Fund firms head for the chop as banks eye margins

ZURICH/LONDON (Reuters) - The likely $12 billion sale of Barclays Global Investors (BGI) to BlackRock (BLK.N) is set to drive industry consolidation, with private equity and pure play firms alike eyeing bargains.

The trend appears to be gaining ground, with the Financial Times on Wednesday reporting that Lloyds Banking Group (LLOY.L) was in talks to sell part of Insight Investments in a management buyout backed by private equity and trade buyers.

"Banks, even five years ago, in the main, regarded asset management as a core activity. In 2009, you have to conclude that few of them still do," said Kevin Pakenham, managing director of investment bank Jefferies Putnam Lovell.

Rival asset managers and private equity firms are lining up to buy assets at bargain prices as fund houses, grappling with lower profits and outflows, go under the hammer.

Some owned by banks and insurers are ending up on the block as cash-strapped owners seek to focus on core strengths and hive off low-margin asset management units that lack the scale to generate good returns.

"This is the first time that there have been more fund managers up for sale than buyers," said Martin Gilbert, chief executive of Aberdeen Asset Management (ADN.L), which recently acquired a chunk of Credit Suisse's (CSGN.VX) funds business and bought Deutsche Bank's UK business in 2005.

Pakenham sees quoted, independent fund firms as the strongest consolidators, citing the Aberdeen-Credit Suisse deal. F&C (FCAM.L) and Schroders (SDR.L) are would-be buyers, he said.

PRIVATE EQUITY

After a lull in M&A activity through much of a global financial crisis, private equity -- particularly U.S. firms -- will likely buy up asset management units from banks, particularly in bigger deals, while pure play fund firms pick up smaller businesses.

Investors like J.C. Flowers, Blackstone and TPG are possible buyers, said Robin Johnson, corporate partner at international law firm Eversheds in London.

Exane BNP Paribas analyst Elie Darwish said: "It suits the kind of investment strategies these companies have. It doesn't consume capital and private equity has the know-how to brush up what they acquire and achieve critical mass before selling it."

In May, Lloyds said the terms of a state-backed plan to insure its riskiest assets might alter, and regulators could force it to make disposals.

Pakenham said: "The more distressed the bank, the more likely it's going to be to move to a sale." Other institutions with government backing, like Goldman Sachs (GS.N), RBS (RBS.L) and Commerzbank COMM.UL, will also likely be forced to sell fund and other units to boost capital, he said.

Johnson said the trend over the next 18 to 24 months would be for financial institutions to spin off various parts.

"Banks will say this is to create shareholder value, but actually it's what clients want," he said.

Switzerland's Julius Baer (BAER.VX) last month decided to spin off its asset management operations [ID:nLK568689], a move investors welcomed as shielding its cash-generating businesses from troubled hedge fund arm GAM and boosting shareholder value.

Earlier this year, Societe Generale (SOGN.PA) sold its UK fund arm to hedge fund firm GLG (GLG.N).

"With traditional management, which has falling sectoral assets under management, banks could sell assets that don't have critical size. This is not necessarily the right strategy with alternative investments," said Darwish.

UBS -- struggling to stem client outflows after its image took a hit from billions in writedowns and a state bailout -- could mull sales, as could other banks worried about poor investment returns, Sarasin analyst Rainer Skierka said.

"Reputational damage could also be an issue. This is true of Credit Suisse and UBS. You could see how many outflows there were from their asset management," said Skierka.

BOUTIQUES/BEHEMOTHS

Julius Baer's spin-off of its asset management operations is a sign of things to come for the banking industry as a whole, said Johnson: "We will be left with smaller, more focused financial institutions at the end of it all."

Aberdeen's Gilbert said there will be fewer asset managers in three years' time and as a result, the survivors are likely to have more assets under management.

"Typically global asset managers and boutiques have the business models and strength to weather the current environment. Mid-size asset managers where diseconomies of scale exist are perhaps the ones most at risk," he said.

(Additional reporting by James Molony; Editing by Andrew Macdonald and Sitaraman Shankar)