The asset manager CIBC covets is tricky to value

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Good luck pegging a ballpark valuation on Russell Investments, the asset manager that CIBC and private equity funds are eyeing. This isn't your traditional fund company.

Typically when asset managers come up for grabs, the deals are inked at prices that amount to between one and two per cent of assets under management. If a company has $100-billion in AUM, buying it for $1-billion is considered cheap, while scooping it up for $2-billion is getting expensive.

Those rules don't really apply to Russell, according to rival asset managers and investment bankers, because the company's business mix is too unique. Based in Seattle, and currently owned by Northwestern Mutual Life Insurance, Russell has three revenue streams: Consulting, money management and indexing.

Maybe more than anything else, Russell can be viewed as a consultant, advising pension funds and institutions on matters such as portfolio manager selection. This service is a hot one, because many big firms are outsourcing the roles of chief investment officers to consultants.

The second revenue stream, money management, is similar to those of Russell's rivals. The company currently has $260-billion (U.S.) in AUM, and its mutual funds offer mixes of everything from equity to fixed-income to alternative assets. However, the way in which Russell goes about building its portfolios makes is a bit unique. Much like its consulting business, the company zeroes in on portfolio manager selection. Instead of constructing portfolios based on strategies (U.S. equities, etc.), investors who put money into Russell's portfolios are really buying funds based on who their managers are.

Russell also makes money from constructing indices such as the Russell 2000, the leading U.S. small-cap index. Money managers license these indices to use for asset allocation and benchmarking.

Not only are there three different businesses, each revenue stream has different fees. Indexing, for instance, is very low margin. For that reason, you can't just slap a standard percentage onto Russell's AUM to derive a value. Instead, you really need to get into its books and build discounted cash flow models, said one banker who works on financial services deals. The deal, then, is likely to be valued the way an acquisition for a standard company would be: On the basis of projected cash flows.

Of course, if a private equity fund or CIBC is desperate to get its hands on Russell, "fair value" becomes a relative term. If CIBC feels like it's been late to the wealth management game because its rivals have already been beefing up, it could be happy to pay up. Ditto for the rival bidders.