valuation trends & considerations€¦ · •lovell minnick partners overview ... ’03 –...
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November 27, 2012 Asset Management Valuation
Asset Management Industry
Valuation Trends & Considerations
November 27, 2012
November 27, 2012 Asset Management Valuation
Introduction
November 27, 2012 Asset Management Valuation
Agenda
Discussion Topics
• Lovell Minnick Partners overview
• Industry background
• Valuation considerations
• Valuation trends
Objective
• Discuss environmental factors influencing valuation
• Review key criteria and approaches to valuation
• Analyze trends in valuations and transaction themes
November 27, 2012 Asset Management Valuation
Lovell Minnick Partners Overview
• Independent, management-owned private equity firm focusing on financial services companies and related business service firms that create, manage, distribute, support or administer financial products & investments
– Initially formed in 1999 as the private equity affiliate of Putnam Lovell Securities
– Provides equity capital for management buyouts, private firm ownership transitions, recapitalizations and growth capital
– Target investment size of €15 – €75 million
– Raised over $850 million in committed capital and have completed investments in over 30 companies
– 15 investment professionals with over 200 years of collective industry experience
– Offices in Philadelphia and Los Angeles with a presence in Frankfurt
3
26%
14%
7%5%5%
8%
16%
10%
9% Commercial Banks
Specialty Finance
Other Outsourcing Insurance
Financial Tech
Asset Management
Broker/Dealer and Product Distribution
Capital Markets
Representative Deal Flow Since 2008 Partnerships Managed by LMP
$0
$200
$400
$600
$800
$1,000
2007 2008 2009 2010 2011
($ millions)
November 27, 2012 Asset Management Valuation
Investment Management Investment Activity
4
Manufacturing Product Distribution Wealth Management/Trust
Fixed Income
Equity
Emerging Markets
Wealth Management
Trust
Extensive operational and investment experience across the investment management value chain
November 27, 2012 Asset Management Valuation
$33.9
$43.0
$56.1
$5.1
$7.0
$11.0
Exit Year - 2 Exit Year - 1 Exit Year
Average Revenue Average EBITDA
Partnership and Value Creation
5
Strategic positioning
Buyer landscape knowledge
and contact base
Buyer economic analysis
Monetize growth trajectory at
appropriate time
Compensation and retention
Senior executive and sales
force recruiting
Operating leverage
Corporate transitions
Organizational Development
Exit Maximization
Realized or Publicly Traded LMP Investments (1)(2)
12 Investments
($ millions)
Corporate development
Product development
Business development
Capital structure solutions
Growth Initiatives
(1) Includes all LMP realized investments (2) Past performance is not necessarily indicative of future results.
Revenue CAGR: 29% EBITDA CAGR: 47%
November 27, 2012 Asset Management Valuation
State of the Industry
November 27, 2012 Asset Management Valuation
Challenging Environment for Investment Managers
7
• Net inflows flat since the credit crisis
• Global economic slowdown projected, particularly in developed countries
• Margins remain healthy, but are unlikely to improve due to limited growth
Limited Organic Growth
• Continued rise in passive products at the expense of traditional active
• Risk averse investors prefer cash and fixed income over equities
• Alternatives gaining more widespread acceptance and availability
Shifting Investor
Preferences
• Investors increasingly demand independent, conflict-free advice
• Advice-seeking investors shift balance of power towards distribution
• Forced divestitures due to parent company capital and regulatory requirements
Structural Changes in
the Industry
• Valuation must be understood in the context of an industry facing considerable challenges
• Only those firms that overcome these challenges will command a premium valuation
November 27, 2012 Asset Management Valuation
Industry Growth Has Stalled
• Historically, asset managers generated healthy growth through market gains and net flows
• However, total industry AUM has been flat since the onset of the financial crisis
– Primary driver has been lack of net inflows
8
Source: Boston Consulting Group
Global AUM Trend Global Net Flows
($ trillions)
$34.0
$58.8
$48.4
$54.3 $58.2 $58.3
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
2002 2007 2008 2009 2010 2011
0% CAGR
3.1% 3.2%
4.5%
5.7%
4.0%
-0.5%
1.0%
-0.2%
0.1%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011
(% of AUM at beginning of period)
November 27, 2012 Asset Management Valuation
Challenges Facing Traditional Products • Appetite for lower cost, higher yield, and non-correlated products all driving growth in alternatives and
passive products
• Eroding market share for traditional actively-managed products
9
Source: Boston Consulting Group
Asset Class Growth & Revenue Matrix
-5%
0%
5%
10%
15%
20%
25%
0 50 100 150
Fixed-income ETF
Equity ETF
Passive fixed-
income
Fixed-income
core
Money market
Passive equity
LDI
Fixed-income
specialty
Balanced
Structured
Equity core
Solutions
Real estate
Equity specialties
Infrastructure
Commodities
Private equity
Hedge fund
Fund of PE fund Fund of
hedge fund
Passive Products/ETFs
Traditional Active Products
Alternative Products
(2011 – 2015 CAGR)
Net Revenue Margin (basis points)
November 27, 2012 Asset Management Valuation
2%
7%
-9%
-4%
4%3%
-1% -1%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2002-2003 2004-2006 2007-2010 2011-2012
European Equity Net Sales U.S. Equity Net Sales
• Since the financial crisis, investors have avoided risk, resulting in net outflows from equities
• Net inflows concentrated on fixed income products, market moneys, and bank deposits
• Regulation (pension fund reform, Solvency II) compounds the problem by incentivizing allocations away from equities
Net Flows Favoring Yield Products
10
Source: 2012 Investment Company Institute Fact Book, Boston Consulting Group, Strategic Insight 1) 2012 YTD information through September 30, 2012 2) Mutual fund net flows
Net Flows into Long-Term Assets 1 1H 2012 European Net Flows 2
(€ billions)
(5.3)
6.4
7.5
7.6
8.2
9.2
11.8
12.0
7.5
9.5
(4.9)
6.9
(€ 10.0) (€ 5.0) € 0.0 € 5.0 € 10.0 € 15.0
Short-Term Euro Bonds
Euro Equities
High Yield Global Bonds
Emerging Market Equities
Euro Target Maturity
Euro Money Markets
Global Currencies Bonds
USD Investment Grade Bonds
Global Corporate Bonds
Asset Allocation
USD High Yield Bonds
Emerging Market Bonds
Equities Allocation Products Cash & Bonds
Risk Aversion
Risk Absorption
November 27, 2012 Asset Management Valuation
Commoditization of Beta
• Passive products, including ETFs, on the rise and taking share from actively managed products
• Low return environment increases the appeal of ETFs as a cost-effective means for asset allocation
• Lackluster investment performance by many celebrated fund managers (e.g. Bill Miller)
• Continued relevance of certain actively-managed strategies (e.g. small cap, emerging markets, etc.)
11
Global AUM by Product
63%54% 49%
21%
22%24%
7%9% 12%
8% 13% 13%
2003 2008 2011
Alternatives
Passive/ETF
Solutions
Active Specialties
Active Core
$39 trillion $58 trillion $48 trillion ’03 – ’08 CAGR ’08 – ’11 CAGR
Alternatives
Passive/ETF
Solutions
Active Specialties
Active Core
14.1% 8.0%
9.6% 14.2%
26.0% 24.1%
5.1% 9.2%
1.4% 2.8%
Source: ICI, Preqin, Strategic Insight, HFR, BlackRock ETF report, Towers Watson, P&I, BCG Global Asset Management Notes: 1) Alternatives includes structured products, hedge funds, private equity, real estate, infrastructure, LDI and commodity 2) Solutions include absolute-return, target-date, asset allocation and volatility 3) Specialties includes foreign, global, small and mid-cap credit, high yield, etc. 4) Active core includes active domestic, large-cap equity, and fixed income funds
4
3
2
1
November 27, 2012 Asset Management Valuation
Growth in Alternative Strategies
• Early part of the last decade saw a surge in the growth of alternative assets
• Moderate growth expected in the near-term
– Aided by increased interest in non-correlated and yield-oriented strategies following the financial crisis, e.g. absolute return, alternative credit, etc.
– Challenged by a difficult fundraising environment, particularly in private equity
• While pensions and sovereign wealth funds will drive the majority of near-term net flows, an emerging source of growth is the increased accessibility of alternative products to retail investors
12
Global Alternative Asset Growth
Source: Strategic Insight, HFR Industry Reports, McKinsey 1) Long-term ’40 Act Funds
Rise in Retail Alternative Assets
$2.9
$4.2
$5.7
$5.0
$5.6
$6.2 $6.5
$0.0
$2.0
$4.0
$6.0
$8.0
2005 2006 2007 2008 2009 2010 2011
($ trillions) (% of Year-end AUM)1
78%69%
60%
11%
15%
16%
8%10%
11%
3%6%
13%
0%
20%
40%
60%
80%
100%
2005 2010 2015P
Active ETFs/Passive Solutions Retail Alternatives
November 27, 2012 Asset Management Valuation
$6.8
$10.4
$14.6
2003 2009 2014P
Distribution Trending Towards Professional Advice
• Post-crisis, investors are more interested in seeking out professional financial advice
– Considerable uncertainty following the financial crisis
– Net worth significantly diminished after the real estate downturn and financial market turmoil
– Many investors nearing or entering retirement age
– Supporting regulatory initiatives in both Europe (RDR) and the U.S. (DOL/ERISA)
13
Trends in Distribution Advisor-Controlled AUM
Investment Advice
Product Manufacturing
Investment Decision
Advisor Compensation
Historical Trend
• Wirehouse
• Insurance
• Open architecture
• Conflict free
• Commission • Fee based
• Actively
managed
• Target date
• Passive
• Model portfolio • Turnkey asset
management
• Advisor directed
($ trillions)
Source: Cerulli Associates
November 27, 2012 Asset Management Valuation
Paradigm Shift
• To recap, as we’ve seen
– Significant impediments to growth for asset managers
– Paradigm shift in the structure of the industry
• Valuation depends upon a firm’s ability to navigate this challenging market environment
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• Positive macroeconomic outlook
• Greater job security / long horizon
• Investors in accumulation phase
• Equities orientation
• Fee opacity and unawareness
• Prefer active managers
• Risk-seeking
• Closed or controlled architecture
• Self-directed
• Negative macroeconomic outlook
• Less job security / shorter horizon
• Investors at or near retirement
• Fixed income orientation
• Fee transparency and scrutiny
• Towards passive products
• Risk-aversion
• Open architecture
• Advisor-directed
Then Now
November 27, 2012 Asset Management Valuation
Valuation Considerations
November 27, 2012 Asset Management Valuation
Valuation Process
16
Qualitative Assessment
• Qualitative analysis before quantitative analysis
• Consider intrinsic value factors
• Consider market and situational factors
Financial Analysis
• Prepare historical and projected financials
• Common adjustments include:
• One-time items
• Standalone costs
• Management
compensation
Valuation Analysis
• Common valuation methodologies include:
• Discounted cash
flows analysis
• Comparable companies analysis
• Publicly-traded
companies
• Previous transactions
November 27, 2012 Asset Management Valuation
Valuation Metrics
17
Preferred Metrics
• Enterprise Value / EBITDA • Price / Earnings
Challenged Metrics
• Enterprise Value / Revenue • Enterprise Value / AUM
Valuation depends upon the quality of the underlying target and various situational factors
More meaningful indicators of value returned to capital
providers
Results can be misleading; often used
because they are the only figures publicly
available
November 27, 2012 Asset Management Valuation
Intrinsic Value Considerations
18
• Scale vs. specialization • Differentiation • Scarcity value • Barriers to entry
Business Strategy
• Quality of leadership • Bench strength / key person risk • Shareholder composition • Aligned compensation and equity incentives
Organization
• Diversified product line-up / concentration risks • Performance • Style risk • Product capacity • New product pipeline / opportunities
Investment Products
November 27, 2012 Asset Management Valuation
Intrinsic Value Considerations (continued)
19
• Institutionalization • Repeatability • Sources of alpha • Proprietary / unique expertise or information advantages
Investment Process
• Performance indicators • Net flows • Diverse and stable distribution channels • Sales organization • Intermediary / consultant / client feedback
Organic Growth
• Diversification (style, client, product, manager, etc.) • Recurrence (particularly in alternatives) • Quality of distribution • Client composition
Quality of Revenue
November 27, 2012 Asset Management Valuation
Market & Situational Forces Influencing Value
20
• Depth of buyer universe • Perceptions of target product mix • Macro conditions / market timing
Strategic Buyer Intensity
• Cost savings / synergies • Distribution synergies • Willingness to share / pay for benefits
Strategic Value to Buyer
• Use of proceeds • Intentions of key personnel • Form of security / participation in economics • Contractual rights and protections • Voting and governance rights
Transaction Dynamics
November 27, 2012 Asset Management Valuation
Industry Valuation Trends
November 27, 2012 Asset Management Valuation
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
U.S. Traditional Managers U.S. Alternative Managers
Historical Context
• Traditional managers have traded downwards based on lower growth expectations and economic uncertainty
• Alternative managers still establishing a trading range after a number of IPO’s since 2007
22
Historical Price / NTM Earnings Historical TEV / NTM EBITDA
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
U.S. Traditional Managers
Averages
5-Yr. 3-Yr. 1-Yr. Current
Traditional 8.8x 8.6x 8.4x 8.1x
Source: FactSet Note: NTM = Next Twelve Months Traditional asset managers include AB, AMG, ART, BEN, BLK, CLMS, CNS, EV, FII, GBL, IVZ, JNS, LM, PZN, TROW, VRTS, WDR Alternative asset managers include APO, BX, CG, FIG, KKR, OAK, OZM
Averages
5-Yr. 3-Yr. 1-Yr. Current
Traditional 16.5x 15.2x 14.1x 14.1x
Alternative 12.4x 9.5x 8.5x 9.0x
November 27, 2012 Asset Management Valuation
Organic Growth Leading to Outperformance • Asset managers with positive organic growth have outperformed the S&P 500; meanwhile, those with
negative organic growth have underperformed the S&P 500
23
80
90
100
110
120
130
Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12
Traditional - Organic Growth Traditional - Negative Organic Growth S&P 500
+21%
+13% +11%
LTM Stock Price Performance
Total Enterprise Value / NTM EBITDA
8.9x
7.3x
Source: Capital IQ Note: NTM = Next Twelve Months Managers with positive organic growth include AMG, BEN, BLK, CNS, EV, FII, TROW, WDR; managers with negative organic growth include AB, ART, JNS, LM
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12
Traditional - Organic Growth Traditional - Negative Organic Growth
November 27, 2012 Asset Management Valuation
Diversification Enhances Valuation
• Diversified managers enjoy several advantages:
– Consistently higher trading multiples
– Superior returns to shareholders
– Greater price resiliency in market downswings
– Lower cost of capital
• For a typical traditional asset manager, a 2.0% reduction in overall cost of capital likely translates into a 10-15% increase in equity value
24
Source: Capital IQ Note: WACC = Weighted average cost of capital 1) Diversification is based on an assessment of managers' asset class, geography and distribution channel characteristics 2) Diversified managers include AB, BEN, BLK, EV, IVZ, LM, TROW 3) Undiversified managers include CLMS, FII, JNS, PZN, WDR
Price Change Forward P/E Risk & Capital
Group1 2000 - 2006 2007 - Present Current 1-Yr. Avg 3-Yr. Avg 5-Yr. Avg Unlevered Beta Est. WACC
Diversified Asset Managers2 249.0% -3.2% 13.3x 14.0x 15.5x 16.4x 1.31 9.8%
Undiversified Asset Managers3 44.8% -59.3% 12.4x 13.2x 14.3x 15.4x 1.51 11.5%
Diversified Better (Worse) than Undiversified 204.2% 56.2% 1.0x 0.8x 1.2x 0.9x 0.20 1.7%
November 27, 2012 Asset Management Valuation
-4.0x
-2.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
Traditional Manager P/E minus Alternative Manager P/E
European Traditional vs. Alternative Managers
• In Europe, alternative managers trade in line with traditional managers
– More established public market presence compared with U.S. alternative managers
– Discount associated with alternative managers eroded in the last decade
– Both have traded up modestly in the last year, but valuations still trail historical norms
25
Source: Capital IQ Traditional asset managers include Aberdeen, Azimut Holdings, F&C, Henderson, Jupiter, Schroders Alternative asset managers include 3i Group, Ashmore, Charlemange, GAM, Gottex, Intermediate Capital, Man Group, Partners Group, Polar Capital
Price / 2013E Earnings Historical Delta in Price / Earnings
0.01x
12.0x 12.0x
0.0x
3.0x
6.0x
9.0x
12.0x
15.0x
Traditional Asset Managers
Alternative Asset Managers
November 27, 2012 Asset Management Valuation
U.S. Traditional vs. Alternative Managers
• Public alternative managers continue to experience a discount relative to traditional managers
• EBITDA valuation discount reflects higher risk associated with performance fees, limited trading history of alternative managers, and fundraising risk associated with the private equity firms
• Earnings valuation discount reflects the factors above, plus greater usage of leverage in traditional managers
26
TEV / 2013E EBITDA Price / 2013E Earnings
Source: Capital IQ Note: TEV = Total Enterprise Value Traditional asset managers include AB, AMG, ART, BEN, BLK, CLMS, CNS, EV, FII, GBL, IVZ, JNS, LM, PZN, TROW, VRTS, WDR Alternative asset managers include APO, BX, CG, FIG, KKR, OAK, OZM
Historical Delta in Price / Earnings
7.7x
6.7x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
Traditional Asset Managers
Alternative Asset Managers
13.5x
8.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
Traditional Asset Managers
Alternative Asset Managers
-10.0x
-5.0x
0.0x
5.0x
10.0x
15.0x
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
Traditional Manager P/E minus Alternative Manager P/E
5.5x
November 27, 2012 Asset Management Valuation
U.S. vs. European Managers
• For traditional managers, U.S. valuations currently exceed European managers due to perceived higher risk and lower growth profile of the European market
• For alternative managers, European valuations exceed U.S. managers due to more established shareholder bases, longer track record in the public market, and greater composition of hedge funds
27
Price / 2013E Earnings – Traditional Price / 2013E Earnings – Alternative
Source: Capital IQ
13.5x
12.0x
0.0x
5.0x
10.0x
15.0x
U.S. Traditional European Traditional
8.0x
12.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
U.S. Alternative European Alternative
November 27, 2012 Asset Management Valuation
$14.6
$8.4 $8.0 $7.7
$12.3
$21.3 $31.0
$13.5
$28.7
$8.5 $9.5
$1.1
14.0x
12.3x 12.0x 12.4x 13.1x
14.1x
11.4x 10.3x
8.6x
11.1x
9.4x
NA
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012
Med
ian
EB
ITD
A M
ult
iple
To
tal T
ram
sact
ion
Vo
lum
e ($
B
N)
Transaction Value Median EBITDA Multiple Paid
Global Asset Management M&A Activity • Recent transaction volumes and valuations trail pre-crisis levels
• Downward trend in valuation reflects sector headwinds and overall quality of businesses transacted
28
$797
$508 $349 $556
$1,092
$2,057
$1,337 $1,610
$2,653
$364 $575 $80
113 113
82
108 11097
8895
55
42
25
4
0
20
40
60
80
100
120
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012
To
tal N
um
ber
of T
ran
sact
ion
s
To
tal A
UM
Acq
uir
ed (
$ B
N)
AUM Acquired Total # of Transactions
Total Number of Transactions and AUM Acquired
Total Transaction Volume and Median EBITDA Multiples
Includes BlackRock /
BGI transaction
Source: Capital IQ, Company Filings Note: YTD reflects 1H 2012.
Lack of blockbuster
transactions and market
volatility have reduced
AUM acquired
November 27, 2012 Asset Management Valuation
Key Transaction Trends
29
Long Term Trends M&A Valuation Trends
• Consolidation driven by rising costs associated with distribution access and scale efficiencies
• Separation of alpha and beta products driving demand for hedge funds and index products / ETFs
• Disaggregation of manufacturing and distribution causing unbundling of captive asset managers
• IPO market remains active but volatile
• Public market multiples converging around the median as market has rallied
• Since 2007, there has been a clear re-valuation of the asset management businesses
• Valuations for control deals have migrated to high single digit multiples
• Highly dependent on quality of the franchise
Example Transactions Driven by Key Trends
Consolidation Global Product Platforms Disaggregation
Asia-Pacific
November 27, 2012 Asset Management Valuation
Conclusion
November 27, 2012 Asset Management Valuation
Conclusion
31
• Difficult to generate organic growth in today’s market
• Limited net flows outside of fixed income, emerging market, and passive products
Challenging Market
Environment
• Traditional products face stiff competition from passive and alternative products
• Commoditization of beta and demand for advice shift power towards distributors
Shifting Industry Structure
• Valuation reflects the intrinsic value of the firm plus market and situational factors
• Valuation is quality dependant; qualitative assessment guides quantitative analysis
Valuation Analysis
• Challenging growth environment keeping current valuations below historical levels
• Diversified, scaled, and growth-oriented firms command stronger valuations
Valuation
Trends
• M&A activity limited by uncertainty, bid/ask spread, and competing priorities Transaction
Activity
November 27, 2012 Asset Management Valuation
LOS ANGELES
The Plaza at Continental Park 2141 Rosecrans Avenue, Suite 5150 El Segundo, CA 90245 United States of America Tel: 00.1.310.414.6160
PHILADELPHIA
Radnor Financial Center 150 N. Radnor Chester Road, Suite A200 Radnor, PA 19087 United States of America Tel: 00.1.610 995 9660
32