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Tuesday, December 05, 2017

Beware Fee Cuts Beyond the Point of Deal Viability

Reported by Neil Anderson, Managing Editor

Fundsters looking to sell your business, beware of cutting your fees so far that you kill deal possibilities outright.

Neil Hennessy, chief of Novato, California-based Hennessy Advisors [profile] is one of the most acquisitive fundsters leading a smaller shop, and he continues to be on the hunt. Yet he worries that, as active asset managers have reacted to the continued rise of low-cost and passive investments, many small fund firms may be overreacting.

"Some of the these mutual fund companies outsmarted themselves and cut their fees beyond the point where they can be acquired," Hennessy tells MFWire.

The problem, Hennessy says, factors in when an acquirer like him wants to acquire your shop and merge your fund(s') assets into the acquirer's existing funds. Mutual fund boards will not look kindly on moving fund shareholders into an acquiring fund that has higher fees. To appease the acquired fund(s) board, the acquirer would then have to cut fees on its own fund at two years, Hennessy says ... and a cut like that eats into the expected value of the deal and thus could substantially reduce the price the acquirer is willing to pay.

So, for fundsters at smaller firms looking for possible buyers, pay attention to the fee levels on your potential buyers' own funds.

Looking out over the next 12 to 24 months, Hennessy predicts continued industry consolidation, especially given tough organic growth prospects for most asset managers.

"It's going to be very tough to grow organically," Hennessy says. "Either you're going to have to acquire or be acquired."

Hennessy himself continues to be on the hunt for deals. 

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