The asset management business is expected to see more M&A activity in the coming year, according to Jefferies’ Financial Institutions Group.

In a new report, the firm says that while global transaction activity slumped during the first half of 2010, a growing backlog in deal activity will likely work its way through the pipeline over the next 12-18 months. It suggests this predicted resurgence will likely be driven by independent sellers seeking liquidity.

So far this year, the volume and value of deals being done compares with the early years of this decade, but this is down notably from the previous few years. But Jeffries expects that to change later this year, and into next year, as it sees potential sellers, becoming “increasingly willing to engage in serious transaction discussions”.

It believes that overall deal volumes will increase, as strategically driven transactions ramp up due to: firms looking for growth partnerships, and business owners seek to address estate planning issues. As this sort of activity increases, buyers will be more willing to pay strategic premiums, it says. And it predicts that Asian and emerging market buyers will join US- and UK-based pure-play asset managers as the predominant buyers of asset management businesses.

“Investors will continue to increase their allocations to global / international portfolios and traditional fixed income, thus making targets with those capabilities the most highly desired among buyers looking to fill out their product suites. Managers specializing in emerging markets investment strategies, particularly those with local presence in their investment markets, will garner particularly strong interest among buyers,” it predicts.

Finally, it predicts that IPO activity will exceed historical levels in the coming months, assuming that global equity markets cooperate, “as more firms look to the public markets in the face of a narrowed universe of asset management buyers.”

“Earnings should improve, leading to stronger valuations and greater readiness by sellers to accept offers, but uncertainty regarding the global economic recovery will linger, driving the need for highly structured transactions,” said Aaron Dorr, a New York-based managing director within Jefferies’ Financial Institutions Group.

IE