ASSET MANAGER DEALS:

//////////////////////////////////////////////////////////////// ASSET MANAGER DEALS: Trends in Asset Manager M&A Five-Year Empirical Deal Study Christopher S. Harrison Schulte Roth & Zabel LLP Negotiating any deal begins with knowing the market. Copyright 2015 by Bureau of National Affairs, Inc., Arlington, VA 22202

/////////////////////////////////////////////////////////// Often, the most effective argument at the negotiating table is that a proposal follows trends in the market, all the more so when backed up by numerical analysis. This paper combines expertise in asset manager transactions with a quantitative approach to produce a survey of the market trends for buying and selling stakes in asset managers.

ASSET MANAGER DEALS Trends in Asset Manager M&A Five-Year Empirical Deal Study Christopher S. Harrison Co-head of Asset Management M&A Schulte Roth & Zabel LLP New York City CONTENTS Introduction...1 Deal Drivers...1 More Deal Flow...2 Rise of Minority Deals...4 Deal Size...8 Changing Players...10 Global Trends...15 Methodology...18

/////////////////////////////////////////////////////////// THE NUMBER OF ASSET MANAGER DEALS HAS GROWN BY NEARLY 50% SINCE 2010.

INTRODUCTION The number of asset manager deals per year has grown by nearly 50% since 2010. 2014 was a tremendously busy year, with no sign of a slowdown in 2015. Asset management M&A is a specialty unto itself. These transactions often represent multiple deals in one: an acquisition, earn-out agreement, governance structure, retirement system, succession plan and commercial services contract. Every deal is unique in its facts, the business issues at stake, the economic trends in play and the personalities and negotiating tactics involved. Yet, in analyzing the data, a number of trends emerge. These findings stem from an unprecedented collection of information on over 1,800 deals worldwide, across a five-year period from 2010 through 2014. This paper provides a detailed analysis of those trends and flags key findings throughout. I trust that you will find this study pertinent in ascertaining today s market for asset management M&A and what the future of this field may hold. DEAL DRIVERS A few core drivers emerge: Consolidation Smaller asset management firms are being rolled up into larger institutions. Investment Minority stakes in asset managers are being acquired as financial investments. Several new funds have been formed for the purpose of buying minority stakes. Regulation Banks provided impetus to the market through 2012, as they sold divisions in light of regulatory shifts. Activity from banks has dwindled over the past two years, especially in the U.S. These drivers resulted in the following trends: Growing global market for asset manager deals. Rise of minority deals. Increasing number of non-traditional players. Bank activity has all but died out. Since 2010: 600+ Minority Deals 1,200+ Control Deals 1,800+ Worldwide Deals 1

More Deal Flow MORE DEAL FLOW The market for asset manager deals is growing. From The 2010 market through for 2014, asset the manager number of deals targeting is growing. asset managers From 2010 increased through steadily 2014, on a global the number basis. Cumulative of deals growth targeting the asset number of deals managers during that increased period reached steadily almost on a 50%. global basis. Cumulative growth in Focusing the number only on the of deals U.S. and during Europe, that the pattern period is essentially reached the almost same, 50%. though the increase in activity has been concentrated to some extent in 2011 and 2012, leveling off but remaining high during the last two years. In the rest of the world, the activity level continued to Focusing grow rapidly only during on the last U.S. two and years. Europe, the pattern is essentially the Despite same, steady though growth, the increase the spread in of activity deal flow across has been quarters concentrated has changed. to While some in 2010 the extent number in of 2011 deals and signed 2012, up was leveling roughly off even quarter-over-quarter, but remaining high more during and more the last deals are now two being years. announced around the end of the year. Asset Manager Deals (Global) 600 500 Deals per Year 400 300 200 100 0 2010 2011 2012 2013 2014 Asset Manager Deals 7 2

In many cases, that pattern has been driven by efforts to close deals by the end of the tax year (or prior to the next year s tax filing deadline) when tax rates are scheduled to increase. These patterns are discussed in more detail in the next sections. The increase in deal flow has not only come from all corners of the world, but also across both minority and majority deals. 100 90 80 Asset Manager Deals (Global Comparison) Deals per Quarter 70 60 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Asset Manager Deals (US/Europe) Asset Manager Deals (Non-US/Europe) US/Europe Deals (4Q Avg) Non-US/Europe Deals (4Q Avg) 3

RISE OF MINORITY DEALS Historically, majority deals have dominated the asset manager M&A market, and continue to represent Historically, majority deals have dominated the most deals today. asset manager M&A market, and continue to represent most deals today. While Minority the number deals: of majority the deals buyer has takes continued a to increase over the last several years, that stake in the asset manager which growth has to some extent stabilized and been outpaced does by not the grant growth them of minority control. deals. These include both strategic and financial transactions. While the number of majority deals has continued to increase over the last several years, that growth has to Minority deals: the buyer takes a stake in the some extent stabilized and been asset manager which does not grant them control. These by include the both growth strategic of minority and financial outpaced deals. transactions. Majority Majority deals: deals: the buyer the buyer acquires majority control (over 50%) of the target asset manager. acquires majority control (over These include spin-outs from larger institutions. 50%) of the target asset manager. These include spin-outs from larger institutions. 100% 90% 80% 70% Minority vs. Majority Deals (Global) Deals per Year 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 2013 2014 Minority Majority 9 4

The pace of minority deals has almost doubled over the last five years. In 2014, the number of minority deals grew by roughly 40% compared to 2013. In contrast, majority deals actually declined by around 5% in the same period. More asset managers, including less established asset managers, are finding that they are capable of raising capital through the sale of a minority stake in the current market. 50% 40% 30% 20% 10% 0% 50% 40% -10% 30% 2014 Growth 2014 Growth 20% Minority Deals Majority Deals 10% 0% -10% Minority Deals Majority Deals Deals per Quarter 35 30 25 20 15 Deals per Quarter 35 30 25 20 15 Minority Deals (U.S. and Europe) Minority Deals (U.S. and Europe) 10 10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q2 Q3 Q3 Q4 Q4 2010 2010 2011 20112012 2012 2013 2013 2014 2014 Minority Deals Minority Deals (4Q Avg) Minority Deals Minority Deals (4Q Avg) 5

Strong financial market performance has also played a role in widening the gap between buyers and sellers expectations of value. Managers who have performed well recently often have higher expectations for the value of their incentive fee streams. Buyers are often larger entities with institutional memories that reach back to the financial crisis and want to heavily discount incentive fees, in line with how the public equity markets discount less predictable incentive fees. While there has been fluctuating growth in the number of minority investments in South American, Asian, and African asset managers, much of the rapid growth in minority deals has occurred in the U.S. and Europe. 14 Minority Deal Buyers (U.S. and Europe) 12 Deals per Quarter 10 8 6 4 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 Asset Manager Non-Traditional Asset Manager (4Q Avg) Non-Traditional (4Q Avg) 6

Many minority deals have some strategic component to them. Most, however, are primarily a financial transaction. The founders of the target manager are able to take money off the table by monetizing a portion of the equity value of their management company. Several funds have recently been created for the sole purpose of taking minority stakes in various asset managers. These mostly U.S. and European funds are substantial, but are not the only buyers in the market. Despite a brief drop around 2011, asset manager platforms remain the most active buyers of minority stakes by a large margin. These are made up of both a large number of specialist players that are making acquisitions with house money as well as private equity funds raised for the purpose of pursuing minority deals. Financial institutions have demonstrated a sharp drop in buying activity over the last few years, and have drastically reduced the number of minority investments in asset managers. Before regulatory changes pushed banks out of much of the asset management market, many financial institutions pursued majority deals as part of a strategic growth plan. Since 2008, there have been only a few acquisitions of asset managers by banks, some of which pursued a strategic minority path. Non-traditional buyers, such as conglomerates and insurance companies, continue their slow but steady increase in activity in the minorityinvestment space. In most minority deals, the founders are selling existing equity, and getting capital gains treatment for the sale. Recently, more asset managers are pursuing strategic equity raises. In these transactions, the management company issues new shares, and the funds go onto the balance sheet. This is being done for a variety of reasons, including raising capital for acquisitions and expansion. Buyers have taken a range of approaches as to the liquidity of their minority stakes. On the one hand, a financial buyer will need to know that it can monetize its stake at some point. On the other hand, many buyers view themselves as long-term investors, planning alternative exit strategies such as an IPO. Senator Investment Group / Blackstone Strategic Capital In February 2014, Blackstone s new $3 billion fund, set up to acquire minority stakes in asset managers, acquired a stake in Senator Investment Group. Senator, a $7 billion event-driven hedge fund manager, explained their rationale for the transaction as allowing Senator to recapture substantial economics, to continue to re-invest in their infrastructure as well as reward and retain their partners and employees. 7

DEAL SIZE Majority Deals The size of majority deals is getting larger. The average assets under management (AUM) of targets in majority deals in the U.S. and Europe has grown significantly over the last five years, with a dip in average AUM at the end of 2014. Growth in average AUM has been driven in part by a number of particularly large headline majority deals, as well as growth in the average manager size in the industry generally. At the same time, the rise of minority deals has allowed many midsize managers that otherwise might have done a majority deal to select a minority sale transaction structure that fits their firm, avoiding a sale of control over the business. This has pulled some deals with smaller managers out of the majority deal sample set. Average AUM (Majority Deals) Billions $35 $30 $25 Average AUM $20 $15 $10 $5 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Average AUM Average AUM (4Q Avg) 8

Minority Deals The average AUM of minority deal targets is getting smaller. It used to be that only the largest managers had access to the investors looking for a capital transaction in the form of buying a minority stake. Now, smaller managers are able to interest this source of capital and are becoming increasingly attractive targets. The average AUM of managers engaging in minority deals in the U.S. and Europe dropped meaningfully throughout 2011 and 2012, and has stabilized at a lower level in 2013 and 2014. The drop in average AUM appears to be due to changes at both ends of the market. The largest deals in terms of AUM are being done less frequently. There are only a limited number of large, established managers and a handful of those managers have decided to start making acquisitions themselves. On the other end of the spectrum, financial buyers have become more comfortable doing deals with smaller managers, and some are even seeking them out for their additional upside potential. Average AUM (Minority Deals) Billions $50 $45 $40 $35 Average AUM $30 $25 $20 $15 $10 $5 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Average AUM Average AUM (4Q Avg) 9

ers CHANGING PLAYERS Sellers Asset managers making divestitures represent the most predominant type of seller in asset manager deals, representing about 50% of all deals worldwide. With some fluctuation in the number of deals year-over-year, the number of divestitures from asset managers has been in slight decline over the last five years. The end of 2011 through 2012 saw a rise in sales and spinouts by banks, as they responded to regulatory changes and higher capital requirements around the world. These sales have now dwindled, presumably as most asset management businesses owned by financial institutions that were at risk under the newly enacted regulatory regimes have already been divested. e Types of Sellers (Global, 2014) Strategic Partners / Blackstone In August 2013, Credit Suisse sold its Strategic Partners business to Blackstone. Strategic Partners primarily operates as a secondary private equity fund of funds and had, at the time of the sale, approximately $10 billion in assets under management. a Asset Manager Non-Traditional Bank. Strategic Partners / Blackstone 10 In August 2013, Credit Suisse sold its Strategic Partners business to Blackstone. Strategic Partners primarily operates as a secondary private equity fund of funds and had, at the time of the sale, approximately $10 billion in assets under management.

While not reflected in the data, there is some anecdotal evidence that banks are starting to consider buying stakes again, though these stirrings have yet to turn into actual deal activity. After all, asset management is a service business that is not capital intensive and that should not present a heightened regulatory risk or call for excessive capital requirements. More recently, an increasing number of deals have involved non-traditional sellers, such as conglomerates and insurance companies, a trend that has continued through the end of 2014. Taken together, these non-traditional sellers are becoming significant participants in the market. Sellers (Global) 70 60 Deals per Quarter 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Asset Manager Bank Non-Traditional Asset Manager (4Q Avg) Bank (4Q Avg) Non-Traditional (4Q Avg) 11

Targets While deals targeting hedge fund managers are often some of the largest and most prominent, they represent only around 10% of the market by volume. Deals to buy stakes in hedge fund managers have remained relatively flat, along with deals targeting venture capital and private equity fund managers. Traditional investment managers, such as wealth management platforms, in contrast, witnessed substantial volatility: heightened deal activity in 2012 followed by a significant drop for the subsequent two years. Targets (Global) 60 50 Deals per Quarter 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Hedge Fund Manager PE/VC Traditional Manager Hedge Fund Manager (4Q Avg) PE/VC (4Q Avg) Traditional Manager (4Q Avg) 12

Buyers Asset managers are the main buyers of other asset managers, representing the acquiring side in almost 60% of all deals during the five-year period covered by this study. Over the last three years, the trend of asset manager buyers consolidating the industry by acquiring smaller targets has continued, while leveling off in 2014. After disposing much of their asset manager portfolios on account of regulatory developments and capital requirements, deals with bank buyers have shrunk to a tiny fraction of the market after 2012. Funds, by contrast, have consistently represented around 10% of the buyers. Selected Buyer Types (Global) Deals per Quarter 80 70 60 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Asset Manager Asset Manager (4Q Avg) Non-Traditional Non-Traditional (4Q Avg) 13

Increasingly, pension funds, insurance companies, and other entities outside the traditional asset management industry have started buying more stakes in asset managers. In 2014, these non-traditional purchasers accounted for over a quarter of all asset manager acquisitions; in the second quarter of 2014, they comprised about a third of all asset manager buyers. For many years, pension funds have invested heavily into the funds of asset managers, and built up the infrastructure for doing so and evaluating the investment. Now, many pension funds have realized that they have excellent diligence teams and unique market insights into the relative performance and quality of managers. Some are beginning to use that talent to make acquisitions of minority stakes in asset managers. Nuveen Investments / TIAA-CREF In October 2014, TIAA-CREF, a national financial services organization, bought Nuveen Investments for $6.25 billion from Madison Dearborn Partners. Nuveen, a highly diversified asset manager focusing primarily on mutual funds, commodities and municipal debt, managed approximately $230 billion at the time. Nuveen itself had made several acquisitions in recent years, including a controlling stake in the $15 billion commodity fund manager Gresham Investment Management. 14

GLOBAL TRENDS Through the end of 2014, the most prominent targets continued to be asset managers in Europe and the U.S. Historically, the number of deals involving European asset manager targets has maintained a small but consistent lead over U.S. asset manager targets. While the European market has continued to dominate much of the growth in deal activity, U.S.-based managers have been expanding their share of transactions. 29% 40% 5% 22% 4% 15

U.S. asset managers are not the only ones increasing their share of the market in the last couple of years. Asian asset managers are more and more active, strengthening their share of transactions as well. Asian managers have represented more than 20% of the targets in every quarter since the end of 2012. In the fourth quarter of 2014, deals targeting asset managers based in Asia outnumbered acquisitions of U.S. managers. Selected Regions 60 50 Deals per Quarter 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 Africa Europe Africa (4Q Avg) Europe (4Q Avg) Asia North America Asia (4Q Avg) North America (4Q Avg) 16

Buyers in the U.S. and Europe also follow expected trends, with bank activity dwindling after 2012 in the face of greater regulatory burdens and non-traditional buyers capturing a much greater share of the market. Notably, asset manager buyers have a greater impact in the U.S. and European markets, as much of the activity from non-traditional buyers stems from Asia. 60 50 Asset Manager Buyers (U.S. and Europe) Deals per Quarter 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 Asset Manager Non-Traditional Bank (4Q Avg) Bank Asset Manager (4Q Avg) Non-Traditional (4Q Avg) 17

METHODOLOGY This paper analyzes data on over 1,800 majority acquisitions of and minority investments in asset manager targets announced between January 1, 2010 through December 31, 2014. The data were compiled and reviewed by attorneys at Schulte Roth & Zabel LLP. The data set excludes transactions (i) for which no information on the parties involved was available, (ii) which were subsequently cancelled, (iii) which were determined to be an internal restructuring or (iv) in which the target was incorrectly identified by the third party data sources as an asset manager. The findings described in this paper may not be representative of the broader M&A market and are not intended to be an exhaustive review of the surveyed transactions. The observations presented here are based solely on a review of publicly available information for the surveyed transactions. The views expressed in this paper are solely those of the author. A number of caveats apply to this and any review of transactions. Quantitative analyses vary meaningfully from study to study. Different results are generated by: Sample size. The smaller the sample, the more they can be influenced by outlier deals. Sample selection. Rarely do studies consider all available data. How they pick and choose affects the results. Period reviewed. Trends change, by definition. The period studied matters. Mix of deal types. Different deal types constitute their own market. More or less of one type skews the results. 18

/////////////////////////////////////////////////////////// Christopher Harrison is co-head of asset management M&A at Schulte Roth & Zabel LLP in New York City and an Adjunct Professor at New York University School of Law, where he teaches popular courses on negotiating M&A deals. Mr. Harrison has worked in all aspects of U.S. and cross-border M&A transactions, with a particular focus on asset manager M&A. In 2015, Mr. Harrison published Make the Deal: M&A Terms and the Market with Bloomberg BNA. Bringing behavioral finance, business and law together, the book provides a lucid analysis of how M&A deal terms work and interrelate and gives readers a clear sense for the realities of M&A, by providing a thorough market analysis for each deal point and showing what is at stake in a deal. Mr. Harrison s undergraduate training was in statistics and behavioral economics. He then studied law and economics at NYU School of Law. He can be reached at +1 212-756-2191 and christopher.harrison@srz.com.

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