Sandler O’Neill: smaller acquisition deals the trend of H1

Demand for private credit will increase as hedge funds face fee pressure and low returns.

The number of small merger and acquisition deals in the asset management industry seems to be on the rise, which comes as financial firms look favourably on a target if it has a private debt practice.

These  are conclusions from the mid-year asset management transaction report that the M&A advisory firm Sandler O’Neill released on Tuesday. The firm tallied and analysed 98 overall announced transactions globally the first two quarters, totalling $1.2 trillion.

Of that total, the median assets under management that was transacted across all deals in the first six months of 2017 stood at $1.5 billion, the lowest since the second half of 2014, the report stated. And 62 percent of deals involved sellers with AUM of less than $3 billion, including 42 percent with less than $1 billion.

“Despite significant anticipation of large-scale consolidation in the asset management industry, the most pronounced trend thus far in 2017 has been a high volume of small acquisitions,” the report read.

The New York-based advisor attributed this spike in small acquisitions to an increasing number of “roll-up” acquisitions, where multiple small companies in a similar market or industry market are acquired and merged. Another factor is the expanding universe of buyers for such deals, including banks, “which are now having a pronounced effect on deal volume”.

The report highlighted a notable increase in private equity targets, which accounted for 59 percent of alternative asset manager deals announced the half of 2017 compared to just 29 percent last year. The firm cited the SoftBank Group acquisition of $3.3 billion Fortress Investment Group as the “blockbuster” deal of the period.

The report also stated that in general the demand for private credit practices “will remain in high demand by both strategic and financial buyers, given increased investor allocations” to the asset class.

Christopher Browne, managing director at the advisor, told Private Debt Investor that this demand for private debt comes amid tough times in the hedge fund industry.

“Hedge funds have been challenged for returns and hit with significant fee pressure the last 12 to 18 months, compared to private equity-style credit funds with lock-up capital,” he said. “They’ve seen a tougher road.”

Though demand for private credit capabilities may remain strong, the number of loans related to M&A deals beyond just the asset management industry seem to be decreasing.

Such M&A loans for the first two quarters totaled $196 billion, the lowest in four years, according to the Lead Left industry newsletter. That number compares to the $730 billion in leveraged loans that were completed in H1, of which 70 percent were refinancings or repricings.

Randy Schwimmer, senior managing director at Churchill Asset Management and publisher of the Lead Left, said debt repricings are less prevalent among smaller companies than with broadly syndicated issuers because bank groups in mid-market deals have fewer lenders with larger hold sizes.

Scwhimmer also pointed out that more sponsors are seeking small add-on acquisitions for their platform companies.

“This effectively reduces the blended cost of capital when the business is sold down the road,” he added. “For example, if the buyer’s entry level multiple is 10x debt-to-EBITDA, adding three or four acquisitions averaging 5-7x multiples can lower the net multiple. This helps the sponsor improve their overall returns.”