Opportunities in Asset Management

Copyright © 2013 MSF Enterprises, LLC Copyright © 2013 MSF Enterprises, LLC

MSF Enterprises, LLC

OPPORTUNITIES IN

ASSET MANAGEMENT

Copyright © 2013 MSF Enterprises, LLC

Table of Contents

Section Page

Introduction 3

Global Capital Markets 4-12

Evolving Asset Management Industry 13-19

Deal Activity 20-27

2


Introduction

3

The financial services landscape has been growing substantially since 2008 as wealth management firms, mutual funds, ETFs and alternative investment groups have rallied and returned to pre-financial crisis asset levels. The businesses themselves have become stronger, with better product diversification and improved management teams. Now the industry is in a cyclical pattern where scale, breadth and vision will be the critical factors over the next five years that decide which firms become the next industry bellwethers. Currently, there are 66 publicly-traded asset management firms globally. The largest firms top out in the trillions and scale down to $20B+ in AUM. We suspect that over the next decade we will see the number of publicly-traded firms triple as many larger private firms ($20B+) move toward public structures to create higher valuations and provide succession planning for their managing members. Scale is becoming the most important factor for long-term success in the financial services industry. Money managers not only have to generate returns for their investors, they are now expected to grow and increase the value of the business itself. Necessary components of growing an asset management business include developing new products, designing investment structures to suit a range of investor needs and expanding the firm’s global distribution network. By placing greater emphasis on developing the business as a whole, asset management firms can uniquely position themselves to create long-term value. With that said, firms can no longer be content with reaching $1B in AUM - “$10B and beyond” is the new hurdle to become a major player in the industry.


Global Capital Markets

4


Size of the Global Financial Market

5 Source: McKinsey Institute, BCG

$225 Trillion: Size of Global

Financial Markets

Global AUM (in $T)

$58 Trillion: Size of Global

Market for Managed Assets

Global Stock of Debt and Equity Outstanding ($ trillion, end of period, constant 2011 exchange rates)


US Europe

South America

South Africa

Asia MENA

SE Asia

Russia

Australia

Fund sponsors globally catering to an investor base of public and private pension funds, sovereign wealth funds, endowments, foundations, banks, family offices and retail clients are now looking for more cross-border opportunities. Firms from the US, Canada, Europe, MENA, Japan, Asia-Pacific and South America are now in play to create the next global asset management firm.

Looking at the World

6


Largest Global Money Managers

7

Rank Asset Management Company Country AUM (US$bn)

1 BlackRock Inc. US $3,791.59

2 Vanguard Group US $2,215.22

3 State Street Global Advisors US $2,086.20

4 Fidelity Investments US $1,888.30

5 PIMCO US $1,624.35

6 JP Morgan Asset Management US $1,426.40

7 BNY Mellon Asset Management US $1,385.86

8 Deutsche Asset & Wealth Management Germany $1,244.44

9 Prudential Financial US $1,060.25

10 Capital Research & Management Co. US $1,045.57

11 Amundi France $959.79

12 Goldman Sachs Group US $854.00

13 Franklin Templeton Investments US $781.77

14 Northern Trust US $758.94

15 Wellington Management Co. US $757.73

Source: Pensions & Investments

*Rankings as of 12/31/2012

$33 Trillion: Approximate Size

of 25 Largest Asset Managers

Copyright © 2013 MSF Enterprises, LLC Copyright © 2013 MSF Enterprises, LLC Copyright 2011 MSF Enterprises, LLC

8

Top 20 Hedge Fund Managers: Past and Present

1 Bridgewater Associates $83,300

2 JPMorgan Asset Mgmt $54,800

3 Brevan Howard Asset Mgmt $40,000

4 BlueCrest Capital Mgmt $35,300

5 Och-Ziff Capital Mgmt $31,900

6 Man Group $29,600

7 Baupost Group $26,700

8 BlackRock $26,635

9 Winton Capital Mgmt $25,700

10 D.E. Shaw & Co. $23,400

11 Lone Pine Capital $22,000

11 Renaissance Technologies $22,000

13 Elliott Mgmt Corp $21,500

14 AQR Capital Mgmt $20,300

15 Credit Suisse Hedging-Griffo $19,985

15 GAM $19,600

17 Viking Global Investors $19,400

18 Davidson Kempner Capital Mgmt

$18,590

19 Farallon Capital Mgmt $18,400

20 Adage Capital Mgmt $18,360

1 JPMorgan Asset Mgmt $33,087

2 Goldman Sachs Asset Mgmt $32,531

3 Bridgewater Associates $30,210

4 D.E. Shaw Group $27,300

5 Farallon Capital $26,200



8 Barclays Global Investors $18,953

9 Man Investments $18,800

10 ESL Investments $17,500

11 GLG Partners $15,833

12 Tudor Investment Corp. $14,850

13 Citigroup Alternative Inv. $14,081

14 Lansdowne Partners $14,000

15 Campbell & Co. $13,600

16 Atticus Capital $13,500

17 Caxton Associates $13,500

18 Citadel Investment Group $13,400

19 Cerebrus Capital Mgmt $12,800

20 Moore Capital Mgmt $12,500

1 Moore Capital Mgmt $8,000

2 Farallon Capital $7,794

3 Andor Capital Mgmt $7,500

4 Maverick Capital $7,500

5 Citadel Investment Group $7,150

6 Angelo, Gordon & Co. $7,000

7 Soros Fund Mgmt $7,000

8 Pequot Capital Mgmt $6,500



11 Caxton Corp. $5,500

12 HBK Investments $5,491

13 Chilton Investment Co. $5,000

14 Duquesne Capital Mgmt $5,000

15 ESL Investments $5,000

16 Highfields Capital Mgmt $5,000

17 Tudor Investment Corp. $4,946

18 Highbridge Capital Mgmt $4,200

19 Perry Capital $4,137

20 Man Investments $4,000

2001 2006 2013

Rank Firm AUM [$M] Rank Firm AUM [$M] Rank Firm AUM [$M]

Source: Institutional Investor, Bloomberg Markets


$37.9B: Combined AUM of Top 5 Hedge Fund Managers in 2001

$245.3B: Combined AUM of Top 5 Hedge Fund Managers in 2013


Global Equity and Bond Markets

9

Source: World Federation of Exchanges, Morgan Stanley, Bank for International Settlements, Thomson Reuters, Barclay’s Capital

Size of US IG and HY Corporate Bond Markets

Regional Distribution and Total Market Capitalization of Global Bond Market

$99.5 Trillion: Size of Global Bond Market

$54.6 Trillion: Size of Global Equity Market


Alternative Asset Classes

10

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010 2011

Trill

ion

s o

f U

SD

Size of Global Alternatives Market

Source: McKinsey Institute, Managed Funds Association

CAGR 2005-2011 Alternative Assets: 14.2% Traditional Assets: 1.9%

$6.5 Trillion: Size of Global Alternatives

Market

$2.3 Trillion: Size of Global Hedge Fund

Market

Estimate of Hedge Fund Assets, Net Asset Flows and Number of Funds


Alternative Asset Classes

11

Private Equity Assets Under Management

Private Equity AUM by Fund Type (as of 9/2012)

$3.3 Trillion: Size of Global Private Equity

Market

Source: Preqin


Registered Investment Companies (RICs)

12

Total Assets in Mutual Funds, Closed-End Funds, ETFs and UITs

Private Equity AUM by Fund Type (as of 9/2012)

$14.7 Trillion: Size of Global Retail Market

Structures

Closed-End

Mutual funds1Funds ETFs2

UITs Total3

1995 $2,811 $143 $1 $73 $3,028

1996 3,526 147 2 72 3,747

1997 4,468 152 7 85 4,712

1998 5,525 156 16 94 5,790

1999 6,846 147 34 92 7,119

2000 6,965 143 66 74 7,247

2001 6,975 141 83 49 7,248

2002 6,383 159 102 36 6,680

2003 7,402 214 151 36 7,803

2004 8,095 253 228 37 8,613

2005 8,891 276 301 41 9,509

2006 10,398 297 423 50 11,167

2007 12,001 312 608 53 12,975

2008 9,604 184 531 29 10,348

2009 11,113 224 777 38 12,152

2010 11,832 238 992 51 13,113

2011 11,627 243 1,048 60 12,979

2012 13,045 265 1,337 72 14,719

3 Total investment company assets include mutual fund holdings of closed-end funds and ETFs.

2 ETF data prior to 2001 were provided by Strategic Insight Simfund. ETF data include investment companies not registered

under the Investment Company Act of 1940 and exclude ETFs that invest primarily in other ETFs.

1 Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute. The

data do not include mutual funds that invest primarily in other mutual funds.

*Source: Investment Company Institute, Strategic Insight Simfund


The Evolving Asset Management Industry

13


14

60 Year History of Asset Management

The complex art form of investment management has been evolving for decades, with market developments forcing investors to seek out alternative methods to achieve outperformance.


Correlation: Expanding Asset Classes

15

The Modern Portfolio Theory (MPT) asset base of bonds and equities has only limited diversification benefits, particularly given that correlations increase during crisis periods.

Asset Class Correlations from 2004 to 2006 (2007 to 2008 in Parenthesis)

Traditional MPT Assets

Endowment Asset Types (Alternatives))

Increasing the number of asset classes and diversifying investment strategies can reduce portfolio correlation and volatility…

*Source: Szado (2009)


Endowment v. Traditional Model

16

Risk/Return Profile for portfolio with 100% Traditional Assets to 100% Alternative Assets

(June 2001-December 2011)

Portfolio drawdowns under the Endowment Model are typically lower in magnitude than drawdowns from traditional asset allocation models. This reduced market sensitivity generally enables alternative asset strategies to outperform traditional strategies over the long-run.

*Endowment performance includes Harvard, Yale, Princeton and Stanford, with fiscal year ending June

**60-40 allocation composed of 60% SPX and 40% Lehman Brothers/Barclays Aggregate Bond Index, with annual rebalancing

The New Efficient Frontier

50% Hedge Funds 50% Managed Futures

45% Hedge Funds 45% Managed Futures 5% Stocks 5% Bonds

50% Stocks 50% Bonds

Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

*Source: NACUBO-Commonfund, Yahoo! Finance

Indexed Performance Comparison: Endowments v. S&P 500 v 60/40 Allocation


The Endowment Model

17

• The Endowment Model uses every investable asset class to achieve full diversification through non-directional alternative strategies

• Utilize alternative assets with low expected correlation to the market

– Private Equity Firms—

• Buyouts of established firms with the long-term goal of generating returns from leverage and increases in operating efficiency; PE may provide limited diversification over equities due to common fundamental links between the asset classes

– Venture Capital Groups—

• Early stage investments that seek to capitalize on high growth opportunities, while taking on greater risk due to operating uncertainty and longer investment horizons

– Hedge Funds—

• Range of strategies that seek to take advantage of special opportunities and exploit inefficiencies in the market, often with the goal of producing absolute returns

– Real Assets—

• Investments with high correlation to inflation that often produce a high current yield, including real estate, natural resources, TIPS and other commodities

Endowment Model Advantages Potential Setbacks

Increased Diversification Difficult to Access Strategies

Reduced Volatility High Cost of Execution

Reduced Drawdowns Lack of Liquidity


18

Endowment Model Allocation

Endowment Models Feature a 20-60% Allocation to Alternatives

Domestic Equities

12%

Fixed Income 9%

International Equities

16%

Alternative Strategies

60%

Cash & Equivalents

3%

$1B+ Endowments

Domestic Equities

32%

Fixed Income

20% International

Equities 18%

Alternative Strategies

23%

Cash & Equivalents

7%

$50-100MM Endowments

Larger endowments allocate a greater portion of their assets to alternative strategies, yet smaller funds can still benefit from an allocation to alternatives even when the strategy is executed on a smaller scale

Asset Allocations for Fiscal 2011

*Source: NACUBO-Commonfund

Alternative Allocation for Top Endowments: • Absolute Return 20% • Private Equity 15% • Real Assets 25%


Asset Flows and Investor Allocation

19

Asset Management Industry Average Net Flows (% of AUM)

Shifts in Investor Allocation Over Time

Investors have steadily reduced allocations to traditional asset classes (“active core”) while dedicating more capital to alternatives and passive investments

Source: BCG

The asset management industry has experienced a sharp drop in net flows since 2007

At the same time, certain asset classes have demonstrated resilient growth as investors shift allocations


Deal Activity

20


Asset Management Transaction Environment

21

Total Number of Transactions and Acquired AUM

Asset Management Deals in 2012

Asset Management Transactions 143

Aggregate Disclosed Deal Value $8.5B

Aggregate AUM Transacted $1.5T

IPOs 2

Total Number of Public Asset Managers 66

MBOs & PE Sponsored Transactions 29

Minority Stake Transactions 37

Cross-Border Transactions 44

Alternative Manager Sales 48

Median Forward P/E Multiple (Publicly Traded Managers in U.S.) 14.5x

Median Run-Rate EBITDA Multiple (Global Private Transactions) 8.8x

Source: Sandler O’Neill


Asset Management Industry Multiples

22 Source: Sandler O’Neill, Freeman & Co.

Traditional Firms: Artio, BlackRock, Calamos, Cohen & Steers, Eaton Vance, Federated Investors, Franklin Resources, GAMCO, Invesco, Janus, Legg Mason, Manning & Napier, Pzena, Schroders, SEI Investments, T. Rowe Price, Waddell & Reed, Virtus

Alternative Firms: Apollo, Ashmore, Blackstone, Carlyle, Charlemagne, Fortress, KKR, Man Group, Oaktree, Och-Ziff, Partners Group, Polar Capital

LTM P/E

1-Year

Forward P/E

EV / LTM

EBITDA

EV / Forward

EBITDA

2011 2012 2011 2012 2011 2012 2011 2012

U.S. Traditional Asset Managers 12.4x 15.6x 12.1x 14.5x 6.1x 8.3x 6.1x 7.8x

U.S. Alternative Asset Managers 12.1x 9.5x 6.4x 7.7x 10.7x 9.8x 5.4x 7.0x

U.K. Traditional Asset Managers 11.0x 14.7x 10.9x 12.0x 6.2x 8.4x 5.8x 7.2x

U.K. Alternative Asset Managers 14.8x 15.6x 12.8x 13.0x 7.9x 8.6x 7.4x 6.9x

Median Trading Multiples for Quoted Fund Managers

Asset Manager EBITDA Multiple: Range and Average Over Time

Traditional Firms – EV to LTM EBITDA Alternative Firms – EV to LTM EBITDA


Asset Management Deal Volume Transactions AUM by Type

• M&A for Alternative Asset Managers has not yet returned to pre-recession levels

• M&A for Funds of Hedge Funds and Private Equity Firms showed strength in 2012

• In terms of transacted AUM, 2012 volume was more than 60% below the 2009 peak

• While down from recession and pre-recession levels, transacted AUM is up over 50% from 2010

Source: Sandler O’Neill 23

Alternative Asset Manager Transaction Activity


M&A: Looking Forward

24 Source: Freeman & Co.

After increasing 22% in 2012, asset management M&A activity is on track to rise another 12% in 2013

29 transactions have closed in the U.S. in 2013 (as of 4/30) 26% increase from same period 2012

•Alternatives

•Global and International Strategies

•Passive Investments

•Retail Alternatives

•Solutions

Asset Management Growth Areas

Global Asset Management Transactions (as of 4/30/13)


Effects on Valuation

25

Start 2013

Firm AUM $15,000.00

Average Fees 1.50%

Revenue $225.00

Expenses $144.00

EBITDA $81.00

Margin 36%

Multiple (x) 8.3

EV $672.30

Current

Worse Case Down Side

Cumulative Change

$9,000.00 -40%

1.50%

$135.00 -40%

$86.40 -40%

#DIV/0!

$48.60 -40%

36%

6.5 -21.7%

$315.90 -53%

Downside

Growth Goal Cumulative

Change

$13,000.00 -13.3%

1.50%

$195.00 -13.3%

$124.80 -13.3%

#DIV/0!

$70.20 -13.3%

36%

7.5 -9.6%

$526.50 -21.7%

Recovery

Assumptions • Asset manager with $15B in AUM experiences 40% decline in asset value • Expected EBITDA multiple declines as a result of the drawdown, reducing valuation by 65% • Even with AUM rebounding back to $13B, the business valuations remains 30% below pre-

drawdown levels

Key Takeaway: Several Factors Determine Valuation • AUM

• Stability and diversification of capital sources • Fee structure • EBITDA and EBITDA Margin • Valuation Multiple


Publicly Traded Managers: Performance and Valuation

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Relative Performance of Asset Management Firms

Source: Freeman & Co.


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Enterprise Value

Fund Performance

Distribution Operational

Efficiency

Firm Structure

Manufacturing

Building Firm Value Asset Management firms should focus more on utilizing

fundamental business principles as a guide for operations

• Product Manufacturing • Provide strategies and structures that meet the needs of a wide range of investors • Consider capacity constraints • Separately managed accounts, pooled investment vehicles, ‘40 Act products

• Operations • Efficiency of operational structure • Leveragability of systems and personnel

• Distribution • Investors by type and geography • Scalability

GOALS: Develop Distribution Channels, Grow AUM, Improve EBITDA, Expand Valuation Multiples


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