followed by insurance companies and their affiliates with 14 deals

Money management holding companies and their affiliates only did about a dozen deals in 1997; brokers and investment banks made about nine.

Financial service acquirers generally keep their affiliates operationally distinct, but also are seeking ways to make the most of the affiliates’ talents.

Crain News Service