Size does matter, but it’s not everything

Firms are prepared to pay up to three times more than the usual price for a fund manager with significant funds under management (FUM), according to the latest analysis fromPricewaterhouseCoopers(PWC).

The report suggests that purchasers of funds management businesses are prepared to pay significantly higher prices for larger operations. Since 1998 the premium deals have been made with managers with more than $10 billion in FUM, attracting sales prices of between 10-18 per cent of FUM.

In the past four years, none of the fund managers with less than $5 billion in FUM have attracted this premium for price, generally going instead for prices between 1-6 per cent of that amount.

The trend that emerges with this information is that acquirers are using consistent growth rates to value businesses, which could be a danger if the numerous post-acquisition risks are not taken into account.

While theInvestment and Financial Services Association’s survey of industry statistics sees the scale of operations as the most important factor for fund managers in improving efficiency, there is not always a clear link between the size of a fund manager and their earnings rate.

PWC flag key manager risk, improving efficiency and the earnings rate on FUM, sustaining the value of a previously independent brand, and investment performance as the real challenges in determining the success or failure of an acquisition.

Other factors which determine price include access to distribution, funds under advice, and wrap or master funds platforms; as well as manger efficiency. A strong brand/reputation, technology, ownership of customers and access to niche markets also work in favour of the selling manager.