Valuations of asset management businesses depend on the future not the past. Investors and consultants must consider several factors including whether there will be growth in net new money, if margins will hold up, if key personnel will stay with a firm and how investments will performance.

But in a global marketplace, the key assessment benchmark of a firm’s quality is investment performance.

While firms with great prospects but without good investment performance exist, it is irrational to assume that in the new world of mandating boutiques with serious mandates over large or captive asset managers they will continue to do so. The safe brand syndrome is rapidly being replaced by the investment performance (good to superior) syndrome, and rightly so.

Consultants, clients and analysts all want superior performance and the information age allows good managers to be found, be they traditional, active, hedge or other.

And although a future growth business plan is the main academic basis for a good valuation, a good track record is the basis for future performance, as past investment performance is the most sustainable indicator for future growth prospects.

Most of the redemptions that occur are due to personnel changes or poor investment performance. In future the best way to increase a firm’s market value and revenue generating capacity will rest substantially on this indicator. Firms will be well advised to focus on it as it is the best form of value creation for them and their clients.

Recent comparisons of firms with varying performance levels have identified a delta of approximately 50% in market value in favour of high performing managers. But why should a poorly performing manager be worth even the discounted cash flow of his book given the likelihood of incalculable redemptions withdrawals and people departures?

One could make a case that for the poorly performing funds the only basis for assigning a good-will premium is the secrecy about their performance and the loyalty of clients while new managers attempt an investment turnaround. But the window for poor performance to be rectified by new ownership following a takeover of an underperforming manager would appear to be shrinking in light of the increasing willingness of investors to reallocate money.

One could also argue they are undervalued since good performance will gain increasing mandates once the word gets out. And this has a multiplier effect as the firm grows and can accept larger mandates and so on, subject to its capacity to invest the growth in funds.

It could be further argued that the frequently criticised salaries and bonuses of good investment managers are entirely justified given the multiplier effect their contribution has on their firm’s valuation.

The valuations of such firms could be classified as cheap when estimating the future size of the enterprise, as long as it retains a good operating reputation based on transparency and superior performance.

A survey of the M&A tendency of many asset managers and large institutional groups over years shows a clear tendency to be proactive. This comes from confidence in the marketplace following almost record financial results.

Consequently, if a firm is considering a listing or industrial stake disposal, it should base its valuation expectations on its key future value driver - its investment performance.

As well performing boutiques or units are identified as serial and superior performers, their valuations will assert themselves into a justifiable premium and may even be considered as bargains to be had.

Ray Soudah is the founder of Millenium Associates, a Swiss-based independent M&A advisory firm to the global financial and asset management industry