Hellman & Friedman LLC's plan to buy Gartmore Investment Management from Nationwide Financial Services Inc. furthers the separation of product manufacturing from distribution at large financial services companies and illustrates small asset managers' preference for independence over consolidation.
It also confirms the disappointment of Nationwide's hopes for rapid growth in Europe.
"The big players are getting bigger, but the dominant trend in the industry today is that the best performing businesses are the ones that remain independent," said Allen Thorpe, a managing director at Hellman & Friedman, a San Francisco private equity firm. "High-quality asset managers want to work with the best firms."
Despite an industry trend toward consolidation, he said, "there is a macro trend toward disintermediation of manufacturing and distribution."
The deal, which is expected to close in July, would give Gartmore's senior fund managers and executives a significant portion of the company's equity as well as control of its day-to-day operations. The deal's terms were not disclosed.
Ben Phillips, an analyst at Putnam Lovell NBF Securities Inc., said the pace of asset company management buyouts has accelerated in the past 10 years and that the Gartmore deal is the largest. Hellman & Friedman and Gartmore's executives are to buy $44.9 billion of assets under management, nearly half the total being managed by Gartmore Group.
The Gartmore Investment Management unit operates in the United Kingdom, Europe, Japan, and Latin America, said Robert Rosholt, the chief financial officer and an executive vice president at Nationwide; the Columbus, Ohio, insurer is retaining Gartmore Group's $46 billion of U.S. assets.
When it bought Gartmore six years ago for $1.64 billion, the company added $86 billion of assets and nearly doubled in size. At the time it said it wanted to grow rapidly in Europe, but Mr. Rosholt said the trend toward convergence in Europe and difficult market conditions dampened that strategy.
"Things just didn't grow as much as we anticipated in Europe," he said. After signing a deal last month to sell Pan Euro, its European life insurance business, "we just realized the synergies there would not be that great in order to sustain this business."
Analysts said large banks are considering whether to sell part or all of their asset management businesses - and in some cases have already acted. PNC Financial Services Group Inc. and Citigroup Inc. have made such deals in the past year, with Merrill Lynch & Co. and Legg Mason Inc., respectively.
"At the end of the day, firms are deciding whether they want to be a fund manager or a fund distributor," said Burton Greenwald, an analyst at BJ Greenwald Associates in Philadelphia.
"Manufacturing and distribution don't make sense together," agreed Mr. Thorpe of Hellman & Friedman.
Nationwide decided to sell Gartmore's foreign operations in order to focus on its business in the United States, Mr. Rosholt said.
Putnam Lovell's Mr. Phillips said private equity firms like Hellman & Friedman are increasingly interested in helping investment firms' managers do buyouts because these firms can be bought privately at a low multiple and then taken public for a significant return on the initial investment.
"Hellman & Friedman have been in this for a long time," he said, "and they have identified this as an industry with thick margins. This is very attractive and can generate significant cash flows."
Mr. Thorpe said he believes there will be more management buyouts.
"We want to focus on management teams that want independence to create a strong, vibrant business," he said. "There are discussions that are ongoing, and I think we will see more activity in this vein. We think there will be a lot of these" management buyouts. "There are a lot of big distributors that own asset managers and shouldn't."
His firm has been interested in asset management since the 1980s, Mr. Thorpe said. In the mid-1990s it helped Franklin Investments buy Templeton Investments to create Franklin Templeton.
In May 2004, Hellman & Friedman helped the management of Delaware International Advisers Ltd., a London fund manager, buy the $20.9 billion-asset business from Lincoln National Corp., a Philadelphia insurance company. Last week's Gartmore management buyout announcement was very similar, Mr. Thorpe said.
"Nationwide, like a lot of insurance companies, realized that it is good at insurance and insurance products," Mr. Phillips said. "People go to them for risk protection and annuities. Creating alpha is harder for big companies to do."
"Our focus as a strategy is on U.S. customers and small businesses," said Nationwide's Mr. Rosholt.He said Nationwide in the next six to 12 months would rebrand the U.S portion of Gartmore Group, which does business as Gartmore Global Investments Inc. in Philadelphia, as a stand-alone brand. The Gartmore deal's proceeds would be used to help the insurer build capital, he said, possibly for a deal down the road.
"We will be opportunistic," he said. "We will keep our eyes open in the financial services business, to develop our personal lines and our small-business lines."
