T. Rowe Price Group plans to acquire a New York-based investment firm for $4.2 billion, making its first big expansion into private markets in a bid to grow beyond its better-known mutual fund retirement business.
In its largest-ever acquisition, the Baltimore-based money management firm has agreed to acquire 100% of the equity of Oak Hill Advisors. The alternative credit manager has $53 billion of capital under management and more than 300 employees worldwide.
The Baltimore firm will pay $3.3 billion at closing, including about three-quarters in cash and a quarter in T. Rowe Price common stock. T. Rowe will pay up to an additional $900 million in cash after achieving certain business milestones starting in 2025, the company said.
The firm said the addition will accelerate its expansion into alternative investment markets and complement its existing global business. Alternative investments in privately owned companies typically include private equity, private lending, venture capital and private real estate assets.
“While we are committed to our long-term strategy to grow our business organically, we have also taken a deliberate and thoughtful approach to considering adding new capabilities through acquisitions that advance our business strategy,” Bill Stromberg, T. Rowe Price CEO, said in an announcement Thursday.
Stromberg said Oak Hill meets the “high bar” for such opportunities.
“Their proven private credit expertise will help us meet our clients’ demand for alternative credit,” Stromberg said.
The transaction is expected to add to T. Rowe Price’s diluted earnings per share by a low- to mid-single-digit percentage next year. Shares of T. Rowe Price rose 5.7% Thursday to close at $215.29 each.
Thursday’s stock price increase could indicate that the market views the deal favorably and does not believe T. Rowe Price will be overpaying, said Karyl Leggio, a finance professor at Loyola University Maryland.
“T. Rowe is a conservative company, and this is a good growth move, a good sign for the direction of the company in the future,” Leggio said.
The firm announced the deal as it reported third-quarter results, missing analysts’ expectations in both earnings and revenue as the stock market in September lost gains made in July and August. The firm also saw $6.4 billion of net outflows during the quarter as some investors shifted away from growth after years of attractive returns, the company said.
The firm on Thursday reported net revenue of $1.95 billion, missing estimates of $1.97 billion but jumping 23% from the third quarter of 2020. Earnings rose to $3.27 per share, increasing from $2.55 per share in last year’s third quarter but missing analysts’ estimates of $3.31 each.
Rob Sharps, the firm’s president who will take over as CEO on Jan. 1, had said in July that any future mergers or acquisitions would prioritize potential partners that could offer new capabilities.
Alternative credit strategies have been in demand globally from institutional and retail investors who are looking for attractive yields and risk-adjusted returns, the company said.
While T. Rowe offers investments in more secure, fixed-income bonds, Oak Hill has a successful track record in consolidating high-risk debt, such as bond issues for struggling companies, which can offer a higher return, Leggio said.
“What T. Rowe has done is acquire a company that does this very well,” she said.
Both firms’ management teams envision building a broader business in private markets by combining Oak Hill’s specialty in alternative credit with T. Rowe Price’s global scale, an increasingly important competitive advantage, Sharps said Thursday.
“We ... applaud [T. Rowe Price’s] plan to acquire alternative credit manager Oak Hill Advisors ... for $4.2 billion in a deal that diversifies” the company’s mix of assets under management, Catherine Seifert, an equity analyst with CFRA Research, said in a research note Thursday.
But she said concerns remain about fund outflows that started in the second quarter and accelerated in the third. Seifert maintained a “hold” rating on T. Rowe Price shares and raised the 12-month target price by $13 to $220 per share.
The purchase price for Oak Hill includes the retirement of the New York firm’s outstanding debt at closing.
Oak Hill will operate as a stand-alone business within T. Rowe Price. It will manage its investments and maintain its own employees, culture and investment approach.
Glenn August, founder and CEO of Oak Hill, will continue in that role and will join T. Rowe Price’s board and management committee after the deal closes. Oak Hill’s management partners all will sign long-term agreements and continue to lead the business in their current roles.
“Joining with T. Rowe Price will better position us to meet the evolving investment needs of clients, as well as the financing needs of companies and financial sponsors, while maintaining our record of measured and thoughtful growth,” August said in an announcement Thursday.
T. Rowe Price, founded in Baltimore in 1937, had $1.61 trillion in assets under management as of Sept. 30. The firm provides mutual funds, sub advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries.
The two firms plan to co-develop new products and strategies for T. Rowe Price’s wealth and retail channel, including broker-dealer and bank businesses. The Baltimore firm has agreed to commit $500 million for co-investment and seed capital alongside Oak Hill management and investors. Both firms expect to expand into other alternative asset categories over time.