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Can investors' infatuation with fixed income last? Gluskin Sheff + Associates Inc. seems to think so, laying out about $70-million in cash and stock to buy an asset manager specializing in global credit.
Gluskin Sheff, which manages roughly $7-billion, has agreed to pay $15-million in cash and issue 1.9-million shares to buy employee-owned Blair Franklin Asset Management. The purchase brings Gluskin Sheff $625-million of new assets (assuming clients stick around) that are almost all in a global credit fund. Peter Zaltz, the chief investment officer at Blair Franklin, will become one of the top bond managers at Gluskin Sheff.
This was the year the bond rally was supposed to end, but it hasn't, perplexing many forecasters. Blair Franklin's main fund focuses on credit spreads, and tries to back out interest rate risk. It has done well, putting up a return of 14 per cent a year since 2004.
Still, a big rise in interest rates and any associated widening in spreads could take the shine off such funds and slow flows into them.
For now, it's a bull-market kind of deal. Gluskin Sheff is using its strong stock – the shares have more than doubled in the past two years as Gluskin Sheff funds have prospered – to buy a bond fund for what management acknowledges is a full price based on multiples of assets under management.
"We felt there was an appropriate discount for a private company versus our public multiple, but at the same time we believe in paying for value," Mr. Freedman said, describing the purchase as "building for the long term. We felt we paid a good price for a great asset. " There's a generational change angle to this story, too, as managers with new independence go their own way.
Gluskin Sheff's founders, Ira Gluskin and Gerry Sheff, have stepped back from the company they once controlled. Last year, they sold the bulk of their stock. They also retired from the board.
Similarly, Blair Franklin has been in the second phase of its life, having split in 2012 away from sister company Blair Franklin Capital Partners. Blair Franklin was founded in 2003 by Bay Street legend Gordon Cheesbrough and his partner Steven Sharpe. The asset management side started in 2004.
Gluskin Sheff has not traditionally been acquisitive, and Mr. Freedman said the purchase was a result of a search Gluskin Sheff had undertaken to find opportunities to expand. He told analysts on the conference call that Blair Franklin was not for sale, but after conversations initiated by Gluskin Sheff, the deal came together.
Mr. Freedman said there is little overlap between the 200 customers that Blair Franklin has and his firm's client list. Both are primarily managers of money for high net worth individuals.
There are expected to be plenty of cost cutting opportunities and chances to cross-sell products to the new clients. Even before that's done, Gluskin Sheff expects that to add to earnings.
The price is subject to adjustments, depending on meeting asset under management targets. Assets at closing must be 85 per cent of the $625-million that Blair Franklin now has.