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Manning & Napier expects to close acquisition soon

Rochester Business Journal
May 16, 2014

Its pending acquisition of Chicago-based 2100 Xenon Group LLC will create alternatives for investors facing the threat of rising interest rates, executives of Manning & Napier Inc. say.

The acquisition is scheduled to close by the end of June.

“We expect it to be relatively soon,” Manning & Napier CEO Patrick Cunningham said in an interview. “We’re going through some post-agreement due diligence. It’s a deal we’ve come to terms with. I believe it’s just taking care of the formalities of closing the deal.”

Terms of the deal have not been disclosed.

Founded in 2001, 2100 Xenon specializes in managed futures and global macro strategies for institutional and individual clients.

Oversight of managed futures is done using proprietary trading or discretionary methods to go long or short in futures contracts. Managed futures is one of several specialties 2100 Xenon provides, Cunningham said.

“One of the reasons alternative strategies are attractive is they don’t act or perform like the other asset classes, i.e., stocks and bonds,” he said.

“Managed futures have been able to provide protection during periods where interest rates have risen, and that’s one of the risks we see, especially considering how low interest rates are now.”

The acquisition will help mitigate risks for Manning & Napier clients and allow the Perinton-based money manager to enter certain market sectors for the first time, Cunningham said.

“We hear what our clients are concerned about, and one of the big concerns they have is rising interest rates and inflation,” he said during an April 30 earnings call with analysts. “We believe this is another tool for us to address that.

“In addition, we think it opens up opportunities in the insurance industry and a variety of industries that we haven’t really penetrated to any great extent so far.”

Alternative strategies are becoming more institutionalized after starting as a boutique business, said Daniel Burnside, an adjunct professor at the Simon Business School of the University of Rochester and director of quantitative research at Brighton money management firm Clover Capital Management Inc.

“It’s basically a catch-all for everything outside of the plain-vanilla equity and fixed-income portfolios that we traditionally concentrated on,” Burnside said. “There are more products coming out that are attempting to passively create the returns that used to be done with a lot of complicated human decision-making.

“From the investment advisers’ point of view, it’s still a very attractive end of the business because the fees are high. And very often, the fees are not flat fees but rather incentive fees based on performance. If the performance is good and so forth, the numbers can be really big.”

2100 Xenon offers three managed futures programs and one fixed-income program, with assets under management of $200 million, officials said. It employs 11 people, all of whom will remain in Chicago.

“We don’t intend to move them or change that,” Cunningham said during the earnings call. “We’re going to let them operate independently the way they have. We will, of course, avail all the assets we have and the capabilities we have to the team in Chicago, but they have a process that we think is a solid process and that we’re not going to tamper with.”

Manning will incorporate aspects of 2100 Xenon programs into some of its core products, Cunningham said.

“I don’t have a specific timeline to talk to you about,” he said, “but that is something we are actively working on, and that was one of the motivations to make the acquisition as well.

“Particularly in the large institutional space, we think there are some opportunities to grow their assets on a stand-alone basis.”

Jay Feuerstein, founder, CEO and chief investment officer of 2100 Xenon, is to become part of Manning & Napier’s senior research group as managing director of alternative strategies. Director of research Jeffrey Bolduc is to be an alternative strategies portfolio manager.

“Jay is a person that I’ve known personally for some time,” said Manning’s chief financial officer, James Mikolaichik, during the call. “We started our conversations with him and his firm over a year ago.

“We invested a little bit of money with them. We started working on and talking about a few different product strategies around how his products might help us dampen volatility in multi-asset-class products and limit downside and manage certain risks that we see in portfolios.”

Mikolaichik was the point person for Manning during the acquisition process.

Feuerstein “can now provide product strategies inside a $52 billion firm,” Mikolaichik said, speaking of Manning & Napier’s assets.

“And we also get a person that’s been in the alternatives space for 30 years to help us think about alternatives as we go forward, looking at additional products or looking at additional potential acquisitions.”

Manning will be judicious in searching for additional mergers or acquisitions, Mikolaichik said.

“We’ve seen a reasonable amount of activity in the M&A space,” he said. “I think this continues anytime you have an up market.”

Manning also is increasing its focus on the defined contribution investment-only market by forming a dedicated sales team.

That market will grow to 60 percent of defined contribution plan assets by 2017, up from 52 percent at the end of 2011, a study by mutual fund industry research firm Strategic Insight states.

“Manning has done their homework,” Burnside said. “They know what the demand is for the product.”

Investment-only defined contribution plans are managed by asset management companies unaffiliated with the record-keeper or plan administrator.

Manning & Napier manages $12 billion in defined contribution assets and $24 billion in multi-asset-class portfolios in a variety of mutual funds, separately managed accounts and collective investment trust funds, representatives said.

“We recognize that we must continuously reinvest in our business to meet the goals of our clients, our shareholders and this evolving industry in order to provide future returns,” Cunningham said.

5/16/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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