2015 was the
biggest year for asset manager mergers and acquisitions in a decade—and in
2016, M&A activity has hardly slowed down.
In March, four
MassMutual boutiques and their combined $260 billion in assets merged to become
Barings. In May, Ares Capital acquired American Capital for upwards of $3
billion, growing its asset base to $13 billion. And in October, Janus Capital
Group and UK-based Henderson Group joined $300 billion in assets under
management to create Janus Henderson Global Investors.
The sheer number
of deals is down this year: As of October, 110 mergers and acquisitions had
taken place in the US asset and wealth management sector, compared to 144 over
the 2015 calendar year, according to data from PricewaterhouseCoopers (PwC).
But the amount of money involved per transaction has “leaped ahead,” says PwC
Partner Sam Yildirim.
Total deal value
in 2015 amounted to $9.7 billion, including three mega deals worth a combined
$6.2 billion. Meanwhile, the first 10 months of 2016 alone has already seen
$9.1 billion in M&A transactions, including two mega deals—the American
Capital acquisition and Janus-Henderson merger—totaling $5.8 billion.
It would seem
that consolidation has become—pun intended—quite a big deal. But what’s
prompting M&A activity this year, and how does it compare with the
motivations of the past? The main driver, experts agree, is an industry shift
toward passive management.
‘A Shift vs. a Cliff’
Prior to the financial crisis, asset managers’ valuations were very
healthy, Yildirim says. The result was robust M&A activity in 2006 and even
in early 2007. But then the financial crisis hit, spooking buyers and
evaporating interest in mega deals. According to PwC, in the past decade there
have been no more than three mega deals per year with the exception of 2007,
which saw seven of them as the financial crisis brought forced sales.
“A decade ago, we saw a lot of stress sales… [but]
after the crisis subsided, we saw things from a product perspective rather than
a stress perspective,” says Jay Langan, partner with Deloitte Advisory and
leader of Deloitte’s financial services M&A group.
These days, consolidation is “more of a shift
versus a cliff,” he adds.
Although the financial crisis is long over, other
changes in the asset management industry are impacting the overall market
structure. Each sub-sector of US asset and wealth management is facing
different challenges that may lead to deal activity, but the mutual fund space,
in particular, is consolidating out of necessity, Yildirim says.
M&A activity among mutual fund providers
surged in the third quarter, according to PwC, with nine deals announced in
this sub-sector out of 36 total asset management consolidations. Comparatively,
the second quarter saw five mutual fund M&As and 30 transactions total.
Among the main
drivers for M&A activity in the space—as well as in the broader asset
management industry—has been the shift among investors to low-fee passive
“Increasing competition and pressure to reduce
costs, particularly for actively managed funds that are struggling to keep pace
with the returns and low fees of index funds and ETFs [exchange-traded funds],
has led to some consolidation in the asset management industry,” says Bill
Haynes, president and CEO of BackBay Communications, a financial services
marketing and branding firm. “Many industry insiders think that there’s much
more on the horizon.”
In addition to the rise of passive management,
there’s an issue of regulation. The Department of Labor’s new fiduciary rule
could be a boon for M&A activity in the mutual fund space, Yildirim
says—but until the degree of the impact on the asset management industry is
made clear, there won’t be too many cash deals and mega deals, at least in the
short term. Add in election-related market volatility, and the prospects for further mega deals this year
are unlikely. However, the expertise, time, and money it will take for managers
to comply with the new regulation, as well as the ability to get shelf space
from wealth managers, will make it more difficult for smaller, independent
managers to go it alone.
changes may favor the firms that are better equipped with technology and better
equipped with resources,” Yildirim
In alternative asset management, on the other
hand, M&A will be motivated more by a desire for new products, talent, and
geography. For these managers, consolidation is not going to be high on the
list, Yildirim says.
“We don’t expect alternatives managers to see
consolidation in the industry as a necessity to survive,” she says. “They
aren’t suffering as much as traditional funds in terms of fee compression.” In
the hedge fund space, things have been relatively quiet as far as mergers and
acquisitions go, but Yildirim expects it will gain steam next year. PwC’s third
quarter report on asset management M&As notes that several hedge funds have
underperformed the broader markets, which could result in mergers.
For firms that do decide to consolidate, the key
to success is articulating a coherent vision for the future and generating
excitement that the new entity will be beneficial to investor clients, Haynes
“A thoughtful strategic branding initiative and
communications program is critical to the success of a merger,” he continues.
“It articulates the benefits of the merger to all parties inside and outside
the combined company. This is particularly the case in the asset management
industry, where it’s becoming more difficult to distinguish on performance and
products. The new brand needs to capture the essence of the company, its
mission, values, and differentiators to provide a touchstone and guidepost for
its approach to its business, customers, employees, industry and community.”
Going It Alone
But this isn’t to say only
big players will win in this environment. Eugene Podkaminer, senior vice
president of capital markets research for consultant Callan Associates, says
all of these consolidation may actually help boutique players “stick to their
knitting” and promote specialties that can’t be replicated on a larger scale.
“For the past 20 or 30 years, you have had large
enterprises that have offered something close to one-stop shopping, and you’ve
had boutiques, and both of them have had their customers,” he says.
Portfolio management acumen in areas like real
estate and infrastructure, for example, can make for an in-demand manager,
Deloitte’s Langan notes, due to the dearth of quality managers in some of these
asset classes. His colleague, Masaki Noda, agrees. “If you’re in a niche space
that could generate returns for investors,” Noda concludes, “I think investors
are willing to pay for it.”