T Rowe Price to buy Oak Hill in $4.2bn cash and shares deal

T Rowe Price is buying credit manager Oak Hill Advisors for up to $4.2bn in cash and shares, in a deal that marks the latest example of consolidation in the asset management industry and illustrates growing appetite for alternative strategies.

Bill Stromberg, T Rowe chief executive, told the Financial Times that the acquisition was the Baltimore-based group’s largest dollar deal to date. He said the purchase would allow the group to pursue growth opportunities in private credit as more institutions and even wealthy individuals to mass affluent clients seek exposure to the sector.

T Rowe, which has $1.61tn in assets under management and is one of the world’s top active managers, said on Thursday that it would acquire 100 per cent of the equity of New York-based Oak Hill, which has $53bn in assets under management across private, distressed, special situations, liquid, structured credit, and real asset strategies.

Under the terms of the acquisition, $3.3bn is payable at closing, about 74 per cent in cash and 26 per cent in T Rowe common stock, and up to an additional $900m in cash is payable if business targets are reached. The high price reflects big demand for private capital and the competition for deals in the sector.

Rob Sharps, president and head of investments at T Rowe and who takes over as chief executive in January, said on a call: “There are three areas that investors are allocating their money towards. Passive, ESG and private markets.”

“Passive is not a strategic aim for us,” he added. “We are building our ESG presence, so that leaves private markets.”

When asked about the mid to high teens multiple on the deal, Sharps said: “We think it’s a fair deal and comparable to recent transactions.”

T Rowe’s funds focus on equity, fixed income and multi-asset strategies, and it said it had limited overlap with Oak Hill in terms of investment strategies and clients. Oak Hill will become its private markets platform with the two firms planning to explore expansion into other alternative strategies in time.

Analysts highlighted that T Rowe was seeking to shift from being an active asset manager focused mainly in equities.

Kyle Sanders, analyst at Edward Jones, said that T Rowe had “needed more diversification” and that Oak Hill provided it with “immediate access to fast-growing private credit markets, instantly filling a hole in their product line-up to meet client demands”.

The acquisition comes as investors turn to private capital strategies in their search for yield in a low-return environment. The overall industry, which includes sectors such as private credit, private equity and infrastructure, grew to $7.4tn at the end of 2020 and is expected to hit $13tn by the end of 2025, according to Morgan Stanley.

Demand for these types of strategies, which offer the prospect of higher returns but charge higher fees and are more opaque, has driven investment groups to hire teams, launch new divisions and hunt for acquisitions. Meanwhile, dealmaking activity has increased in the asset management industry, as firms seek scale, tap into new growth areas and curb costs.

So far this year there have been 160 asset management deals globally, worth $25.3bn, according to Dealogic. Last year there were 208 deals valued at a total of $54bn.

Oak Hill will operate as a standalone business within T Rowe. Its founder and chief executive Glenn August will continue in his role and is expected to join the acquirer’s board of directors and management committee.

T Rowe committed $500m for co-investment and seed capital alongside Oak Hill management and investors. This will be deployed over the next five years depending on market conditions and opportunities.

The deal is expected to close in the fourth quarter, pending regulatory approval.