Merger and acquisition activity among funds management firms has already slowed because of the credit crunch and is likely to be fuelled over the next 12 months by diversified firms looking to offload non-core asset management businesses, according to the latest report from Jefferies Putnam Lovell.

Deal-making in the sector slumped in dollar terms in the first six months of this year, with $US10.6 billion being spent to acquire full or partial ownership of 104 managers worldwide, against $US36.9 billion for 115 firms in the previous corresponding period. Jefferies Putnam Lovell is a US-based international research and advisory group focusing on the funds management industry. The main drivers of M&A activity in the immediate future, according to Aaron Orr, New York-based managing director of Jefferies Putnam Lovell, were the pursuit of non-traditional investment products, international expansion and attempt to restore balance sheets at banks and other financial institutions. He added: “In the financial technology arena, strategic buyers will show enthusiasm for select technology vendors that appeal to the buy side, custodians and exchanges.” Among the trends Jefferies Putnam Lovell expects to unfold during the next 12 months are: • Asset management transaction activity is likely to continue at the pace of the first half of 2008 and will feature a number of larger financial institutions forced to sell their asset management subsidiaries to restock capital. • Deals will take longer to complete and run a higher risk of collapse, reflecting overall conditions in the M&A market. Greater dispersion of pricing will exist as buyers become more discerning. Aggregate multiples for asset managers will soften slightly, reflecting a larger number of forced sales and sales of lower quality businesses. • Despite challenging loan markets, private equity players still flush with cash will play an ever-growing role as buyers. • Interest in hedge funds and private equity managers will continue to drive record deal-flow for alternatives. • Most fund manager IPOs will be shelved until global markets recover. • Cross-border asset management deals will remain robust, with Asian and Middle Eastern buyers wielding their growing purchasing power, and as sellers seek access to global clients and product capabilities. • Strategic buyers will pursue select financial technology targets servicing the buy side, asset custodians, and exchanges, while venture capital and buyout firms will maintain vigorous deal activity in this segment.

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