With AIC gone, who’s next?

Wednesday’s announced sale of AIC Ltd.’s mutual fund business to Manulife came as little surprise to many in the industry, but it has revved up the rumour mill on what consolidation plays could lie ahead in the asset management industry.

“It’s the cycle; it will continue,” says Dan Hallett, president of Dan Hallett & Associates Inc. “Then when you get to a certain concentration, you’ll get regeneration with people splitting off and starting new firms. Over time, it repeats itself.”

The broad market sell-off between last September and March of this year slashed assets under management at all companies, at least temporarily. While the larger asset managers have been able to cope, thanks to their economies of scale, smaller firms have struggled.

“I think this environment could help speed certain [takeovers] along. Without decent sales, it’s a really tough slog and a lot of these smaller firms are not going to make money.”

The market decline also sent investors searching for lower-cost alternatives, such as exchange traded funds, which were already eating into the fund industry before the bear market hit.

“There aren’t a lot of fund companies left that aren’t already owned by some larger entity, but that doesn’t mean they’re not in play. You could have one firm selling to another,” Hallett says.

In the broader market of asset management, Hallett says there is no shortage of smaller firms that may be distressed, making them easy targets for companies seeking a quick boost to their assets under management.

“As much as AGF has been talked about as a target, I think they are just as likely to be a buyer,” he says. “I don’t know that they have a ton of cash to work with, but most of these deals are share-deals anyway.”

Other potential buyers in today’s market include Industrial Alliance, which bought Clarington in 2006 and has since focused on buying distribution, and National Bank, which Hallett says has been “inching in” on the asset management market following its Wellington West acquisition.

“They are aiming to manage a fair bit of money in-house through a handful of mandates,” Hallett says.

Smaller firms that could be targeted include Sentry Select, which is privately held. The owner, John Driscoll, will some day want an exit strategy and selling to a larger firm is one option.

Acuity Funds could also be a target. While the firm has $6.5 billion in total assets under management, its retail fund operation manages about $2.5 billion.

“I don’t agree that you have to have $100 billion in assets to survive, but you need a certain amount of scale to survive and make it profitable enough,” says Hallett. “When you get below $5 billion, you’re really struggling to make it work as a fund company.

“As an institutional fund manager, $5 billion is great; at $1billion you’re doing great. But as a fund company, there is more infrastructure needed. You need a sales force to get out there and recommend your funds.”

Sceptre Investment Counsel is another firm that may become a target, after the company’s CEO unexpectedly passed away in July.

“Its unfortunate, and it doesn’t help their cause at all. They have to spend a lot of time and resources looking for a new CEO, and it just makes the battle that much tougher.”

Acquisition targets are not restricted to smaller firms, though.

“I’m pretty confident that in the next five years, Scotia is going to have CI,” says Hallett. “It is just set up to happen. I think that will happen long before the Dundee deal, but who knows — things can always catch you by surprise.”

(08/13/09)