A new report from Jefferies Putnam Lovell suggests that the process of large financial conglomerates selling off divisions to raise capital will drive M&A activity in the global investment management sector in the second half of 2008 and beyond.

M&A activity in the sector slumped in the first half, the firm noted. In the first six months of 2008, firms spent approximately US$10.6 billion to acquire ownership of 104 fund managers, compared to the US$36.9 billion spent in 115 deals in the year-earlier period.

It suggests that the number of deals in the next 12 months may be similar, but the value of transactions will rise, “inflated by capital-raising moves of damaged financial institutions”.

“Pursuit of non-traditional investment products, international expansion, and attempts to restore balance sheets at banks and other financial institutions will drive asset management dealmaking activity in the months ahead,” said Aaron Dorr, New York-based managing director at Jefferies Putnam Lovell. “In the financial technology arena, strategic buyers will show enthusiasm for select technology vendors that appeal to the buy side, custodians, and exchanges.”

In the first half, a record 38% of transactions involved alternative asset managers, well above the 30% posted during the first six months of 2007, the firm reported. Also, it noted that cross-border transaction activity represented 34% of deals announced during the first half of 2008, below the year-earlier level of 43%.

In the next 12 months, Jefferies Putnam Lovell expects that deals will take longer to complete and run a higher risk of collapse, reflecting overall conditions in the M&A market. “Greater dispersion of pricing will exist as buyers become more discerning. Aggregate multiples for asset managers will soften slightly, reflecting a larger number of forced sales and sales of lower quality businesses,” it suggests.

Also, it predicts that: private equity players that are still flush with cash will play an ever growing role as buyers; interest in hedge funds and private equity managers will continue to drive record dealflow for alternatives; most fund manager IPOs will be shelved until global markets recover; cross-border deals will remain robust, with Asian and Middle Eastern buyers wielding their growing purchasing power, and as sellers seek access to global clients and product capabilities; and, strategic buyers will pursue select financial technology targets servicing the buy side, asset custodians, and exchanges, while venture capital and buyout firms will maintain vigorous deal activity in this segment.