Making alternative deals work: Five ways to prevent value slipping away

Asset managers are targeting niche alternative acquisitions to differentiate their offering and boost returns. Yet these ‘alt’ deals come with distinctive and potentially difficult integration and return challenges for both buyers and sellers. So, how can your business manage the risks and realise the full payback?

In a recent blog, my colleague Andrew Claymore and I looked at how M&A is helping asset managers to outpace competitors by enabling them to curb costs, bring technology up to speed and gain the new and differentiated capabilities they need to justify their fees.

Standing out from the pack
Consolidation continues to be a key part of the deal focus as asset managers seek to strengthen scale and reach, together with taking positive steps to avoid becoming the next target themselves. Yet what really marks out the recent upsurge in acquisition is the targeting of small, specialised alternative fund managers.

Above market returns are clearly part of the attraction. Just as important is the desire for differentiation. Many portfolios have become almost indistinguishable as the number of listed businesses declines and fund managers cluster around a limited selection of high performing small cap companies. Acquiring firms that are active in niche areas such as private credit, distressed assets or real estate can therefore provide an effective way to stand out from the pack.

Win-win
The attractions for the acquired businesses are equally compelling. When operating on their own, these firms have to spend a huge amount of time and energy raising finance, addressing regulatory matters and investor needs - taking focus away from investments and deals. A large parent can offer access to a distribution network and supply of funds, allowing them to devote more of their time to value-generating investment selection and management. The acquired business can also take advantage of the buyer’s well-developed valuation, investor reporting and regulatory oversight.

Deal risks
Yet making these deals work can be challenging. Competition for prime targets means that acquisition multiples are high, meaning a large return is needed in order to make the transaction worthwhile. And while retaining talent is an important element of all successful deals, it’s absolutely vital in businesses where the value is tied up in the specialist expertise and market relationships of a handful of key personnel. Standard incentives such as earn-out clauses can only go so far in keeping these people on board, especially when they’ve become accustomed to very high rewards and working in their own way. If they become frustrated, they’re likely to underperform and eventually leave, taking the deal value with them.

So how can you create the right environment for the deal to succeed?

1. Think differently
These aren’t standard deals with standard measures of post-deal value delivery. The costs are going to be high, so you should be looking at how to supercharge the returns by ensuring the ‘rainmakers’ have the time and capital they need do what they do best.

2. Develop a clear blueprint
The non-standard nature of these deals makes it especially important to develop a clear and early M&A blueprint. The blueprint would set out the capabilities – ‘value bridges’ – you’re looking to acquire and how (e.g. gateways into certain alternative asset class), assess potential targets and identify who would need to do what within your organisation to integrate the acquisition successfully and maximise the uplift.

3. Be clear up front
The risk that cultures and expectations may clash means it is vital to ensure key people from both investment and back office teams in the acquired and acquiring business are clear about how the operation is going to work post-deal and their particular roles within the new structure. Important areas to agree and clarify include funding, rewards and operational support.

4. Make staying worthwhile
While retention can be bolstered by financial measures such as deferred earn-out clauses and spreading cash incentives, it’s also important to create a climate where key people will want to stay and perform at their best. Offer these people and their teams the appropriate autonomy, and ensure flexibility from the core business.

5. End-to-end orchestration
In our experience, it’s helpful to have end-to-end oversight from developing the M&A blueprint through to target identification and integration planning. At PwC, we assign a dedicated ‘Deal Value Architect’ to work with clients throughout this process. This approach doesn’t just ensure a strong underpinning for the strategic rationale (the ‘why’), it also gives the process of delivering deal value (the ‘how’) greater clarity, momentum and personal accountability.

Competitive boost
Get these deals right and you’ll not only be able to put more of your capital to work at a higher return, but also bolster your reputation for genuinely differentiated alpha management.

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