New Business Opportunities for Boutique Asset Managers
New Business

New Business Opportunities for Boutique Asset Managers

Asset management merger and acquisition activity in the U.S. was valued at some $28 billion in 2020, the highest deal value in the sector since $29 billion in 2000, according to data from Dealogic. But if the late burst of activity in 2020 was any indication, it will be difficult for some industry players to resist acting quickly for fear of being left behind. Analysts and executives expect the wave of consolidation to carry into 2022 as sheer scale has become a necessity for fee-pressured investment managers looking for an edge. All indications suggest the asset manager arms race has only just begun. 

Unlike the activity and attention being drawn to the larger fund complexes that were more focused on cost synergies, more interesting business activity has been brewing with smaller-to-mid boutique fund managers. This area is focused more on deals done for strategic reasons – such as acquiring distribution or new capabilities. It all comes back to implementing new or enhanced growth and strategic positioning.

To get a better picture of this, we reached out to Institute member Dan Sondhelm of Sondhelm Partners – an experienced provider of marketing, public relations and growth strategies for the asset management industry. We asked him to share his unique perspective and experiences in working with asset management firms exploring new growth and partnering opportunities actively in play right now.

Hortz: What have you been uncovering in your work with asset managers as to their growth strategies?

Sondhelm: Distribution is even more competitive this year. Asset managers are still having to confront the fallout from COVID, continued fee compression, the growing popularity of index funds and increased regulations. Despite the challenges, many boutique asset managers are navigating well. They have a good story to tell, they have transformed their sales and marketing models and have expanded their use of virtual and digital strategies, which will be the focus long after the pandemic ends.

But, in addition to that, an increasing number of asset managers are looking for strategic partnerships with other asset managers. For strong manufacturers, who realize they are better money managers than marketers, they want to find a partner to help drive their assets under management (AUM). For asset managers with distribution, they are looking for scale, which will provide for the reinvestment of profits into the business. They want to find niche managers and strategies to sell. It becomes a win-win scenario.

Others are looking to partner to enter another market. Consider an institutional manager that wants to build a presence in the financial advisor space with a partner that is already there. Maybe they can find a partner with a lousy performing mutual fund, and they can be the replacement manager for those assets. Or they can launch a fund collaboratively.

As one former client said after a sale to a global asset manager with distribution, “I would rather earn 50 percent of the management fees of $1b AUM than keep 100 percent of just $100 million. I should have done this [sold to a larger firm with distribution] sooner.”

Hortz: Besides those partnership growth strategies, can you give us some examples of other strategies asset managers are pursuing and what their motivations are?

Sondhelm: Still others want to simplify their business. Consider the wealth manager that launched mutual funds believing assets would pour in. When they did not, they found a partner to take over the mutual funds and were hired to be the subadvisor. They continue to manage money and leave the operations and distribution to the partner.

Some smaller firms are looking to achieve cost efficiencies. They do not necessarily find a partner for growth but to lower operating costs to take pressure off their profit margins. More assets in the Trust can lower expenses ratios, and help returns, for both sides.

In some rare cases, a firm just wants to sell and walk away. It may be because they want to focus on their core advisory business, so they might sell all or part of the firm. Or it may be part of a succession strategy. 

Fortunately, for these managers, there are plenty of asset managers willing to partner with firms with these sorts of situations. These firms range from large, global firms to boutiques with distribution to much smaller firms looking to help their business. Some are funded with outside capital to fund these opportunities. Others are self-funded. They can gain ownership stakes or just collaborate in different ways.

Hortz: What kind of ideas should boutique managers be open to but may be unaware of the flexibilities they may have in negotiating and structuring of those options?

Sondhelm: Most asset managers that are looking for a strategic partnership have specific goals in mind. It just depends on their needs, preferences, and what they want to accomplish – and finding a strategic partner looking for the same thing. There are many models that can create a win-win situation depending on what both sides are looking for.

Some asset managers wanting to sell the firm fully or in part can become an affiliate or blended in within a larger firm. They continue to manage money while handing over the headaches of running the business over to the larger firm. They can sell all or a portion of their business and remain a fund manager within another organization. 

Other managers that want to remain independent can have their mutual funds reorganized or adopted by a firm with distribution. The funds can be reorganized and rebranded by the new firm. The manager can then be hired by the firm to subadvise the funds, and possibly more.

For firms that want to grow but are not interested in selling anything, one of the simplest models is a sub-advisory relationship. An asset manager will be hired by a more prominent firm that has established distribution channels to take over existing portfolios, often underperforming, or to start a new mutual fund. To start a new fund, it often helps if the asset manager can fund the fund with $20-30m AUM. This capital and the commitment to distribution by the other side, shows both sides have “skin” in the relationship.

Hortz: What services do you offer to explore and expedite these new partnerships?

Sondhelm: We are a firm that helps asset managers grow. We help with marketing, public relations, and sales. We also work with asset managers that want to find a strategic partner.

Our strategic partnership group helps clients explore what they want to accomplish and then outline the types of strategic partners that can help deliver it. We help clients understand what results are realistic and what it will take to get there.  We often help a firm position themselves for success and better tell and position their stories specifically for the acquiring firm.

We develop materials, prioritize outreach, make phone calls, and send emails to key people within the acquiring firms to try to garner interest. When there is interest, we prepare our clients for the call, outline what to expect, help keep the process moving, asking the right questions, and supporting negotiations until the deal is done, while guiding them around the mistakes commonly made. However, we are not an investment bank, so it is essential for our clients to retain their team of trusted advisors depending on the direction they want to go. 

Hortz: How do you help the firms with distribution looking for niche managers?

Sondhelm: We have strong relationships with many of the asset managers in the industry that are looking to partner with other asset managers. We learn what types of firms they are looking for, what types of investment strategies they are seeking, and what types of deals they prefer.

Many of them have strong teams of folks looking to add strategic partners. Others are newer to the strategy of growth through strategic partnerships. We help where they need it. Then we bring them good ideas.

Hortz: Can you share some recent transactions you have helped facilitate?

Sondhelm: One client, a $50 billion institutional manager, wanted to unload three of their mutual funds to focus on their core institutional business. Before our engagement, they had a few conversations with other asset managers that did not go anywhere. We introduced them to an asset manager that wanted to reorganize all three funds and hire the manager in a sub-advisory role. They are thrilled at the energy the new distribution team is bringing so far.

Another boutique manager wanted to sell their only mutual fund to focus on their successful wealth management business. We found an asset management firm looking to start a mutual fund with a similar strategy. They acquired the mutual fund within about 6 months.

Another boutique firm wanted to sell its two mutual funds to focus on their institutional business. We found a larger firm with an established retail distribution system that wanted a sub-advisory relationship with one of the funds and merged the second fund into one of their own funds with a similar strategy. 

One boutique institutional asset manager with a niche strategy is now managing $200m for a mutual fund family with distribution through subadvisory. The fund firm was looking to replace its existing subadvisor for a mutual fund due to lousy performance.

Hortz: What sort of firms are you trying to find new homes for right now?

Sondhelm: We are working on placing several managers right now. Here is our current list of available managers:

We have two former rockstar managers. Both managed billions for larger shops and then started their own firms. Challenged to gain assets, they are looking to be part of larger asset managers that can help with sales and marketing. One manages international large and small-cap. The other manages a short-term quantitative tactical equity trading strategy such as managed futures and shorting.

We have several managers that are looking to have their top performing mutual funds sold or reorganized into larger fund families with distribution. They want to become the subadvisor. Strategies include two niche fixed income strategies, two world equity strategies and an options-based strategy. AUM range from $30m to $600m.

We have two institutional asset managers looking for subadvisory in the advisor space. One specializes in global fixed income. The other has expertise in global macro/systematic trend following. AUM range from $2b to $5b.

We are also working with a fintech firm that is looking for a strategic partner. This firm is an investment research platform with a patent that predicts which stocks will go up or down. It was tested by several large asset managers and passed with flying colors. The firm wants a partner with a firm that can provide some capital to fund growth and some investment capital so they can subadvise a portfolio or mutual fund.

Hortz: What have you seen as to what makes a good strategic partnership? What should asset managers be looking for?

Sondhelm: If growth is important to you, make sure the firm offers distribution. I talk to asset managers who say they have been talking to a firm that wants to acquire them or launch a fund, but they have $250m AUM and one salesperson. It is unlikely a firm like this will be able to raise money for them.

Asset managers should have realistic expectations. Just because you are partnered with a firm with distribution does not mean they will drop everything and focus on you. They have other strategies to focus on. You want to ask the right questions in the dating phase to ensure their other strategic partners are having a good experience and are raising assets.

Make sure both sides have skin in the relationship. Sometimes the niche manager does not want to bring capital or pay for any collaboration with the strategic partner. They believe they brought the investment expertise and that is enough. At minimum, they will need to play an active role in the sales and marketing process that is now led by the strategic partner.

Asset managers want to make sure the cultures are a good fit. We try to source opportunities where we believe that will be the case. Sometimes, however, it’s good for a firm to walk away from the deal if they will be uncomfortable in the relationship.

Hortz: Any other thoughts or recommendations you would like to offer smaller-to-mid-sized asset managers about the options they have in today’s business environment?

Sondhelm: There are clear trends that asset managers need to embrace if they want to grow. Many firms are nearing a tipping point where the only way they can survive, let alone thrive, is to think strategically about their future and how they can maximize their possibilities.

The timeframe from deciding to pursue a strategic partner to closing a deal can take months or years. It might take several months just thinking through who the right buyers are and the kind of arrangement that makes the most sense. It can take several months to position your firm for maximum appeal. You can spend another few months in discussions with potential buyers before finding the right partner and another few months negotiating final documentation.

The point is that the process can take a while, making it critically important to consider what is possible now to maximize your options and increase your chances for a positive outcome.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique client/community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.