Asset management-related business is growing in volume and diversity as the search for yield and protection widens. Geraldine Lambe interviews Calvin Redlick, head of FIG for northern Europe at BNP Paribas.

Until a few years ago, asset management-related business at investment banks was restricted to vanilla custody, FX and securities trading. Now, driven by the search for yield and principal protection, asset managers require a much broader range of products and advisory services.

According to Calvin Redlick, head of financial institutions group (FIG) for northern Europe at BNP Paribas, asset management-related business is the biggest growth area, if not the biggest revenue generator, in the FIG group. He says that one of the main drivers for growth is asset managers’ increasing use of equity derivatives.

Man Group, for example, launched a fund-of-hedge-funds capital-guaranteed product in October last year, aimed at retail investors. The Man RMF Multi-Style Series 2 raised the equivalent of about $215m in euros and dollars and the product’s portfolio will invest in five hedge fund styles: equity hedged, event driven, global macro, managed futures and relative value. As a structured product, it offers increased investment exposure, and incorporates a principal protection structure and a potential profit lock-in feature.

“We not only guaranteed the principal – which essentially means extending our balance sheet – but the structure we provided also allows 100% of the funds raised to be invested in the underlying portfolio,” says Mr Redlick.

More comfortable

Although traditional asset managers were generally slow in using derivatives, they are becoming more comfortable with them in the fixed income space, too. In this space, products such as currency and interest rate guarantees are now more common.

“Asset managers are increasingly using swap overlays on behalf of underlying client portfolios, for example. This is a big growth area for us,” says Mr Redlick.

Demand for structured investments and exposure to synthetic risk – including exposure to hedge funds – is also growing. “Although this is still an embryonic market, this is where investment banks will gain a lot of business,” says Mr Redlick.

One example of a structured deal is the Tenzing collateralised fund obligation transaction carried out last December for Invesco Private Capital as the investment manager, in which BNP Paribas was both the arranger and the liquidity provider. Essentially, the transaction represents the securitisation of existing limited partnership interests and new commitments to private equity funds made within the structure.

Investment commitment

In private capital funds, general partners – which manage the underlying company investments on behalf of the fund – secure commitments to invest capital up to a specified amount from the limited partners investing in the fund. As the funds make investments, they draw down capital from the limited partners over an investment period, usually of no more than five years. Returns are distributed net of fees to the limited partners as the underlying investments distribute dividends or other returns, or when some or all of an investment is realised. The third-party liquidity facility was structured to ensure timely payment of interest and expenses on all classes of notes.

“These sorts of transactions are becoming more common and use our structuring and arranging expertise, as well as our balance sheet,” says Mr Redlick.

In terms of capital, asset managers have not traditionally had the same requirements as other financial institutions. But Mr Redlick believes that forthcoming regulatory changes such as Basel II will mean that some asset managers will need more capital, partly driven by the need to put aside capital to offset operational risk.

Aside from driving capital raising activities (one asset manager is said to be considering a convertible bond), this could spur on industry consolidation, whether divestment of ‘owned’ asset management operations or transactions involving independent firms.

In the UK, only 12% of asset managers remain independent. Ownership is dominated by insurers (39%), investment banks (19%) and retail banks (18%). In addition to the large number of small firms, there are a few sizeable independents (with more than $100bn in assets under management), including F&C Asset Management, Schroders, HHG and Amvescap. Two of those are rumoured to be acquisition targets.

Following the announced disposal of Life Services, HHG has become a more or less pure asset management play. With a market capitalisation of around £1.8bn, it is vulnerable to larger acquirers. There have been strong recent share price moves on the back of bid speculation. Names associated with the bid include Old Mutual.

After a torrid year or so (including a $375m settlement with the US regulator and subsequent outflows of funds), a number of analysts regard Amvescap as a takeover target in the medium-term (12-18 months). Most recently, SG was rumoured to be assessing an acquisition but many believe that Amvescap is more likely to be bagged by a large US fund.

“We will see more consolidation. We have not seen much cross-border activity and this could easily be on the cards in 2005 or 2006,” says Mr Redlick.

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