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www.berkcap.com

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NEWSLETTER

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3rd-Quarter 2008

NEW YORK | DENVER | LONDON

The Market Shifts for Buyers and Sellers

Berkshire Capital Securities LLC is a privately-owned investment bank that provides merger, acquisition, valuation and strategic advisory services to clients focused in the investment management and securities industries. Since 1983, Berkshire Capital has completed over 225 transactions (with AUM transfer of over $400 billion and an aggregate value of nearly $10 billion) and over 185 valuations, strategic reviews and fairness opinions.

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Headquartered in New York City, the firm has offices in London and Denver. The Berkshire Capital team consists of about 35 professionals and support staff dedicated to our mandate with more than 20 years’experience focused in the investment management and securities industries.

Although the financial crisis has pounded the financial services industry with increasing ferocity since the summer of 2007, buyers and sellers in the asset management industry have continued to cut deals at a pace approaching last year’s record-setting level. In recent months, however, the marketplace has been changing with events. The major investment banks that were regular buyers of assets managers, particularly hedge funds, are bankrupt (Lehman Brothers) or engaged with their transformation into commercial banks (Goldman Sachs and Morgan Stanley). Commercial banks with existing asset management operations are generally focused on strengthening their balance sheets as opposed to making targeted asset management acquisitions.

Meanwhile, two major banks that have emerged from the crisis as apparent winners — Bank of America and Wells Fargo — are busy merging the operations of Merrill Lynch and Wachovia, respectively, both of which have large asset distribution and/or management businesses. In Europe, diversified financial firms with asset management operations such as ING, Royal Bank of Scotland and UBS have all seen their fortunes decline precipitously with the credit crisis, with many forced to secure government funding. The ability of many of these companies to focus on acquisitions is questionable. Santander, which has survived the credit crisis better than most, had been seeking to divest its large asset manager for months until it finally shelved that plan in late October due to “market conditions.”

At the moment, “market conditions” generally refer to one of two factors. First, potential buyers are having more difficulty raising capital. Second, and more importantly, the turbulence in financial markets is playing havoc with valuations. According to the Investment Company Institute, assets in U.S. stock funds totaled $4.96 trillion in September 2008, down from $5.85 trillion in June and $6.94 trillion in October 2007. The sharp decline in fee-based assets, and its impact on the bottom line, is apparent in the quarterly results of publicly traded asset managers of all sizes, including those with previously turbo-charged performances.

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The Berkshire Capital Newsletter is distributed electronically.

Although the prevailing environment is forcing dealmakers to place transactions on hold in the short term, there is a flipside: independent asset managers of all stripes are under the most intense financial pressure they have faced in recent memory, and many need to find a partner to survive. Additionally, several mid-size banks with asset management units, such as Fifth Third Bancorp, are reportedly reviewing divestitures as a means of raising capital — and in some cases to exit a business that in the best of times can be difficult for banks to master. Debates over valuations notwithstanding, these possible distress sales bode well for flexibility at the bargaining table. As Northern Trust Global Investments president Stephen Potter recently told Investment News in discussing potential acquisitions: “We believe it will only increasingly be a buyers’ market.”

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© 2007 Berkshire Capital Securities LLC. All rights reserved.

Some information presented in this publication may be obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently, Berkshire Capital Securities LLC cannot guarantee its accuracy.

BlackRock chairman and CEO Laurence Fink reinforced that view during the company’s third-quarter conference call. Fink said he expects “huge opportunities in the investment management business for consolidation,” citing the impact on companies of diminished asset bases combined with the increased costs of research and risk management, as well as the additional regulation that he believes is likely next year. BlackRock has “had more inquiries recently about merger opportunities than we’ve ever had,” Fink said, but noted that the company had not “begun any of the conversations” given the state of financial markets.

BlackRock, with its scale and financial strength — it still posted net income of $218 million during a disappointing third quarter — should be in an enviable position to enhance its business through selective acquisitions. But private equity players are also expected to assume an important role in the reshaping of the industry. Although the financial crisis has impacted the industry’s fund-raising prowess and its ability to employ leverage, private equity firms worldwide still hold an estimated $450 billion in cash. (In the third quarter of 2008, the industry raised $88 billion, the lowest quarterly total since 2005, according to Preqin.) Over the last few years, the industry has shown an increasing interest in asset managers, and

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