Alternative asset management deals get regulatory boost

NEW YORK (Reuters) - Alternative asset management deals may outpace traditional fund manager transactions this year for the first time ever, as regulatory pressures prompt banks to shed hedge fund and private equity assets, a new study shows.

Alternative asset manager deals, which included divestments by such banks as Citigroup Inc C.N and Bank of America Corp BAC.N, more than doubled to 52 in the first half of the year, according to a report by Freeman & Co released on Monday.

Such deals have already exceeded 31 transactions in the traditional asset management space in the first half of 2010, Freeman said.

Alternative manager deals should exceed 100 this year, with acceleration in the second half due to U.S. financial reform legislation and international regulatory initiatives, according to Freeman, an independent advisory firm focused on the financial services sector.

In contrast, traditional manager deals may only reach 70-75 transactions in 2010, Freeman predicts.

“There is some real regulatory pressure that’s causing transaction that you probably wouldn’t see otherwise,” Freeman Chief Operating Officer Eric Weber said.

These deals have also received a boost as managers come under pressure to consolidate to increase scale and manage costs, especially as fund sizes have shrunk due to losses during the financial crisis, Weber said.

“You have a fund that’s gone from $2 billion to $1 billion, and they are like, ‘Wow, maybe we should think about partnering,’” Weber said.

The uptick in deals is also a sign that alternative asset portfolios are increasingly being seen as a necessary part of a diversification strategy, Weber said.

“You probably want to have some part of your strategy address your clients’ demands for alternative asset products,” Weber said. “It’s another marker that alternatives are here to stay.”


The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, restricts banks from proprietary trading and places limits on the size of private equity or hedge fund investments.

Some U.S. banks have been shedding assets. Last month, media reports said Morgan Stanley MS.N was planning to spin off hedge fund unit FrontPoint Partners.

Earlier this summer, Citi agreed to sell its private equity unit to StepStone Group LLC and Lexington Partners. Bank of America was shedding a $1.2 billion commitment to funds managed by Warburg Pincus LLC WP.UL and spun off a $1.9 billion portfolio of private equity investments.

Despite the activity, though, overall deal volume in the sector was depressed in terms of assets under management, Freeman said.

Assets under management that changed hands fell to $417 billion in the first half of this year from $2.7 trillion a year ago and is on pace to be much lower than in the past five years, as the large transformational deals become scarce, Freeman said.

Editing by Anshuman Daga