The rationale behind T Rowe Price’s largest-ever deal
T Rowe Price diversifies with Oak Hill deal
T Rowe Price is known for several things: strong actively managed fund performance, low staff turnover and successful investments in companies such as Twitter and Warby Parker long before they went public. One thing it is not typically associated with is dealmaking. The Baltimore-based group has reached $1.61tn in assets under management (making it a top 20 player globally) largely through organic growth — shunning the route of so-called transformational mergers and acquisitions that some rivals have gone down.
But that all changed on Thursday when T Rowe unveiled the acquisition of New York-based Oak Hill Advisors for up to $4.2bn in cash and shares. It is the largest deal in T Rowe’s 84-year history, and ranks number 13 in terms of the biggest asset management industry deals of all time, according to Dealogic. Shares in the asset manager rose 5.7 per cent on the day the deal was announced, and this year they have nearly doubled the S&P 500’s performance. Read the full report from me and US investment editor Michael Mackenzie here.
So what does this transaction tell us about the state of the asset management industry?
Private markets are hot right now (as if we needed further confirmation)
For T Rowe, the deal marks a shift from being an active asset manager focused mainly in equities to a more diversified business, with a strong and growing position in one of the most desirable parts of the market: alternatives. Oak Hill has $53bn in assets under management across private, distressed, special situations, liquid, structured credit, and real asset strategies.
“There are three areas that investors are allocating their money towards. Passive, ESG and private markets,” said Rob Sharps, president and head of investments at T Rowe, who takes over as chief executive from Bill Stromberg when he steps down in January. “Passive is not a strategic aim for us,” added Sharps. “We are building our ESG presence, so that leaves private markets.”
Investors are rushing into private capital strategies in pursuit of growth, hoping that returns there will counteract the dimming outlook for traditional equity and bond markets. The overall industry, which includes sectors such as private credit, private equity and infrastructure, grew to $7.4tn at the end of 2020, is now about $8tn, and is expected to hit $13tn by the end of 2025, according to Morgan Stanley.
The oft-heard mantra is alive: differentiate or die
The march of low-cost passive providers such as BlackRock, Vanguard and State Street dealt a strong blow to the active asset management industry, heaping pressure on prices they can charge investors. The asset-weighted average cost of an actively managed US mutual fund has shrunk by a third over the past three decades, according to Morningstar, and no one in the industry thinks this trend is going to stop any time soon.
In this environment, groups such as T Rowe, Capital Group and Baillie Gifford have justified their existence — and their fees — by proving that you can beat the index if you take long-term, concentrated bets on individual stocks.
In many ways the growth of private assets (just look at the booming value of the five US listed groups) is another weapon in the fight against the passive tide: these strategies command a premium for locking up your money, they are difficult to replicate in a low-cost exchange traded fund, and they are growing as quickly as passive investing. Their growth reflects the “barbell” approach that many investors are adopting: allocating to cheap ETF strategies at one end of the spectrum, expensive alternatives strategies at the other — and squeezing out everything in between.
Toppy times: ‘systemic risks’ ahead
T Rowe’s purchase price for Oak Hill implies a mid-teens to high-teens multiple on 2022 earnings after-tax distributable, according to Morgan Stanley, a valuation that analysts said reflects heady competition for assets in this space.
But it is also worth sounding a note of caution amid the gold rush. My colleagues Robin Wigglesworth, Joe Rennison and Antoine Gara covered a striking report from Moody’s rating agency last week, which warned that opacity, eroding standards and the difficulty in trading private credit pose “systemic risks”.
While the rise of non-bank lenders such as Apollo, Blackstone and Ares has been a boon to many companies at a time when banks have retrenched, Moody’s says the “explosive” growth of private credit is storing up risks in a hard-to-monitor corner of the financial system. Meanwhile, Robin also argued in a recent column that the private capital party is getting dangerous and investors chasing after high returns could ultimately be left disappointed.