Federated Buys a $12.4B MF Biz
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Wednesday, May 8, 2019

Federated Buys a $12.4B MF Biz

Chris Donahue and his team are at it again, this time buying a business that includes $12.4 billion in mutual fund assets and $1.5 billion in separate accounts.

John Christopher Donahue
Federated Investors
President, CEO & Chairman
Yesterday Donahue, president and CEO of Federated Investors [profile], and Mike Lyons, head of corporate and institutional banking and the asset management group at the PNC Financial Services Group, confirmed that Federated has agreed to buy part of PNC Capital Advisors [profile], the bank's asset management arm. (Rumors of some kind of PNC-Federated deal surfaced last week.) The deal includes PNC's government and treasury money market funds (about $9 billion in combined AUM), its equity mutual funds (about $2.7 billion), and its fixed income funds (about $700 million). (Federated had $484.9 billion in AUM and nearly 1,900 employees as of March 31, 2019.

The deal is expected to close in Q4 2019. The price tag is expected to be about $52 million up front, though Donahue clarifies that "there is one little wiggle" as the price will vary depending on the money market fund AUM when the deal closes. Yet there will be no earnout, Donahue confirms, and no investment bank or consultant was involved in the deal. The price tag translates into about 0.37 percent of the AUM involved.

The plan is for Federated to merge most of PNC's 18 mutual funds into existing Federated funds. Yet three PNC funds — the PNC International Equity Fund, the PNC Emerging Markets Equity Fund, and the PNC International Growth Fund — will transform into new Federated funds, and the six-person, Cleveland-based team that runs those funds, led by Martin Schultz, will remain in Cleveland but join Pittsburgh-based Federated. That team specializes in international growth equities, while Federated's existing international equity strategies are on the value side of the spectrum.

"We're over the fact that they're Browns fans. We're okay with that," Donahue quips. "There's a good cultural fit there."

Federated and PNC's history goes all the way back to Federated's creation in 1955.

"PNC lent my dad and his buddies the money to found the company," Donahue says, and in 1989 the bank helped with Federated's management buyout from Aetna. On the flip side, Federated has long distributed its offerings through PNC's wealth management arm.

The Federated-PNC deal, Donahue says, "shows you what good neighbors can do" and is "a win-win all around", for fund shareholders, for Federated, and for PNC.

"This really tells a great story of how people in Pittsburgh can get stuff done and attract a lot of attention and do well by all their customers," Donahue says.

"All money market fund assets are good," Donahue adds. "It's just a natural event over here."

Indeed, Federated spokesman Ed Costello confirms that, over the past 20 years, Federated has done more 50 fund merger and adoption deals, many with banks like PNC.

"A lot of these deals, and this was one of them, really come out of a client-service attitude," Donahue says. "When they have assets and want to do something, we want to help them get there ... We more than willing to spend time and effort in order to find a warm and loving home for those funds."

"We never stop. We never have," Donahue adds. "We continue to look for those kind of arrangements."

Meanwhile, once the Federated deal closes, Baltimore-based PNC Capital Advisors will have about $21 billion in AUM, plus its institutional advisory business will have about $26 billion in OCIO business. Separately, earlier this spring PNC agreed to sell its defined contribution retirement plan recordkeeping business. PNC's fixed income and money market teams are staying on to handle separate accounts.

"PNC's institutional asset management business will now be focused on its core strength: providing comprehensive outsourced chief investment officer (OCIO) services and custom investment solutions to help our clients run their businesses better," Lyons states. "PNC will continue to proactively deliver value-added advice and solutions for our wealth management and institutional clients, leveraging our bespoke investment solutions and strong open architecture platform."

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