BNY Mellon Asset Management's first foray into private equity turned heads this week because many wealth managers are shying away from the sector.
Ronald P. O'Hanley, the president and chief executive of the Bank of New York Mellon Corp. unit, explained that buying a stake in a private-equity firm that specializes in emerging markets rather than developed ones will help his company stand out in a crowded field.
"Private equity has been on our mind for awhile and we think it is an important alternative asset class," he said. But clients can already get many domestic investment options from the "big-branded" private-equity companies. "We don't think that that is an investment opportunity for us."
The acquisition of a 20% stake in Siguler Guff & Co. Inc. fits well with Bank of New York Mellon's multiboutique asset management strategy. The multistrategy private-equity firm, which had $8 billion of assets under management at Sept. 30, offers a fund of funds targeting distressed securities and emerging markets such as Brazil, Russia, India and China. The sale was announced Monday; the price was not disclosed.
Siguler, of London, was founded in 1991 within PaineWebber and became independent in 1995.
BNY Mellon Asset Management has worked with Siguler since January, when BNY Mellon began distributing Siguler's products and services. In May, Siguler Guff Advisers LLC, Siguler's registered investment advisory subsidiary, became the investment adviser of the private-equity fund of funds previously advised by West LB Mellon Asset Management.
Bank of New York and Mellon had private-equity investments in their portfolios before the companies merged, O'Hanley said, but this is the first time BNY Mellon Asset Management has offered proprietary private-equity products to its customers.
Analysts said many wealth managers are divesting private-equity units because the financial crisis has caused the sector to slump considerably in the past 18 months.
Geoffrey Bobroff of Bobroff Consulting in East Greenwich, R.I., said that Morgan Stanley bought a series of private-equity and hedge fund managers last year and "I don't know if they could generate any value from those deals now."
"Bank of New York Mellon is in a position to make acquisitions that are more reasonably priced right now," he said. "The near-term future of private equity is still unclear. Bank of New York Mellon is buying a small stake and can see how it develops."
O'Hanley said many investment companies are getting out of private equity because of the huge financial commitment associated with private-equity products. Often, "the next investment was predicated on the payoff from the last investment and payoffs are slow right now," he said, but private-equity investments in emerging markets are different.
"We think that private equity in emerging markets should have stronger returns," he said. "And given our investment capabilities in emerging markets and the distribution arrangement we already had with Siguler, we thought that this was a nice fit."
O'Hanley said there could be more opportunities for BNY Mellon Asset Management to acquire private-equity firms but nothing is imminent. He said BNY Mellon has the option to buy a larger stake in Siguler, but it does not plan to do anything soon.
"We want to continue to be opportunistic," he said. "We don't have three or four deals waiting in the wings. We have a highly developed organic growth strategy that we are very comfortable with."
The acquisition was BNY Mellon Asset Management's second in the past three months of a London company. In August it bought Insight Investment Management Ltd. for $387 million from Lloyds Banking Group PLC. Insight Investment specializes in so-called liability-driven investment solutions, active fixed-income asset management and alternative asset management.
Bobroff said BNY Mellon has raced ahead of some of its rival custody banks and could gather more share by widening its product selection. "A lot of people are looking for liquidity right now and Bank of New York Mellon is taking the opportunity to expand its services," he said. "It is adding capabilities and not scale, and it is interesting to see someone diversifying their business. The real challenge is going to be putting all of these pieces together."