By Haozhe(James) Huang, Friedrich von Storch and Yujia Bao (IE Business School), Anna Muizniece, Simon Gustafsson and Knut Örnéus (Stockholm School of Economics)
Photo: Ayadi Ghaith (Unsplash)
Overview of the deal
Acquirer: Goldman Sachs
Target: NN Investment Partners
Total Transaction Size: $2.0 billion
Announcement Date: 18th August 2021
Expected Close Date: Q1 2022
Goldman Sachs has announced its agreement to acquire NN Group’s asset management arm for total cash proceeds of $2.0 billion. The deal consists of a base purchase price of $1.8 billion, a ticking fee and excess capital to be distributed in the form of a dividend before completion. As part of the agreement, NN Group and Goldman Sachs Asset Management will enter a ten-year strategic partnership where the new combined entity will continue to provide asset management services to NN Group.
The deal aligns with Goldman Sachs’ strategy of shifting its revenue stream from volatile trading and deal advisory to more dependable and recurring asset and wealth management fees. Upon competition, Goldman will double its assets under management in Europe from $335 billion to more than $600 billion. The Netherlands will also become Goldman’s significant location in Europe, with NNIP’s full integration into Goldman’s European asset management unit. Significant synergies will be created leveraging the complimentary global network of both companies, and Goldman Sachs’ strong capital position to fund growth opportunities.
“The combined investment expertise and scale will enhance the service offering to NN Investment Partners’ clients, including NN Group” - David Knibbe, CEO (NNIP)
Company Details: (Acquirer - Goldman Sachs)
The Goldman Sachs Group, Inc., is an American multinational investment bank and financial services company. It offers services in investment management, securities, asset management, prime brokerage, and securities underwriting across its 20 divisions.
Founded in 1869, headquartered in New York, United States
CEO: David M. Solomon
Number of employees: 40,800
Market Cap: $136.5bn (as of 09/08/2021)
LTM Revenue: $55.2bn
LTM P/E: 6.8x (as of 09/08/2021)
LTM P/B: 1.4x (as of 09/08/2021)
Company Details: (Target - NN Investment Partners)
NN Investment Partners is a Netherlands-based asset manager, with headquarters in The Hague and offices in Europe, Asia, and the Americas. It presents a diverse range of funds within fixed income, equity, multi-asset and alternatives investment strategies, integrating environmental, social and corporate governance (ESG) criteria throughout the investment process. As of June 2021, NN IP has had an AuM of €298bn, making it the third largest Dutch asset manager.
Founded in 1994, headquartered in The Hague, Netherlands
CEO: Satish Bapat
Equity value: $1,986m
Implied EV: $1,975m
LTM Revenue: $600m
LTM EBITDA: $102m
LTM EV/EBITDA: 19.3x
LTM P/E: 26.5x
Projections and Assumptions
The $2bn acquisition of NNIP, which is Goldman Sachs’ largest acquisition since David Solomon became CEO in 2018, has a clear underlying strategic rationale as the bank aims to shift its revenue streams away from volatile deal advisory and trading revenue to more dependable and recurring asset and wealth management fees. The deal follows the larger trend in the banking industry of diversifying revenue streams, which has led to a number of high-profile transactions with a similar rationale, including Morgan Stanley’s $7bn acquisition of Eaton Vance and $13 bn acquisition of E-trade in 2020 or JP Morgan’s $1bn acquisition of UK-based digital wealth management firm Nutmeg in June 2021.
As for NN group, the sale of NNIP will increase its solvency ratio by 17%, which would be used for future acquisitions and returns to shareholders. The winning bid was chosen for shareholder maximization, and the price tag was pushed up by a wide range of bidders including DWS, Generali, and Prudential.
Through the acquisition, Goldman will be adding $335bn of assets under management to its European asset management business, essentially doubling its total to $600bn and raising the global total to $2.6tn. NNIP will be fully integrated into Goldman’s European asset management unit with 900 employees joining the bank from the Dutch asset manager, making the Netherland’s an important geography in its European unit.
The deal will see Goldman gaining additional expertise in fixed income, in which three-quarters of NNIP’s funds are focused. Furthermore, NNIP brings knowledge in responsible investments, having incorporated ESG criteria into 74% of assets under management. As part of the deal, NNIP’s parent company, Dutch insurer NN Group, will retain about $190bn in assets at Goldman Sachs Asset Management.
Goldman Sachs acquisition of NNIP serves as a clear pathway to become less reliant on volatile businesses such as equities and bond trading, which composed 48% of Goldman Sachs revenues in 2020. The acquisition grants Goldman Sachs more steady recurring revenues in the long-term. If this proves to accelerate the growth of Goldman Sachs, the company will seriously consider further similar acquisitions, according to David Solomon, CEO.
However, this acquisition could lead to more long-term upsides than just consistent revenues. NN Investment Partners is known to have a strong position in environmental, social and governance investing, notably in areas such as green bonds, impact equity and sustainable equity, hence NNIP will strengthen Goldman Sachs Asset Management’s sustainable investment strategy, which aims to deploy $750 billion across investing, financing, and advisory activities by 2030 to accelerate climate transition and advance inclusive growth.
Another long-term benefit comes from Goldman Sachs being able to capture a strategic foothold in Europe. The investment bank gains access to a bigger pool of retail and institutional investors in Europe and can bolster its product offerings in areas such as European equities, investment-grade credit, and green bonds. Moreover, with the uncertainty over Britain’s access to the bloc after Brexit, Goldman Sachs is in a more secure position by having allocated more assets and human capital in Europe.
Risks and Uncertainties
With the expansion into the European market, Goldman Sachs will compete against local asset managers as well as global managers such as BlackRock and Vanguard. As the asset management fees have trended downwards the past 10 years, the question is when Goldman’s expansion and establishment in Europe will yield above market returns, and if the growth of their expected recurring revenues business will leverage at the anticipated value with the acquisition of NN Investment Partners.
With the historical fee development in mind, Bloomberg indicates that the margins might fall even more. Studies show that the average firm should expect 11 % lower margins driven by the new fee schemes as well as the fierce and upcoming competition from new entrants as well as global peers. This is specifically true as it is forecasted that competition will intensify as larger players take a larger fraction of the institutional segment due to industry consolidation. Given the advantages such consolidation could bring, similar acquisitions have recently taken place such as the asset manager’s Amundi SA €825 million acquisition of Lyxor Asset Management.
As a summary, these uncertainties and risks would imply a potential threat on earnings in the asset management industry as a whole as well as a higher level of competition in the industry going forward.
“This acquisition allows us to accelerate our growth strategy and broaden our asset management platform. NN Investment Partners offers a leading European client franchise and an extension of our strength in insurance asset management” - David Solomon, CEO (Goldman Sachs)