MutualFundWire.com: Will Russell's Plum Asset Arm Agree With Buyers' Stomachs?

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Friday, July 11, 2014

Will Russell's Plum Asset Arm Agree With Buyers' Stomachs?

Seems like other people see the buying opportunity that we at MFWire see in Russell Investments.

The London Stock Exchange announced in late June the $2.7 billion deal to buy Russell.

James Comtois, in an excellent article for Pensions & Investments, reports that the LSE will "likely" only keep Russell's indexing business, and sell off the other bits.

Comtois went on to cite sources who say that the other bits, in total, could go for between $700 million to $1 billion in total.

In fact, he went on to interview leading industry M&A expert Don Putnam of Grail Partners, who declared that "without a doubt" the legacy bits would be spun off.

The opportunity comes from this: the real prize in Russell is its indexing business. Its $260 billion asset management business, as well as investment consulting operations, are more problematic.

The LSE itself, in its statement announcing the deal, said that it will "review" Russell's $260 billion investment management business.

Edward Higham, managing director at Silver Lane Partners, a private equity shop active in asset management deals, had this to say on the LSE/Russell deal:

We think this deal makes strategic sense for LSE’s global index/intellectual property business. It gives LSE entree into the US in a big way, with a well-known brand that strategically supplements LSE’s existing FTSE index business. It provides LSE with greater scale, diversification and global reach, along with potential for meaningful cost savings from the combination.

We think the strategic fit of Russell’s investment management business is less clear and would not be surprised to see a follow-on transaction for this part of the business – particularly in light of management’s stated intent to undertake a “comprehensive review” of the business to determine its fit within the LSE group. The investment management business is nearly twice as profitable as the index business and its sale could go a long way towards reducing transaction-related debt and funding the overall purchase of the index business which we think is where LSE's true interests lie.

We think potential buyers for the investment management business could include private equity firms and some of the larger, global banks seeking to build their recurring fee businesses.

The Russell investment management arm is indeed profitable, but it could pose a big problem for anyone who manages money directly in the institutional asset management market, given Russell's importance as a gatekeeper in this space. Conflict-of-interest fears would disqualify you from too many mandate discussions.

However, you might be able to get away with it if you are purely in retail, or can effectively close off your existing brands from those of Russell. For example, Macquarie, if it kept its Delaware Investments subsidiary separate from Russell, just might be able to make such a deal work.

Can the Russell asset management and consulting businesses be split up? That could be hard, depending on how entangled Russell's consulting minds are with the management of the institutional and mutual fund assets. It might just be impossible.

Other possible bidders for Russell could be rival manager selection consultants Callan or Wilshire, with help from private equity, of course. They, like Russell, are focused on managing managers and institutional consulting, not directly managing institutional assets.

Otherwise, these plum Russell assets will likely be hard for many acquirers to digest.

Printed from: MFWire.com/story.asp?s=49118

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