Magazine article American Banker

How Banks Have Used M&A to Build Fund Business

Magazine article American Banker

How Banks Have Used M&A to Build Fund Business

Article excerpt

Banks have relied heavily on the conversion of trust assets and the "redirection" of maturing certificates of deposits to grow their mutual fund groups.

Those channels are starting to dry up, forcing banks to seek alternatives.

Banks are beginning to exhibit a sense of urgency to build fund assets, and rightly so. Bank-managed funds are well below the industry average in assets per fund across all fund categories. For example, the average size for bank-managed taxable fixed-income mutual funds is around one-third the industry average for the same category.

Increasingly, banks are looking to acquisitions of mutual fund sponsors and institutional money managers as a way to bring assets into their fold. Not all of these acquisitions are pure asset plays, however. Strategic considerations are also a motivation.

For example, acquisitions may allow banks to augment product offerings, bring management expertise in-house, access distribution channels, or gain brand name recognition.

There are a number of ways to value M&A transactions involving investment management firms. Two common ones are the percentage of assets method and the revenue multiple method.

Valuation based on percentage of assets provides a rough benchmark, but does not give any real intelligence about the profit potential of the transaction. The revenue-multiple method compares the annual management fees from the assets managed to the purchase price. This brings significantly more intelligence to the analysis.

The majority of recent M&A transactions have fallen within a band of 2% to 4% of assets and two to five times revenue. …

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