behind the hard data how secular forces are changing fund management worldwide xxi annual conference...

Behind the Hard DataHow Secular Forces Are Changing Fund Management Worldwide

XXI Annual Conference of the IIFASydney, 31 October 2007

CONFIDENTIALMember, SIPC

Shift from accumulation to income requires different skills for protection and yield generation

Product packaging involves more derivatives, insurance, capital markets functions than before

Behind the Hard Data

As baby boomers worldwide retire, investment solutions become more complex

Key Realignment Forces in Global Fund Management

As delivering beta becomes cheaper,investors place a higher premium on alpha

Stock-picking, stock-tracking regarded as different Lessons from 1999-2000 emphasize capacity constraints

More professional buyers drive fund sales Distributors want to differentiate themselves on both hard advice (returns) and soft advice

(estate planning, tax, &c) Delivering more complex solutions means centralizing control of embedded-advice products Customization demand focuses on delivery, favoring large, innovative distributor platforms

Talent becomes more expensive to retain

Alpha is the lightning in the bottle; its generators can set prices if they can consistently deliver

Renewed focus on core competencies

As trends emphasize specialist skills, devolution of manufacturing and distribution

Scale favors distribution and assembly;expertise and talent favor investment engines

Emphasis on protecting product from scale

Greater use of product closures, capacity auctions Larger firms center on beta provision to amass

bulk necessary to offset larger cost base

Rise of pure-play asset managers worldwide

Demand for specialists allows firms to shed packaging and distribution (handled by professional buyers) in favor of pure manufacturing, wholesale marketing

Growing number of strategic and financial operators happy to provide support platforms for boutiques in multi-affiliate models

Performance fees and employee ownership Former encourages true alpha creation Latter increasingly represents the cost of keeping talent from

breaking away to establish boutiques

Industry Challenge Strategic Response

The industry now grapples with the most powerful changes seen in 25 years

1

49

7890 89

10897

119

145159

143

192

168

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sep-07

Disc

lose

d De

al V

alue

($bn

)

0

20

40

60

80

100

120

140

160

180

200

# of

Tra

nsac

tions

Disclosed Deal Value # of Transactions


Strategy is the primary driver in fund management’s recent record-setting M&A

Historical Transaction Activity Involving Asset Management Targets

$4.9

$12.5

$8.2 $12.3

$30.9$14.3

$6.8 $8.6 $8.7 $17.2

$44.1

$41.1

Disclosed deal value in US$bn

Source: Putnam Lovell

2

11.913.1

14.2

0x

2x

4x

6x

8x

10x

12x

14x

16x

18x

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

Ente

rpris

e va

lue

as m

ultip

le o

f run

-rate

EBI

TDA(

1)

Global trade sales UK publics US publics


Strategy has played a key role in raising overall multiples paid for asset managers

Public and Private Pricing as Multiple of Run-Rate EBITDA1

Note: (1) Reflects four-quarter rolling median. Source: Putnam Lovell

3


Financial buyers became more aggressive; IPO activity waxed lyrical (but now…)

Notes: (1) Significantly smaller samples for financial buyers. (2) Excludes overallotment but gross of fees. Source: Putnam Lovell

Fund Manager IPO Proceeds Globally2 ($Millions)Median Prices Paid by Buyer Type1

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H07

IPOs still represent only 6% of disclosed deal value since 1997

BX=$4,130MM

0x

2x

4x

6x

8x

10x

12x

14x

4Q04 2Q05 4Q05 2Q06 4Q06 2Q07

EV a

s mul

tiple

of r

unra

te E

BITD

A

Financial Strategic

4


Vertical integration no longer vogue as asset managers buy each other


Divestiture as % of industry M&A activity, 2001-06AUM Acquired by Buyer Type

Asset managers

Financial services

conglomeratesOthers (PE and IPO)

Bank of New York Mellon

Inner ring: 2001

Outer ring: 2006

26%

46%

as % of # deals as % of AUM acquiredConglomerates 58% in 1H2007,

thanks to a few large dealsFinancial sponsors, IPOs 34%

in 1H2007

5


Two key secular themes, convergence and globalization, help drive realignment


Cross-border M&A as % of acquired AUMAlternative Asset Managers as % of dealflow

53

7

12

22

18

30 30

60

49

6%

3%

6%

12%

18%

12%

19%

21%

31%

29%

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004 2005 2006 Sep-07

Estim

ated

Num

ber o

f Alte

rnat

ive D

eals_

____

0%

5%

10%

15%

20%

25%

30%

35%

% o

f all A

sset

Man

agem

ent M

&A A

ctivit

y___

_

CDO / CLO Hedge Fund HFoF

Private Equity Real Estate Alternative Activity (%)

57%

16%

37%

25%27%

14%

38%

$0

$100

$200

$300

$400

$500

$600

$700

2001 2002 2003 2004 2005 2006 Sep-07

Cros

s-Bo

rder

Acq

uire

d AU

M ($

bn)

0%

10%

20%

30%

40%

50%

60%

70%

% o

f all A

cqui

red

AUM

Cross-Border Acquired AUM % of All Acquired AUM

6


Demand for alternatives changes the fund management industry’s core economics

Note: (1) US statistics reflect only REITs. (2) % of plans surveyed.Sources: Merrill Lynch, Pensions & Investments, Investments & Pensions Europe, Thomson VentureXpert, Hedge Fund Research, Greenwich

Inst’l Investors Likely to Increase Alternatives by 20082Industry Revenues by Segment 2006E

Long-only65%

Hedge26%

Index1%

PE8%

35%

25%

41%

31%

22%

42%

35%

41%

10%

34%

42%

39%

32%

15%

20%

Canada UK Cont Europe Japan US

HF PE RE (1)

7

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Q2 200

7

outside FOHF through FOHF


A glut of hedge funds and FOHFs have crowded the marketplace since 2002

Source: Hedge Fund Research

# Hedge Funds and FOHF WorldwideGlobal Hedge Fund AUM ($Billions)

0

2,000

4,000

6,000

8,000

10,000

12,000

HF FOHF

AUM CAGR since 2002HF 25%

FOHF 33%

2000: 19 new HFs,

2 new FOHFs

per month

2005: 74 new HFs, 19 new FOHFs

per month

Today: 23 new HFs, 6 new FOHFs per month

8


Investors chase while applying further pricing pressure to closet and visible

Global Product Development Continuum

. Source: Putnam Lovell, Morgan Stanley, Boston Consulting Group

Market TrackingInnovative Products

AboveAverageGrowth

BelowAverageGrowth

“Traditional” Products

Revenue Margin

Structured Products

Real Estate

Quantitative

Private Equity

Hedge FundsIndex Funds

ETF

Active Bonds

Money Market

Active Equities

Market TrackingInnovative Products

AboveAverageGrowth

BelowAverageGrowth

“Traditional” Products

Revenue Margin

Structured Products

Real Estate

Quantitative

Private Equity

Hedge FundsIndex Funds

ETF

Active Bonds

Money Market

Active Equities

9


The US is becoming an smaller portion of the global fund management industry

Global Assets Under Professional Management ($Trillions)

. Source: Boston Consulting Group

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2001 2005

US Europe Asia ROW

Growing component of Asia-sourced UCITS

13% 9% 16%11% 15% 25%

12% 9% 20%

7% 8% 9%

95-0

5

01-0

5

2005

CAGRs

10


Cross-border exchanges, new approaches to investing favor global products

Source: Greenwich

% Plans Considering Increased Int’l Equity ExposureInst’l Allocation to Global or International Equities

23%

25%

7%

11%

26% 25%

7%

11%

25%

27%

8%

13%

25%

28%

8%

6%

14%

29% 29%

10%

7%

15%

Canada UK Continental Europe Japan US

2002 2003 2004 2005 2006

41%

26%

20%

12%14%

9%

34%

7%9%

5%

Canada UK Continental Europe Japan US

Will increase int'l equity Will decrease int'l equity

11


The UCITS brand has helped promote a growing cross-border market

Sources: Cerulli, Lipper FERI, Efama

% of European MF AUM in Cross-Border Funds

% of Asian MF AUM in Cross-Registered or Local Foreign-Objective Funds

13%

16%

21%

32%33%

2003 2004 2005 2006 Jun-07

22%

41% 40%

53%

2003 2004 2005 2006

% of European MF Net Flows in Cross-Border Funds

27%

32%

36%

2004 2005 2006

12

$-

$50

$100

$150

$200

$250

Jun-1988 Jun-1994 Jun-2000 Jun-2006

0%

5%

10%

15%

20%

25%

$(100)

$(50)

$-

$50

$100

$150

$200

$250

$300

$350

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

YTD

200

7

Domestic equity Taxable bond

Tax-free bond Int'l/global equity


Even US, Australian marketplaces need increasingly global product development

Sources: Strategic Insight, Australian Bureau of Statistics

Overseas Exposure in Australian Managed FundsUS MF Net New Inflow by Objective ($Billions)

% of total managed funds

Overseas AUM (US$Billions)

13

-80% -60% -40% -20% 0% 20% 40% 60% 80%

Product development

Investment performance

Business brand

Talent retention

Client attraction

Profitability

Client retention

Decision making efficiency

Effective use of senior management time

Operating leverage

"Bureaucracy and hassle"

Negative impact Positive impact


But global businesses currently are paying a price for expansion and growth

Asset Managers’ Perceived Advantages and Disadvantages of Globalization (selected answers, % respondents)

Source: Create Research 2007

14


And mutual funds have driven industry growth to date—but will they in the future?

10-Year CAGRs of Selected Fund Management Industry Segments (1995-05)

• Recent strong growth as equities recover and extraordinary contributions made

• Cash balance plans now the only true growth component

• Growth rate likely includes US IRAs

• Large portion of growth from conversion within Australian SGC

Total assets DB plans Mutual funds HNW assets

• Includes all assets managed professionally for a fee

• Reliance on US 401(k), UCITS taper relief

• Competitive pressure from other products

• Growth strong from emerging Asian affluent

• Propelling growth in packaged products and SMAs

9.3% 5.5% 9.8% 8%11.9%

DC plans

41%ETFsCAGR 2001 -05









• Propelling growth in packaged products and SMAsETFs

CAGR 2001 -05






CAGR 2001 -05





Total assets DB plans Mutual funds HNW assets





• Propelling growth in packaged products and SMAs

9.3% 5.5% 9.8% 8%11.9%

DC plans

41%ETFsCAGR 2001 -05










CAGR 2001 -05






CAGR 2001 -05

Note: (1) Pension data from 1997-2006; HNW data from 1996-2005Sources: BCG, Watson Wyatt Worldwide, Merrill Lynch, CapGemini, Putnam Lovell estimates

16


Assets of wealthy individuals likely to increase as baby boomers retire worldwide

Sources: Cap Gemini, Merrill Lynch

Projected CAGR for HNW AUM (2006-11)Investable Assets of Dollar Millionaires (US$Trillions)

$6.7$9.3 $10.2 $11.3

$6.1

$8.9$9.4

$10.1$4.4

$7.1$7.6

$8.4

$2.7

$3.7$4.2

$5.1

$1.5

$1.7$2.0

$2.3

$-

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

1998 2004 2005 2006

North America Europe Asia-Pacific Latin America Other

Projected 6.8% CAGR to 2011 =

US$52 trillion

4.3%

6.1%

6.8% 7.0% 7.2%

8.5%

9.5%

Europe Africa Global NorthAmerica

LatinAmerica

Asia Pacific Middle East

17


Some possible outcomes for the industry by 2012

25%

>50%

2,000

90%

US$3T

>US$1T

Proportion of world’s professionally managed assets sourced from Australasia, up from 16% currently

Proportion of global industry revenues derived from alternative investments

Number of hedge funds that will wind down—likely to be replaced by others

Proportion of global mutual fund flows commanded by professional buyers

Assets in ETFs, fueled by hedge fund use, but maybe even bigger than HFs

Assets in extension strategies, according to Merrill Lynch; TABB says more

18


Going forward, asset managers will be more apt to offer components of solutions.

– Complex advice and complicated packaging will require parts from multiple providers

– Firms will have wholesale client relationships with distributors who craft retail portfolios

Fund managers will look dramatically different in five years.

– Some banks will build asset management as a core competency, others will shed it

– As professional buyers become more prevalent, so will boutiques

Mutual funds must offer more outcome-oriented returns—or face competition.

– Structured notes and certificates already outsell funds in some jurisdictions

– ETFs shine a strong spotlight on the true value of actively managed collective schemes

Durable diversified firms will offer an array of both long-only and long-short product .

– Sustainable business models will offer truly converged product lines

– Many deals so far concentrate purely on liquidity, rather than longevity

Firms will derive a growing component of revenues from outside their home markets.

– Large US firms should realize 40%-50% of their business from overseas by 2010

Strategic demand for quality products and packagers is secular.

– Pricing for such firms will be more resistant to market downturns

Conclusions

Conclusions

19

Important Disclosures

This communication is being provided strictly for informational purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security referenced herein.

This material has been prepared by Putnam Lovell, a division of Jefferies & Company, Inc. a U.S.-registered broker-dealer, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified, therefore, we do not guarantee its accuracy. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date, and are subject to change without notice, and any views expressed herein may not be supported by independent analysis. Jefferies & Company, Inc. and Jefferies International Limited and their affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or principal for their own account.

This report was created by members of the Putnam Lovell investment banking division of Jefferies & Company, Inc. (“Jefferies”), and has not been reviewed by, or discussed with, any member of Jefferies’ research department. This report is not intended to be, and in no way constitutes a “research report”, as such term is defined in Rule 137 promulgated under the US Securities Act of 1933, as amended, nor should it be considered impartial research under the UK Financial Services Authority (“FSA”) COB Rule 7.16.5. Jefferies’ investment banking department has done, and may continue to do business with, companies included in this report.

Additional information for UK and Canadian investors

This material is approved for distribution in the United Kingdom by Jefferies International Limited, which is authorised and regulated by the Financial Services Authority (“FSA”) and is located at Bracken House, One Friday Street, London EC4M 9JA; telephone +44 (0) 20 7618 3500; facsimile +44 (0) 20 7618 3760. While we believe this information and materials upon which this information was based are accurate, except for any obligations under the rules of the FSA, we do not guarantee its accuracy. This material is intended for use only by a person or entity that qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the “Act”) or qualifies as a person to whom the financial promotion restrictions imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an “intermediate customer” for the purposes of the Conduct of Business Rules of the FSA. None of the investments or investment services mentioned or described herein are available to other persons in the UK and in particular are not available to “private customers” as defined by the rules of the FSA. For Canadian investors, this material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein are available to other persons or to anyone in Canada who is not a “Designated Institution” as defined by the Securities Act (Ontario).

This report was created by members of the Putnam Lovell investment banking division of Jefferies & Company, Inc. (“Jefferies”), and has not been reviewed by or discussed with, any member of Jefferies’ research department. This report is not intended to be, and in no way constitutes a “research report”, as such term is defined in Rule 137 promulgated under the Securities Act of 1933, as amended. Jefferies’ investment banking department has done, and may continue to do business with, companies included in this report.

Reproduction without written permission of Putnam Lovell or Jefferies is expressly forbidden. ©2007, Jefferies & Co., Inc.

20

For Further InformationBen Phillips

Managing Director, Head of Strategic AnalysisTel US +1 617 345 8672

Fax US +1 617 345 [email protected]

behind the hard data how secular forces are changing fund management worldwide xxi annual conference...

Documents