Untapped Opportunity:

Realizing Value in Continental Europes Asset Managers

June 2011
As a group, Continental Europe's banks and insurers collectively have the potential to unlock an additional 175 billion of franchise value from their asset managers, increasing revenues by 24% and adding 2 trillion-plus in new client money. To realize higher value, Continental European banks and insurers must create more opportunity for their asset management operations using an appropriate combination of four growth strategies: Compete more effectively for talent by implementing long-term incentive alignment systems Invest in distribution by recruiting and organizing key talent to open multiple sales channels Rationalize and strengthen product focus by securing the investment skills required to meet shifting investor demands worldwide, unlock value through scale in commoditylike products Evaluate global expansion by deciding whether to achieve profitable scale in non-European markets or focus on regional dominance

Any of four business models would allow Continental European asset managers to realize their full growth potential: Global investments leader, using innovative product development and investment performance to secure higher-margin clients in faster-growing global markets Multiafliate asset manager, using the parents balance sheet to acquire developed fund managers, provide them with expansion capital, and facilitate generational transfer Pan-European scale player, using consolidation to widen distribution of less differentiated product, unlocking margin through efcient packaging Local distributor, potentially divesting fund management operations in favor of re-packaging best of breed asset management products with innovative wrappers and afliated distribution

Table of Contents
1. 2. 3. Introduction ................................................2 Unlocking Value by Igniting Growth ..............4 Strategic Options for Improving Growth Prospects ........................7 Growth Strategy 1: Compete for Talent................................7 Growth Strategy 2: Build Best-Practices Distribution Organizations......................9 Growth Strategy 3: Rationalize and Strengthen Product Focus ....................................13 Growth Strategy 4: Evaluate Global Expansion ..................15 4. Business Models for Successful Continental European Asset Managers ........................................16 5. Conclusion ..............................................19

Authorship
Casey Quirk contributors include: Kevin P. Quirk, Partner Benjamin F. Phillips, Partner John F. Casey, Chairman Daniel Celeghin, Partner Yariv Itah, Partner Rahul Patel, Associate Director

Analyst team Michael D. Chia, Associate Andrew T. Gerba, Associate Jason D. Roche, Associate Jacob F. Walker, Associate

Casey, Quirk & Associates is a management consulting rm focused solely on advising investment management rms worldwide. Our partners and associates help our clients develop broad business growth strategies, improve investment/product appeal and growth prospects, evaluate new market and product opportunities, and enhance incentive alignment structures. Our unparalleled industry knowledge and experience, detailed proprietary data, and global network of relationships make Casey Quirk the leading advisor to the owners and senior executives of investment management rms in the world.

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

Introduction
Asset managers with Continental European owners, most of which belong to the regions banks and insurers, comprise nearly one-third of the worlds assets under professional management. These rms historically have beneted from a number of competitive advantages: Proximity to a local asset management marketplace holding more than 8 trillion Well-capitalized owners Afliated distribution through sister retail and corporate banking networks Nevertheless, throughout much of the last decade, Continental European asset managers have struggled to grow at the same rate as some of their counterparts elsewhere in the world. For the six years ending December 2010, Continental Europes asset managers grew assets under management more slowly than their U.S. and U.K. counterparts, despite being equally, if not more, established as their American and British competitors.

Exhibit 1

AUM Growth by Asset Manager Headquarters, 2004-10E

9% 8%

8% 7%

6%
AUM CAGR (%)

5% 4% 3% 2%

5%

5%

5%

2% 1%

1% 0% Emerging markets U.K. U.S. Australia Continental Europe Japan

Sources: Towers Watson, Pensions & Investments, Casey Quirk Analysis

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Several exogenous factors are often blamed for slowing recent growth. Europes retail investors typically take less risk than others worldwide. Pension reform has failed to create a vibrant institutional market on the continent. Also, the region's ever-changing and complicated regulatory structure, involving compliance burdens at both the member state and European Union levels, has not helped matters. Not all of the challenges are exogenous, however. Continental European rms have steadily lost market share in regional mutual funds, their principal marketplace, to foreign entrantsboth before and after the recent nancial crisis. During the ve years ending in 2010, 75% of net new inow into Continental Europes long-term mutual funds went to foreign entrants, several of which have increased their regional assets under management at the expense of local players.

Exhibit 2

Exhibit 3

Continental European Mutual Fund Revenues Attributable to Foreign Entrants

From 2005-2010
40% 35%
% of Continental Europe MF Revenue

Continental European Mutual Fund Revenues from New Flows by Manager Headquarters
By fund manager headquarters
1,500 1,000 500

30% 25% 22% 20% 15%

28%
Net flows (MM)

0 500 1,000 1,500 2,000 2,500 2006 2007

Foreign entrants

25%

10% 5% 0% 2005 2007 2010

2008

2009

2010

3,000
Continental managers

Note: Includes local and cross-border funds, except those believed to target the U.K. and Asia. Sources: Strategic Insight, Casey Quirk Analysis

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

We believe many of Continental Europes asset managers can make structural changes that will spur growth and make them as competitive as their foreign counterparts, both at home and abroad. More importantly, doing so will make their parent banks and insurers more valuable, a critical advantage as the Continents banks and insurers face increasing pressure to engage in at least a limited dose of cross-border consolidation. Adopting an appropriate combination of four growth strategies, along with clarifying value propositions and business models, will let Continental Europes rms unlock signicant added value from their asset management franchises.

Continental Europes asset managers can make structural changes that will make their parent banks and insurers more valuable

Unlocking Value by Igniting Growth

Traditionally, Continental European banks and insurers have viewed their asset management operations more as utilities that provide portfolios to their other core businesses. Often asset management has accounted for 10% or less of revenues among most Continental European banks and insurers. But the global crisis triggered by the fall of Lehman Brothers in September 2008 signicantly changed perceptions within Continental European banks and insurers by emphasizing some of the inherent value asset management businesses have relative to other nancial services franchises: Asset management remains a high cash ow business. Even during the crisis, when asset management prots fell, median worldwide pre-tax operating prot margins were still 25%, while insurers struggled and banks posted losses. Asset management revenues are less cyclical. Proceeds from duciary businesses such as asset managementwhich offer portfolio advice in return for asset-based feesmay shrink in falling markets, but do not entirely dry up. Revenues from commission-based businesses, such as those generated by proprietary trading or annuity sales, tend to disappear. Asset management requires very little capital, a critical consideration as banks, in particular, seek additional businesses that do not require large balance sheet reserves. Finally, so far, asset management remains less regulated compared to banking and insurance, with some of the more draconian post-crisis regulations either implicitly or explicitly excluding asset management from new requirements. Shareholders increasingly realize this value as well and are willing to pay a premium for holding duciary nancial services businesses such as asset management.

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Exhibit 4

Forward Multiples of European Financial Institutions

16% 14%
2012 Forward Multiples

13.6x

12% 10% 7.8x 8% 6% 4% 2% 0% Banks Life insurers 7.8x

11.0x

11.0x

Asset managers

Private banks

Alternative asset managers

Source: Morgan Stanley

Such investor sentiment indicates Continental Europes asset management operations would be worth roughly 150 billion today if valued at two times revenues, a multiple most investment banks have applied to slower-growing asset management franchises. This is roughly 7% of the estimated enterprise value of Continental Europes banks and insurers.

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

Exhibit 5

Estimated Franchise Value of Continental European Bank- and Insurance-Owned Asset Managers

400 350 300

Franchise Value (B)

175 250 200 49 150 100 154 50 2010 2015: Status Quo 2015: Optimal Business Models 154 154 49

Note: Values status quo at 2x revenues and optimal at 3x revenues Source: Casey Quirk Analysis

Using their current business models, Continental Europes bank- and insurance-owned asset managers will grow franchise value by one-third in the next ve years, assuming 6% capital appreciation. However, they will continue to lose assets and local market share to foreign competitors. If Continental European asset managers could reverse recent lackluster growth, they could improve their value dramatically. Optimizing growth strategies through a combination of stronger asset-gathering, higher fee realization, and greater efciencieswould improve asset growth rates from 5.6% to 9%, reecting more than 2 trillion of net new money gathered worldwide. Annual revenues would increase a further 24%. And because such improved rms could credibly claim a value of as much as three times revenues, a conservative rate for quoted asset management rms, their franchise value could more than double during the next ve years. Banks and insurers increasingly realize that improving their asset management business not only enhances their competitive positioning in investment management marketplaces worldwide, but also can signicantly impact the entire conglomerates shareholder valuea critical advantage in Continental Europes crowded nancial services marketplace, where a erce competition for shareholder capital has begun.

Optimizing growth strategies could more than double franchise values in the next ve years

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Strategic Options for Improving Growth Prospects

Continental European fund managers can benet from any of four growth strategies that not only address key structural challenges unique to their asset management community, but also have fueled the long-term growth of asset management rms worldwide. Asset managers can implement any of the four organically or inorganically.
Exhibit 6

Growth Strategies for Continental European Asset Managers

1
Compete for talent

2
Invest in distribution

Rationalize and strengthen product focus

Evaluate global expansion

Source: Casey Quirk

Growth Strategy 1: Compete for Talent

Asset management, always and everywhere, is a war for the best and the brightest people, one for which Continental European rms have been poorly armed. Some of the differences in Continental European incentive systems are more obvious: Continental Europes asset management executives typically receive more xed compensation than variable remuneration, potentially encouraging free riders and compressing margins when revenue slumpsparticularly given Continental Europes rigid rules regarding downsizing personnel. More importantly, many Continental European asset managers are wholly owned by their parent companies, while many foreign competitors offer equity or equity-like incentives for key talent. In an industry where the most lucrative form of compensation currency is franchise valuegiven the prices for which asset managers are bought and soldsharing meaningful economics with key asset management executives is a critical success factor. A slew of poorly timed and poorly executed acquisitions of fund managers during the past decade have taught many Continental European banks and insurers that creating competitive incentive alignment within an asset management subsidiary is a difcult task. But even a modest change in ownership structureexecuted by awarding equity or equity-like incentives to key talenthas a disproportionately positive impact on revenue growth.

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

Exhibit 7

Median AUM CAGR by Ownership Structure, Global Firms, 2000-10

16% 14% 12%
CAGR (%)

14% 13%

10% 8% 6% 4% 2% 0% Institutions without employee ownership 6%

9%

Institutions with employee ownership

Public

Private

Note: Sample includes 301 rms worldwide managing more than US$10B, excluding liquidity products and neutralizing impact of mergers and acquisitions. Source: Casey Quirk Analysis

One of the largest competitive advantages Continental Europes asset managers lack is strong long-term incentive alignment at the asset management organization level. Many banks and insurers worldwide make two common errors when sharing economics with their asset management units: First, they use the wrong timeframe, by focusing too much on near-term objectives. Clients are shifting to asset managers with alignment systems that focus on long-term value creation, which is the best method of reducing personnel turnovertheir primary fear. Second, they use the wrong currency, by offering parent company stock as the primary longterm alignment incentive. This is generally ineffective because many competitors can offer equity or equity-like incentives directly tied to asset economics, a more compelling proposition for key talent. The most effective incentive alignment systems for asset management subsidiaries of banks and insurers share two key characteristics: they focus on long-term metrics and share franchise value. The latter incentive must be meaningful and represent a broad group, often thoughtfully spread among executive management, investments, distribution, operations, and a set-aside for future recruits. Appropriate equity ownership, however reected, in a bank- or insurer-owned asset

It is not uncommon to see management ownership stakes ranging from 10-20%

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

management operation will vary according to situation, but among the largest asset managers, it is not uncommon to see management ownership stakes ranging from 10% to 20%. Although there are challenges for banks and insurers to institute a signicant equity program at the asset management level, there are many implementation options, including deferred compensation programs, phantom equity, real equity, and option-like strategies. Each of these programs has strengths and weaknesses, and must be tailored to the culture and competitive situation of each bank or insurer. Implementation risk is also high, given increasing regulation and further public scrutiny of compensation among nancial services rms, as well as potential conict with existing compensation schemes elsewhere in the organization. Yet if pursued in a collaborative way with mutual respect to the hurdles and requirements of both the parent company and the asset management group, with intensive use of strong data to support the approach, Continental Europes banks and insurers can signicantly improve their asset management operations ability to effectively compete for the best talent worldwide.

Growth Strategy 2: Build Best-Practices Distribution Organizations

Continental European asset managers traditionally have relied heavily on their parent rms afliated distribution channels to generate most of their new business opportunities. Asset managers afliated with retail banks previously had a particular advantage, as their parent companies aggressively sold investment products to counteract the regional moderation of interest rates sparked by the introduction of the euro. Such rms enjoyed higher margins, thanks to the protected distribution and lower servicing costs an afliated channel provided. But the crisis accelerated a long-unfolding series of changes in Continental Europes fund distribution system, weakening retail banks and applying further pressure to vertical integration. (See next page.) The shifting distribution dynamic exposed Continental European asset managers glaring underinvestment in third-party sales and marketing talent required to tap increasingly inuential non-bank distribution channels: institutions, subadvisory mandates through professional buyers, unit-linked product providers, and others. Investing more in sales and marketing professionals particularly more technical personnel, such as consultant relations ofcers and portfolio specialists, both of whom can appeal to professional buyerswill help Continental European asset managers compete more effectively. Data shows rms with signicant distribution investments grow much faster than their less-leveraged peers.

Building best practices distribution will lead to a faster-growing and more protable asset management operation

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

New Channels for Fund Flows: Shifting Distribution Dynamics in Continental Europe
Continental Europes mutual fund industry, which generates nearly 40 billion in annual gross management fees from more than nearly 5 trillion of assets under management, remains the primary wellspring of revenues for many local asset management rms. The lack of effective pension reform initiatives, at either the member state or European Union level, has discouraged the evolution of a signicant institutional marketplace outside the Netherlands or Switzerland, and the nal enactment of UCITS III in 2001 facilitated easier cross-border fund sales from large central complexes based in Dublin and Luxembourg. Fund distribution, however, remained siloed within large retail banking networks that sold mostly proprietary products, with some access to a limited menu of third-party products, often sold at a surcharge to the client. During the past ve years, however, four signicant change agents accelerated and amplied by the recent nancial crisishave started to reshape retail fund distribution within Continental Europe: 1. Capital constraints. Pushed by shareholders and regulators to strengthen their balance sheets, many Continental European banks have directed the same powerful branch-network sales force to sell deposits instead of mutual funds. 2. Guided architecture. Retail investors who seek out funds have sought innovative, higher-alpha products, either within or outside of a taxprotected or outcome-generating wrapper. Many bank-owned fund complexes in Europe lacked such funds, forcing distributors to look outside the house for appropriate products. Private banks, anxious to mollify clients concerned about potential conicts inherent in proprietary products, also have widened their architecture to accept more external product. 3. Regulators. Several national regulators in Europe have frowned upon vertically integrated fund sales; Italys regulator, in particular, threatened to forcibly separate bank fund complexes from their afliated channels. In addition, further iterations of the Markets in Financial Instruments Directive (MiFID) are likely to shine a brighter spotlight on fund retrocessions. This will force distributors to justify how they selected the third-party products they offer, and likely focus attention on the role of advice in fund sales.

10

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

4. Pension reform. European governments, several of which will need to implement austerity measures to support their debt nancing, will continue to shrink the welfare state. Most European nations so far have indicated individuals, not corporations, will need to shoulder more of the retirement burden. Some countries have attempted to shift retirement burdens in dened contribution planssuch as the PERCO system in France and Germanys Riester initiatives, as well as the more established Swiss pension foundations. But a variety of individual retirement savings products, many of which are insurance-linked and structured under local tax codes, have begun to proliferate throughout Europe. Several of these products will rely on mutual funds for portfolio accumulation. These secular shifts have ended the monopoly retail banks have held on distribution. Mackay Williams estimates bank branches barely controlled 30% of European (including the U.K.) retail assets at year-end 2010, compared to nearly 40% ve years earlier. The four change agents also have unleashed three signicant transformations in European fund distribution: 1. Regarding channel focus, Continental Europe is shifting from a dynamic concentrated on retail banks to one where multiple channels fuel growth, providing new opportunities. Insurers will represent a particularly interesting opportunity, given their growing role in pension income provision to European individuals. Also, the recent proliferation of boutiques, primarily in France, will provide managers around which nonbank channels can differentiate themselves. 2. Different packaging considerations will emerge, as mass retail investors focus more on the yield and protection outcomes that insurance and structured products will provide, letting the packaging sponsors vet and select underlying funds. Institutional share class sales, already a rising force in European distribution, will gain further traction. 3. Finally, servicing models will shift, as distributors act less like platforms and more like professional buyers. Home ofces will apply more technical criteria to select best-of-breed funds that ll certain gaps, either directly or through subadvisory mandates, in their product offers.

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

11

Exhibit 8

Exhibit 9

Sales & Marketing Personnel Expense, 2009

benefits expenses, 2009
25% 22%

Revenue CAGR by Distribution Expense, Global Sample, 2005-10

Global sample, 2005-2010
14% 12% 11.9%

20%
% of C&B Expenses Revenue CAGR %

10% 8% 6% 4% 2% 5.2%

15%

14%

10%

5%

0% U.S./U.K. Continental Europe Firm Headquarters (%)

Source: Casey Quirk/McLagan Performance Intelligence

0% Above Median Below Median

Continental European asset managers could optimize their additional investments by creating more focused distribution strategies and more clearly structured organizations. Key elements of best-practices distribution among global leaders in asset management include: A plan that rigorously and realistically identies and prioritizes target market segments and distribution channels, focusing resources and efforts in places where the rm has a competitive advantage. A strong, experienced, and empowered distribution leadership team. Winning asset management rms seek and retain aggressive distribution leaders that prioritize growth with clear positioning strategies based on well-researched views regarding future market opportunities. Successful distribution leaders actively drive product and service innovation, and build a strong sales and relationship management functions. A distribution organization appropriate in size and quality to the rms growth ambitions, and organized to best support the rms competitive advantages. Leading rms thoughtfully tier their clients and prospects and model their distribution organizations accordingly. For many Continental European asset managers, building best-practices distribution will require signicant investments that likely will impact short-term protability. Effectively implemented, however, such expenditures ultimately will lead to a faster-growing and more protable asset management operation.

12

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Growth Strategy 3: Rationalize and Strengthen Product Focus

Given their less competitive incentive structures, Continental European asset managers have found it difcult to retain strong portfolio managers. Consequently, their fund arrays tend to center around two sets of products: passive products such as cash, index vehicles, and increasingly exchange-traded funds; and regional equity and bond portfolios that often hug benchmarks. Continental Europes retail investors continue to buy large quantities of the rst set of products. But increasingly they have rejected long-only regional equities and bonds, which lost more than 20% of their assets to redemptions during the ve years ending 2010. Investors instead have directed the risk-seeking portions of their portfolio toward higher-alpha products, including concentrated global equities, multi-asset funds, and innovative alternative investments. These products, in which foreign entrants have specialized, garner higher fees. As a result, foreign entrants not only have taken signicant net new ows from Continental fund managers, but also amplied the captured revenues by converting them into higher-margin products.
Exhibit 10

Revenue Impact from Continental European Mutual Fund Flows by Type, 2007-10
8
Revenue Impact From Net Flows (B)

6 5.7 4 2 0.7 0 -2 -4 -6 Active

Foreign entrants

1.4

(5.0) Index
Continental managers

Note: Excludes cash. Sources: Strategic Insight, Casey Quirk Analysis

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

13

Continental European asset managers can benet from the growing polarity in demand within the regions retail marketplace by focusing on either end of the product spectrum, rather than the rapidly-redeeming middle. One option involves focusing on investment skills: buying or building the necessary investment talent to launch innovative, higher-alpha products, thereby improving revenues. While more lucrative in the long-term, acquiring skills involves a greater degree of investment and changes to alignment structures. More importantly, securing the credibility in investments leadership necessary to convince investors that newly launched products will outperform benchmarks is a large step for many rms, and may convince several to pursue inorganic solutions. Competitive investment skills will reect particular secular shifts in client demand observed worldwide, not simply Continental Europe: Strong demand for hedge funds and a rapidly increasing appreciation by investors for their various forms and attributes. Investors are paying particular attention to long-biased products that can augment or replace their traditional core equity and bond holdings, more illiquid products to combat longevity and ination risks, and funds with reduced correlation to markets. Fully globalized portfolios, to mitigate home-bias correlations. Investors are moving to globally benchmarked products and paying particular attention to emerging markets products, where many are signicantly raising allocations and a supply shortage, both in skills and capacity, exists. Whole portfolio management. Investors around the world are moving toward total solutions. This has increased demand for diversied asset allocation products, as well as organizations that provide customized portfolio solutions. Successful rms address these trends by providing solutionswithin either packaged or tailor-made portfoliosor creating component parts for other solution providers. Successful rms address this by providing those solutions in either packaged or tailor-made fashion, or creating component parts for other solution providers. The second option involves focusing on scale. Continental Europes mutual fund marketplace remains littered with subscale funds that reect legacy single-country asset-gathering strategies, as well as highly fragmented distribution reecting the lack of pan-European consolidation to date. Yet among passive products, the largest rms enjoy advantages: the 10 largest index providers, for example, controlled more than 90% of net ows for the three years ending December 2010. As providers of commodity-like products become larger, they realize economies of scale. Increasingly, regional players will consolidate smaller index, cash, and ETF arrays, trading part of their wider margins for access to the sellers distribution. The same dynamic will likely impact regional bond funds, as central banks encourage the formation of large regional asset managers that would continue to support a market for increasingly fragile European sovereign debt.

Demand for hedge funds, fully globalized portfolios, and whole portfolio solutions all represent signicant opportunities to innovate

14

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Growth Strategy 4: Evaluate Global Expansion

Asset management rms gathering more assets from outside their home region grow much faster than regionally focused rms, as rms tap faster-growing markets for asset management services, namely Asia. Globalization is a particularly important decision for rms in Europe, where the population will shrink rapidly over the next half century.
Exhibit 11

Continental European Firm Revenue CAGR by Client Base, 2003-10

20% 18% 16% 14%
Revenue CAGR (%)

17.4%

12% 10% 8% 6% 4% 2% 0% Global Local 7.6%

Note: Global rms source more than 30% of their assets from outside their home region. Source: Casey Quirk Analysis

Again, many Continental European rms face a choice: Firms can elect to further globalize, plowing additional time and capital into building nonEuropean franchises. Such investments tend to reward rms handsomely over time, but are signicant exercises. Asset managers must invest in the right products and distribution to overcome the regional differences that continue to chip away at operating leverage. Firms also can elect to abandon globalization and focus solely on Europe. Doing so reduces the investment outlay dramatically, but forces the player to gather growth from operating efciency, requiring signicant scale in packaging and distribution. Some Continental European rms, primarily their existing multiafliates, have globalized effectively, acquiring developed asset management rms outside the region that provide not only footholds in foreign marketplaces, but also global product skill sets required to appeal to more

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

15

investors worldwide. Conversely, some regional players have grown quickly without any non-European clients, mostly by building local scale, sometimes through consolidation. But many Continental European asset managers have expanded distribution into marketplaces where they have yet to prove a competitive advantage and consequently are struggling to grow protably. Continental European rms debating globalization should examine the costs and benets of further expansion, particularly in the context of their overall strategic goals. Questions that can help frame the solution include: Does the rm currently have a global footprint in terms of presence and client base? What are the biggest regional and country opportunities for the rm? Does the rm currently have products and services with a distinct competitive advantage outside Europe? Could it create such products and services? What type of scale would globalization efforts achieve?

Continental European rms face a choice: further globalize or abandon globalization

Business Models for Successful Continental European Asset Managers

Many Continental European banks and insurers will gravitate naturally toward certain combinations of the four growth strategies described earlier, depending on the current strengths and weaknesses of their existing asset management operations. Adopting one of four bestpractices business models for Continental European asset managers would clarify a rms value proposition to investors, as well as its competitive advantage for shareholders.
Exhibit 12

Successful Continental European Asset Manager Business Models

Strongest Attribute
Investments

Business Model
Global investments leader Multiafliate asset manager

Description
Autonomous asset manager Operating company buying stakes in developed asset managers worldwide Scale fund complex strengthened through consolidation Local rm without proprietary asset management

Distribution Focus
Global, non-afliated institutions and professional buyers Global, afliated retail, non-afliated institutions and professional buyers European afliated and non-afliated retail European afliated retail

Product Focus
Higher-alpha, best-of-breed Higher-alpha, best-of-breed

Balance sheet, nancial engineering Regional scale, afnity with local clients Distribution, afnity with local clients

Pan-European scale player Local distributor

Lower-risk, less differentiated Third-party products inside innovative proprietary packaging

Source: Casey Quirk

16

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Each of the four models emphasizes particular strengths: 1. Global investments leaders build upon existing strengths in active portfolio management to differentiate themselves from competitors. They seek recognition as best-of-breed investors, focusing on total return, as well as product innovation. Global investments leaders also provide investments leadership, encouraging investor acceptance of new investment products and strategies. Their skills are competitive enough to attract potential retail and institutional clients worldwide. 2. Multiafliate asset managers leverage strong balance sheets to make investments in developed, highly competitive asset managers worldwide. Multiafliate asset managers may provide some central distribution, but their primary advantage involves using their balance sheets to provide afliates, not only with expansion capital, but also dynamic recapitalization: buying equity from key executives at a multiple that somewhat reects franchise value in the marketplace, then selling it to a second tier at an affordable price. (Some of the stronger multiafliates worldwide operate as nancial holding companies, more similar to nancial sponsors but with one signicant exception to natural competitors like private equity rms: permanent capital.) Multiafliates can globalize quickly and effectively, if properly aligned. 3. Pan-European scale players grow by consolidating: adding assets and squeezing further efciencies from larger fund sizes. They can expand fastest by concentrating on the passive, commodity-like asset classes European retail investors buy in bulk, and will likely grow through regional acquisitions and partnerships. 4. Finally, local distributors will involve rms that elect to focus solely on distribution, divesting some or all of their asset management operations. A growing number of smaller Continental European asset managers will realize that their clients stay with them for servicing reasons, not outperformance. Their asset management operations increasingly will more closely represent cost centers. Distribution retrocessions, hefty in Europe, make the sale of third-party products attractive, particularly if the distributor can succeed in dispensing quality advice, or applying a value-added wrapper such as an annuity or note, for an additional premium. Many private banks in Continental Europe, already well down the path of guided architecture, will choose this route. Continental European asset managers must carefully weigh which business model makes most sense for them to adopt, but examining recent growth of the regions asset managers shows some of the likely transformations that will occur within Continental Europe during the next ve years: 1. Multiafliates: Continental Europe already houses some of the worlds biggest and most globalized multiafliate rms, most of which will keep their existing business model but strive to optimize it, mostly by correcting imbalances between strong and underperforming afliates.

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

17

2. Wealth managers: These rms often face the costs of servicing a global private banking network, but lack the quality investments necessary to compete within their afliated distribution channels. Wealth managers are likely to attempt redening themselves as global investments leaders, creating products that not only win over their own private banks, but attract third-party distributors required to truly achieve sustainable growth. 3. Larger retail bank- and insurer-owned asset managers: These rms already sit on larger fund complexes built on the back of passive products, guaranteed funds and cash vehicles, and will likely select pan-European scale strategies that leverage this competitive advantage. They will grow through consolidation, and because they will not need to share economics with high-priced investment talent, they will benet substantially from keeping more of the economics. A select number of the global rms, if they are willing to install the new alignment systems required, will likely try to redesign themselves as global investments leaders. 4. Smaller retail bank- and insurer-owned asset managers: The regions most challenged owners of asset managers, many will decide they can build more sustainable revenue from distributing, rather than manufacturing, asset management products. They will swap management fees for advisory charges and retrocessions, charging a premium for access to a loyal client base.

18

June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Exhibit 13

Legacy Continental European Asset Management Business Models by Size and Growth, 2003-10E
2,500

2,000

2010 AUM (B)

1,500

Large, faster-growing firms can evolve toward global investments leaders Smaller, slower-growing firms should consider regional leadership opportunity or distribution-only models

1,000

500

0 -10%

-5%
Multiaffiliate

0%

5%
Wealth Manager AUM CAGR

10%
Bank

15%
Insurer

20%

Sources: Investments & Pensions Europe, Pensions & Investments, Towers Watson, Casey Quirk Analysis

Conclusion
Continental Europes asset management rms still have some of the same competitive advantages most have held for decades: a large local market, afliated distribution, and (in some cases) ample capital. The recent setback in growth need only be temporary, if Continental European banks and insurers are thoughtful about two issues: what type of asset management they think they can build and own, and the competitive differentiators that will make it competitive in Europe or worldwide. Furthermore, increasingly onerous capital requirements in Europes nancial services infrastructure will pit the regions banks and insurers against one another in a war for shareholder capital, and a strong asset management rm could be a powerful weapon for bolstering demand for shares. Transitioning to a more focused and, therefore, more competitive, asset management operation requires executives for Continental Europes banks and insurers, both at the owner and asset manager level, to answer four key sets of questions: 1. What are our core competencies? How competitive is the rms current asset management operations in each of the ve attributes described? Which could form the cornerstone of a new strategy?

Untapped Opportunity: Realizing Value in Continental Europes Asset Managers June 2011

19

2. What should our business model be? Which of the four successful business models most resonates with executives? Does it align with the core competencies that the rm identied? 3. Which growth strategies should we implement? Which ones are required for our business model to succeed, and which ones are feasible? 4. How could we implement the selected strategies? What are the tactical steps required to execute each of the growth strategies? As Continental European rms use new strategies to adapt to a changing environment, many will improve their positions among the worlds largest and most protable asset management rms, regardless of the geographic composition of their client bases.

Exhibit 14

Strategic Evaluation Framework for Continental European Asset Managers

1 2 3 4

Dene core competencies

Select desired business models

Identify opportunities

Address deciencies Implement tactics to solve strategic weaknesses

Objectives

Identify the asset management operations strongest competitive advantage Investments Balance sheet Scale Distribution Local afnity

Transition from unclear strategy to one best aligned with core competencies Global investments leader Multiafliate asset manager Regional scale player Local distributor

Focus on initiatives that will spur growth

Options for Continental European asset managers

Re-invest in distribution Compete for talent Rationalize product focus Evaluate global expansion

New investments Divestitures Organizational changes Review product range

Source: Casey Quirk

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June 2011 Untapped Opportunity: Realizing Value in Continental Europes Asset Managers

Untapped Opportunity:
Realizing Value in Continental Europes Asset Managers
June 2011

John F. Casey, Chairman Kevin P. Quirk, Partner David J. Bauer, Partner Daniel Celeghin, Partner Grace L. Cicero, Partner Jeb B. Doggett, Partner Yariv Itah, Partner Benjamin F. Phillips, Partner Casey, Quirk & Associates is a management consulting rm focused solely on advising investment management rms worldwide. Our partners and associates help our clients develop broad business growth strategies, improve investment/product appeal and growth prospects, evaluate new market and product opportunities, and enhance incentive alignment structures. Our unparalleled industry knowledge and experience, detailed proprietary data, and global network of relationships make Casey Quirk the leading advisor to the owners and senior executives of investment management rms in the world. To discuss these survey ndings, please contact: Kevin P. Quirk Partner k.quirk@caseyquirk.com 203-899-3033 Benjamin F. Phillips Partner b.phillips@caseyquirk.com 917-476-2140 Rahul Patel Associate Director r.patel@caseyquirk.com 203-899-3041

Analyst team: Michael D. Chia, Andrew T. Gerba, Jason D. Roche, Jacob F. Walker Casey, Quirk & Associates 17 Old Kings Highway South Darien, CT 06820 www.caseyquirk.com