Bank Debt
Most asset management firms lack the capital base and physical assets to provide the needed security for lenders to make significant levels of bank debt an efficient source of capital. Banks are generally reluctant to lend to an enterprise with little in the way of tangible assets. Lenders often impose financial covenants on the business, including the requirement of personal recourse to the firm’s principals, in order to provide credit. When available, bank debt tends to be restrictive, of a shorter-term nature and does not offer the benefits of risk-sharing.
Sale of Equity to Private Equity Investor
Private Equity investors often impose some degree of control over an asset manager, such as voting participation, compensation ceilings and consent rights. The presence of a private equity firm often triggers a liquidity event of a different type at a later stage in the relationship, when a private equity firm has the contractual ability to "put" its equity back to management.
Sale of Equity to Strategic Investor
Strategic acquirers generally offer the best option for maximizing current value for the present owners, but there are challenges here as well. For the fund manager, the attraction lies in the opportunity to receive incrementally higher value based on perceived synergies. A sale to a strategic buyer, however, frequently puts an end to many of the entrepreneurial dynamics that led to a fund manager’s success in the first place and makes it more difficult to provide a meaningful equity stake to the next generation of principals.