Despite a first-quarter slump it attributed to declines in its wealth management division, UMB Financial Corp.'s president said it plans to continue adding scale to its alternative investment servicing business through acquisitions.
The Kansas City, Mo., company's UMB Fund Services Inc. announced last week that it has signed a definitive agreement to buy J.D. Clark & Co. Inc., a privately held third-party fund service provider to alternative investment firms, including hedge funds, for cash. The price was not disclosed.
Peter deSilva, UMB Financial's president and chief operating officer and the Milwaukee fund unit's chairman, said in an interview Monday that there are a lot of opportunities to acquire as a result of the economy.
"We are seeing banks that are starved for capital, and we are seeing some opportunities to buy bank-sponsored administrators that have to make some tough choices about how they want to deploy capital," he said.
Two weeks ago UMB Financial said its first-quarter earnings fell 30% from a year earlier, to $32.4 million, or 78 cents a share. It cited turbulent markets that hampered its wealth management division. At that time deSilva said that despite the difficult quarter, his company planned to continue to invest in its wealth division, "because we like the business model and expect them to drive a strong, reliable earnings stream over the long term."
On Monday he said he did not want to repeat the mistakes of other bankers by cutting from its wealth management business in response of a "short-term phenomenon" like poor quarterly results.
"I look at the underlying business, and I see a healthy unit that is getting customers, getting talent and drawing assets," he said. "We want to take a long-term and broader perspective. I look at the metrics of this organization, and it is still fundamentally strong."
UMB Fund Services has hired 11 private bankers in the Midwest in the past six months, deSilva said. "This is a good time for us to be thinking about acquiring."
Analysts said companies should not get trapped in long-term strategies that are based on short-term results.
"Right now financial companies are falling into three categories," said Bob Egan, the global head of research and a chief analyst at TowerGroup Inc., an independent research firm owned by MasterCard Inc. "Some are purely in survival mode. Some are shrinking so that they can focus on specific areas, and some are investing for long-term innovation. This third group is going to be well-positioned long-term."
There is certainly an opportunity to make acquisitions "at a lower premium" than even six months ago, Egan said. "Companies have to be wary about the amount of risk that they are willing to take on right now, but there are certainly deals that can be made at attractive prices."
UMB Fund Services has not made an acquisition since 2001, when it bought Sunstone Financial Group Inc., an administrator that serves mutual funds.
Over the past eight years UMB Fund Services started an alternative investment services administration business, which now has $4 billion of assets under advisement.
Buying J.D. Clark would make UMB Fund Services a "scale player" in alternative investment servicing, deSilva said. "Prior to this deal, we didn't have scale to really play in the alternative investment space. This puts us in the top quartile. We plan to continue to pursue more scale and could make more deals in this space."
The company will consider buying smaller providers, he said, but it could make a deal for a larger firm.
J.D. Clark, which had $18.5 billion of assets under administration as of March 31, would operate as a wholly owned division of UMB Fund Services when the deal closes this quarter. J.D. Clark would keep its name and continue operations from its headquarters in Ogden, Utah. Jeffrey D. Clark, who founded the firm in 1991, would remain its chief executive officer.
With J.D. Clark, UMB would be able to compete with larger trust banks like Bank of New York Mellon Corp., State Street Corp. and Northern Trust Corp., deSilva said.
Analysts said they were unsure whether now is the time for UMB Fund Services to make the deal, given the intense scrutiny on the hedge fund industry and the decline in alternative investment assets industrywide after the Madoff scandal.
But deSilva disagreed. "I see hedge funds surviving and thriving in the future," he said. "We are not afraid of new regulation. In fact, we think that they could be great for providers of administrative services, because the new rules require independent administrative accountants. The hedge fund industry will prosper, and the providers of administrative services will prosper."