It’s quite easy to do bad deals in asset management. Option one, overpay for a private capital business in the aggressive dash for growth. Option two, defensively merge your existing fund manager with a regional peer and botch the integration as you try to make savings. Against that backdrop, Nomura Holdings Inc.’s decision to acquire a cheap US public-markets manager with minimal overlap stands as an oddity. Maybe there’s some logic in buying what everyone else is trying to sell.
The investment industry’s well-known problem is that active fund management is trapped between low-fee passive funds and high-charging alternative strategies promising juicy returns like hedge funds and private equity. This “barbell,” as Oliver Wyman LLC’s Huw van Steenis named the phenomenon, isn’t easy to deal with if you’re already a big active player. Lately, it’s spawned acquisitions of private capital firms. BlackRock Inc. agreed to pay $13 billion for infrastructure investor Global Infrastructure Partners and $12 billion for private credit manager HPS Investment Partners LLC last year — high prices relative to the near-term fee income obtained.
Meanwhile, the existing private equity firms have been looking to diversify into infrastructure and private credit too. It’s been a fantastic time for founders of such alternative investment firms to cash in.
Conventional asset management tie-ups and joint ventures have also picked up — witness transactions involving insurer Assicurazioni Generali SpA, Natixis Investment Managers, Axa SA and BNP Paribas SA. Scale brings efficiency. The risks are culture clashes, client withdrawals and distraction. In the US, Invesco Ltd.’s 2019 acquisition of OppenheimerFunds hasn’t delivered for shareholders. In Europe, the merged Standard Life and Aberdeen Asset Management destroyed 80% of its market value.
Nomura’s agreement this week to pay $1.8 billion for the US and European asset management arm of Macquarie Group Ltd. has a lot to do with what’s happening in private equity. The Australian seller built the business through multiple acquisitions starting in 2010. But the fact is that Macquarie is synonymous with infrastructure. When BlackRock as well as Blackstone Inc. and KKR & Co. are coming for your core business, it makes sense to focus on that fight. Macquarie’s only remaining public market activities will be in its home market, where its name is a clear advantage.
The puzzle is why a Japanese bank is the buyer here. Sure, the deal grows Nomura’s managed assets around 30% to $770 billion. But the acquired business is overwhelmingly American; Nomura has no significant cost-saving opportunity. And active fund management isn’t a powerful growth engine.
Regulation is a nudge. Japan has wasted no time embracing the higher capital requirements for banks now being imposed following the 2008-2009 global financial crisis. That’s an incentive for the likes of Nomura to expand into “capital-light” asset management. In parallel, Japan is attempting to modernize its capital markets and investment industry, which has a bias towards domestic investment. The environment is conducive to Japanese financial firms importing investment expertise from abroad via mergers and acquisitions. Don’t be surprised if there’s more to follow.
If buying a foreign asset manager has logic, where and what? The US market’s size and homogeneity make it an attractive destination for acquiring investment clients, even if asset allocation is now shifting to Europe from the US. The remaining choice is whether to join the bidding frenzy in private assets or double down in public fund management, a buyer’s market.
BlackRock Chief Executive Officer Larry Fink can — probably — get away with high prices for private asset managers because his existing platform offers opportunities to grow his acquisitions. Chris Willcox, the former JPMorgan Chase & Co. exec who runs Nomura’s wholesale and asset management unit, doesn’t have that luxury. Bargain hunting for a conventional asset manager is therefore the less risky course.
Indeed, the Nomura-Macquarie deal underscores one compensating attraction of the active space despite the lack of growth: its profitability. Nomura says the business acquired has a “high operating margin.” Giants like BlackRock enjoy margins of 40%, while London-listed Schroders Plc’s are around 20%, according to Bloomberg data. Being based in Philadelphia rather than New York may help lower costs. While profits weren’t disclosed, the price, at 1% of managed assets, doesn’t seem excessive. Bloomberg Intelligence reckons it’s cheap.
So this seems to be a low-risk and not hugely strategic purchase whose main problem is growth rather than a messy integration. Nomura is reaching firmly for the shaft of the barbell. Much will depend on cross-selling the enlarged unit’s products between the expanded customer base. Good luck with that.
The next temptation will be to use this as a platform for the kind of pricey private capital deal Nomura sensibly chose not to do on this occasion. Coincidentally, HPS was part of Willcox’s empire when he ran JPMorgan’s asset manager before it was carved out. The valuations of private capital firms may well have peaked. Still, Willcox would be well advised to prove the success of this acquisition before trying a radical encore.
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