There were a record number of mergers and acquisitions in the asset management sector in 2020. Recent share price moves suggest investors are betting on more to come.
Activists like Nelson Peltz and John Paulson are agitating for deals and bank executives including Jamie Dimon are hunting for ways to expand their in-house asset management arms. Meanwhile, falling margins and changing client needs are forcing the pace.
Larry Fink, who runs BlackRock, the world’s biggest asset manager, expects further consolidation among smaller players and says executives have little choice. “Firms that are trying to drive long term change, they have to do that.”
Speculation around deal candidates and potential predators has been intense since Morgan Stanley snared Boston’s Eaton Vance in a surprise $7bn deal in October that added $500bn in assets and raised the bank’s asset management arm to $1.2bn. The Financial Times reported it had beaten JPMorgan Chase to the prize. Seized by the idea that Mr Dimon might now make a tilt for Invesco instead, investors sent Invesco shares up 6.5 per cent on one day last week.
“Banks want to diversify and find additional revenue streams outside of lending when interest rates are so low,” said Kyle Sanders, analyst at Edward Jones. “A lot of asset managers need to get bigger and provide a greater product mix for clients who have broad portfolios.”
Just like individuals may find it convenient to use the investment advice and funds offered by their bank, large asset management clients such as pension funds and insurers would prefer to deal with fewer managers who can offer products across asset classes — from equities, through bonds to alternatives like real estate — and across international markets.
That has long been the driving force behind the rise of BlackRock, which now oversees nearly $9tn of client money.
“Investors are looking for fewer organisations to provide advice and they are seeking holistic conversations for a complete portfolio,” Mr Fink said. “Other asset managers can do that, but most of the industry was not developed that way.”
Consolidation in the sector “is not about scale and cost cutting, it’s about providing a broad conversation with clients”, he said.
Deals do usually result in cost savings, however, and that is no small advantage given relentless downward pressure on margins. The average annual fee on actively managed equity mutual funds, for instance, had declined from 0.96 per cent in 2010 to 0.72 per cent at the end of 2019, according to Piper Sandler and the Investment Company Institute. The fees on passively managed equity exchange traded funds have dropped from 0.32 per cent to 0.18 per cent over the same period.
Asset managers also face rising regulatory burdens and a need to invest in technology and data that can boost the distribution of their products.
But recent deals including Franklin Templeton’s takeover of Legg Mason last year, the $5.7bn acquisition by Invesco of Oppenheimer in 2019 and the 2017 merger of Janus and Henderson did not stem customer outflows. Active managers continue to suffer from a general record of lacklustre investment performance over the past decade, driving customers to passive funds that cost less and by definition do not underperform.
“The question is how do you survive and thrive when the ecosystem is evolving,” said Michael Cyprys, analyst at Morgan Stanley. “It will be a multiyear journey for asset managers to improve their position and expand their growth into new areas and extend distribution more widely via technology.”
Even relative giants see the value in bulking up. State Street, inventor of the exchange traded fund, with $3.1tn in its asset management arm, has talked with UBS about combining the unit with the Swiss bank’s own wealth management business, which has $2.8tn in assets. By contrast, Wells Fargo and Bank of Montreal, banks with subscale asset management arms, are looking to shed them.
Meanwhile, several standalone players have become the targets of activists. Mr Peltz held a stake in Legg Mason and was a supporter of its takeover by Franklin Templeton, having been vocal about asset managers getting bigger and using scale to cut costs and increase their market share. His hedge fund, Trian Partners, holds a near 10 per cent stake in both Invesco and Janus Henderson.
BrightSphere Investment Group, the New York-listed multi-boutique that used to be part of the UK’s Old Mutual, has activist pressure from John Paulson, who became its largest shareholder in 2018 and has since been installed as chairman. In November, the share price surged 17 per cent in a few days after talk it was exploring the sale of its private equity affiliate Landmark for $1bn.
“Activists always want an exit and if they think consolidation could facilitate that exit, they’ll push for that,” said Elizabeth Cooper, partner at corporate law firm Simpson Thacher.
The top 10 asset managers only account for 35 per cent of market share, making it the most fragmented industry globally after capital goods, according to Morgan Stanley.
But, for all the signs pointing towards further consolidation, sceptics highlight that asset management transactions are hard to execute because integrating different cultures and structures has traditionally been challenging.
“I don’t see it shrinking down to a handful of multitrillion dollar players,” said Janis Vitols, head of global asset management investment banking at Bank of America. Transactions will be tactical in nature, depending on whether players need to add new geographies or hot asset classes, such as private credit or real estate, to their product mix.
“It’s more nuanced than just rushing to buy assets and build a mega player. It depends on whether they want to grow in the US, Europe or Asia or in a specific category,” said Mr Vitols. “Scale is important but it will be targeted.”