March 3, 2014 / 4:17 PM / 4 years ago

Fitch: More Blending Likely for Asset Manager Platforms

(The following statement was released by the rating agency) CHICAGO, March 03 (Fitch) The potential for increased equity valuation multiples and better access to retail investors could lead alternative asset managers (AAMs) to look for more opportunities to acquire their traditional manager counterparts, according to Fitch Ratings. At the same time, traditional managers are likely to see broader alternative product offerings and asset diversification as worthy objectives, driving an increasing focus on the blending of alternative and traditional investment platforms. The largest publicly traded traditional managers, including BlackRock, Franklin Resources, and Invesco, continue to trade at higher P/E multiples than the largest publicly traded AAMs such as Blackstone, Carlyle and KKR, suggesting that equity valuation considerations may sway AAMs to become more acquisitive in the traditional asset management space. Fortress's acquisition of Logan Circle Partners, a traditional fixed-income manager, in 2010 is one of the notable examples. In addition, AAMs could undertake acquisitions of traditional managers as a way to quickly gain access to large scale distribution to retail investors, an area which has become a critical focus for growth, given the continuing shift in retirement plans to defined contribution from defined benefit. However, we believe that the move by alternative managers to access retail investors comes with material reputational risk. The sophistication of retail investors varies widely. Complicated fund terms, high fees and/or underperformance could therefore draw regulatory scrutiny and potentially hurt firms' ability to raise capital. In addition, fees based on net asset value (NAV) rather than committed capital could lead to revenue pressure and more volatility. For their part, traditional asset managers see product expansion, asset diversification and access to institutional investors with long-dated liabilities as factors supporting a move into the alternative space. Higher base management and incentive/performance fees are also attractive considerations for traditional managers. BlackRock's acquisition of Swiss Re Private Equity Partners, a fund of PE funds, in 2012, and MGPA, a real estate PE advisor, in 2013, and Franklin's 2012 acquisition of a majority stake in K2 Advisors, a fund of hedge funds reflect these trends. Still, more blending of asset manager platforms is not without risk. Beyond the regulatory and revenue risks faced by AAMs, traditional managers could see greater balance sheet usage resulting from co-investments and seed capital. They could also face new regulatory hurdles, particularly given the need to manage liquid alternative products. Lastly, there may be distinct cultural differences between the traditional and alternative asset management firms, which would need to be carefully managed to ensure a smooth integration of one platform into another. Contact: Mohak Rao, CFA Director Financial Institutions +1-212-908-0559 Meghan Neenan, CFA Senior Director Financial Institutions +1-212-908-9121 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch Ratings, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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