Are we about to see a new wave of M&A in the asset management sector? Are the people who buy stocks for a living going to start buying each other? It looks like this might be the case judging by some very interesting research currently undertaken by a few key players in the market. In order to support the above statements, I have selected and analysed a recent research data undertaken by State Street, asset management servicing division for Europe, which conducted a survey amongst asset managers in order to find out where they saw the opportunities to build their business over the next three years.
It seems that most asset managers are interested in the multi-asset solutions. What does this actually mean? What is it that asset managers are interested in? Data shows that 97% of the respondents quizzed said that they are positive in terms of future expectations and excess growth because we are in a fast growing market. The underlying investors drive this so the investor demand is going to change dramatically. In fact, this has already changed to some extent, but I think that a lot of asset managers expect their clients to be more interested in outcome driven asset management. The outcomes, which are linked to their personal unique risk profile, investment goals and personal circumstances. All these aspects can only be effectively managed by the multi-asset solutions. It seems that asset managers are no longer interested in the classic model that we have at the moment, where usually one asset manager is focusing on one single type of asset within the portfolio. Asset managers now have to be able to manage a variety of different types of investments across asset allocation.
Does this mean that we are not necessarily talking about one company buying another, we are talking about rating fund managers, swapping assets so that they can have different types of assets under one portfolio? Analysing this from a M&A point of view, reveals that this has various aspects: you can buy a firm, a team within a particular firm or just the assets. But if you are a player and you have a certain gap in a certain asset class, you can acquire a team that can bring the specific expertise and correct asset class recommendations.
Let’s take a look at this image in more detail and establish as to where people are more bullish. The U.S. seems to be less expecting more deals than the rest of the world. But why are we seeing particular interest in M&A in Japan and Germany? I think that this is related to the structure of the asset management market in these countries. If we look at the size of the players from a global perspective, it is clear that this industry is moving towards a global environment facing global competition. The reason as to why the U.S. is not anticipating a large number of M&A is because they are already too big and are not in such a pressured position, compared to other countries with various small and middle-sized players. These smaller and medium-sized players are now in a situation where they are either too small to face global competition or too large to be a boutique and operate at a very cost effective level.
It is clear that the biggest fund managers expect the highest numbers of deals. Smaller companies are the ones that might be hovered up by the bigger players. Whilst this might be the case according to State Street research, I still think that there is going to be room for small boutiques because they usually do not operate on a global scale – they are focusing on a couple of markets. It is expected some further selective M&A activity among European asset managers, particularly where institutional investors increasingly demand scale, such as alternative investment, private equity and real estate. Aberdeen Asset Management‘s (A-/Stable) acquisition of Scottish Widows Investment Partnership and Schroders‘ (A+/Stable) acquisition of Cazenove Capital, both in the UK, are examples of recent selective acquisitions. Aberdeen‘s deal will add scale to its UK equities and fixed-income business, while Schroders expanded its private banking operations. It is expected that the acquisition of smaller specialists to remain popular ways for asset managers to add competences, products, clients or distribution channels.
It is interesting to observe that other researchers such as Fitch Ratings UK share different views on a new M&A era within the asset management sector, arguing that this is unlikely to happen. The European asset managers are set to rationalise further, but a widespread M&A spree is unlikely to happen. Most managers may opt for less intrusive strategies, such as a reduction in the number of funds and cost cutting, to tackle margin pressure in a fragmented and competitive market rather than face M&A challenges. I personally think that Fitch Ratings do not expect widespread M&A because there is not many large candidates left and deals can bring considerable risks. There could be stark cultural differences among managers and they may also face investor outflows. Other challenges include a negative impact on an asset managers‘ credit profile if an acquisition involves debt funding, regulatory hurdles in the approval phase and over-paying in a competitive market, particularly if a bidding war is triggered.
The logic of the way in which the fund management sector is moving is clear. There is a squeeze on the middle. Either you are passive player, in which case it’s all about scale and getting very big or you are truly trying to beat the market, trying to get “Alpha” as they say in the jargon and that means being small. Those caught in the middle are going to find it challenging and increasingly harder to survive.