Q&A With Northern Lights Ventures On Small Market Asset Management Plays

Since the financial collapse, buyout firms have been actively interested, strategically or for their portfolios, in large pieces of “too big to fail banks,” and other orphan asset management units. In addition to the sales of asset management units from Bank of America, Lehman Brothers, AIG and Barclays, industry experts predict a wave of consolidation for asset management that trickles down to the middle market and small market.

In recent months deals like Macquarie’s $428 million acquisition of Delaware Investments, Canadian insurer Sun Life Financial’s $326.1 million acquisition of  Lincoln National Corp further solidify that claim. In August, Guggenheim Partners acquired Claymore Group, a provider of ETFs, closed-end funds and unit investment trusts.

I spoke with Paul Greenwood of Northern Lights Ventures to learn more about deal activity at the lower end of the market. Based in Seattle, Northern Lights Ventures makes minority stakes in asset management firms from an evergreen fund.

peHUB: What’s the nature of the opportunities out there for buyout firms to invest in asset management?

Paul Greenwood: Over the last year we have seen more distressed opportunities than usual. Those are beginning to dissipate now. We’re starting to see bigger deals, and starting to see more teams in large organizations contact us about leaving those firms.

At the darkest hour of the economic crisis, you didn’t see many people wanting to spread their entrepreneurial wings. Now they feel that the worst is past. (Examples: Ex-UBS executive forming Singer Partners, another new firm called Beinville Capital,

pH: What’s your preference, the distressed deals or the money managers striking out on their own?

PG: We don’t invest in investment management turnaround situations, as we believe those are next to impossible in this industry. If the organization is broke, it means you need new people, a new investment process, and a new culture, and its hard to do that while maintaining the current book of business.

So we like MBOs. Or just growth capital deals. We’re seeing more MBO opportunities because a lot of big firms are trying to choose the direction of their asset management business, and some are willing to get rid of parts of it for reasonable prices.

pH: Do you compete with many other buyout firms for deals?

PG: Not really. The other firms focus at the largest end of the market. We’d rather buy smaller firms, and its not particularly capital intensive, so you can buy a stake in a decent-sized firm with a relatively small check.

pH: Why investment management?

PG: It’s one of the best legal businesses in the world, because investment management capital markets generally go up over time. That provides a nice top line growth even if there’s no new business. If the stock market goes up 10% on average, than revenues go up around that much. Most businesses don’t have that much organic growth baked into the business model. Secondly, the cost of new business in this business can be very low and can even approach zero.