UPDATE 1-Fund manager unit sales, mergers seen rising in '09

(Adds comment from banker interview, byline)

By Joseph A. Giannone

NEW YORK, Jan 12 (Reuters) - The brutal market conditions of 2008 are expected to yield a bumper crop of asset management company deals this year, including mergers among hard-hit fund managers and more private-equity buyouts, investment bankers at Jefferies Putnam Lovell said on Monday.

After more than 20 years of snapping up money managers, commercial banks and insurers are expected to put their investment divisions on the block to raise cash and simplify. Meanwhile, hedge fund firms battered by volatile markets and redemptions are seen combining forces.

"The most active buyers over the past decade, namely commercial and investment banks and insurance companies, are now becoming sellers," said Aaron Dorr, a New York-based investment banker at Jefferies Putnam Lovell, a unit of Jefferies Group (JEF.N).

Dorr, in a brief phone interview, said one example of this trend is struggling insurer American International Group (AIG.N), which is expected to put many of its investment businesses on the block to raise much needed cash.

More banks and insurers are also considering strategic partnerships for their money management units, Dorr said.

Citigroup (C.N) and Merrill Lynch in recent years exchanged their asset manager arms for businesses or shares in the expanded investment firm.

Dorr also expects hedge fund firm to consolidate, pooling capital and cutting costs after the industry's worst year in decades.

"The changes hedge funds are going through are enormous, in terms of the redemptions," Dorr said. "We expect to see survival-mode transactions."

DEAL VOLUMES WERE DOWN

When measured by deal value, fund manager deal activity fell dramatically to $16.1 billion last year from $52.1 billion in 2007, with only three transactions exceeding $1 billion.

Bankers remained busy, though, based on the number of deals and actual assets. Last year was the second most-active year on record in global asset management with 217 deals, compared with 242 in 2007.

The industry also saw its second-best year in terms of assets under management, with $1.99 trillion transferred through deals last year. That was on par with assets sold in 2007 and second only to the record $2.65 trillion of assets moved in 2006.

This trend will help companies that focus on money management, Dorr said. "We expect pure-play asset managers and private equity firms to be the biggest beneficiaries of this massive reshaping of the industry," he said.

Distressed sales dominated the M&A scene in the second half of last year, Jefferies said, with about two-thirds of all deal activity attributed to divestitures.

In recent months, bankrupt Lehman Brothers (LEHMQ.PK) sold Neuberger Berman to its managers, Credit Suisse (CSGN.VX) sold some funds businesses to Aberdeen Asset Management and Allianz (ALVG.DE) bought Commerzbank's (CBKG.DE) Cominvest unit.

Jefferies also forecasts a big jump in fund manager buyouts by private equity firms. Buyouts slumped in 2008, with these cash-rich firms accounting for only 10 percent of announced deal value after credit markets shut down.

"Asset managers have a (profit and loss) problem; they don't have a balance sheet problem," Dorr said, which will make them attractive to buyout firms. "Private equity is looking to deploy capital. Bank financing is shut, but they will still look at deals. The pricing comes down." (Reporting by Joseph A. Giannone; Editing by Brian Moss, Richard Chang)