My previous column focused on growing speculation about domestic bank mergers in Europe, a still-fragmented regional sector struggling to deal with low profitability and high costs in a prolonged period of zero interest rate policy/negative interest rate policy, economic recession brought about by Covid-19, and competition from the US Big Five in key product areas.
Like the banks, asset managers are struggling with many of the same issues. It’s been clear for a while, though, that the timing is right for more buyside mergers and takeovers. I’d previously pushed back on consolidation over-exuberance among money managers and been cautious about whether asset management M&A would happen at the pace or at the scale some in the industry had been forecasting. Now I’m not so sure.
Even though the big deals in recent weeks and months have been among US-domiciled firms, they’re having a big impact in Europe as the US asset management majors operate very large businesses in Europe, the Middle East, and Africa. Asset management takeover fever started as a theme well before Covid-19 but it’s been accelerated by many of its impacts.
Unlike the banks, the AM consolidation process has moved way beyond the realm of speculation; money managers are getting on with it. What’s so enthralling about the asset management deals that have been agreed of late; or about the situations where sellers have put chunky asset management businesses on the blocks; or looking at the mega-deals being talked around the market, is that the outcomes will not be incidental for the industry.
In fact, they will re-order how the industry is stratified as the number of firms with US$1 trillion-plus in assets under management increases amid ongoing talk that between a fifth and a third of all firms currently making up the buyside universe could disappear. That’s pretty dramatic.
The reasons driving consolidation are by now well-rehearsed: pressure on fees, pressure on margins, pressure on costs, rising regulatory and operating costs, the drive for scale, the drive for revenue, the relentless march of (much cheaper) passive strategies, the buy versus build approach to adding capabilities in ESG, adding new client demographics, adding strengths in niche markets, in alternatives and uncorrelated strategies in an accelerated manner; adding well-regarded AM brands. The list goes on.
Morgan Stanley’s deal to acquire Eaton Vance, Franklin Templeton’s takeover of Legg Mason, and the merger between Natixis-owned Ostrum Asset Management and La Banque Postale Asset Management will push the merged firms into top 20 global industry positions. And ever since it came to light a few weeks back that Nelson Peltz’s Trian Partners had acquired stakes in Invesco and Janus Henderson, there’s been speculation that a merger of the two may be on the cards. That’s far from fact, but a merger would place the merged entity near the top 10 on a pro forma basis.
Meanwhile, private equity firm TA Associates has been widely reported as looking at options to sell Russell Investments (with AUM of US$300 billion), while Wells Fargo has reportedly been shopping its asset management arm (with AUM of US$580 billion), having reached out to a variety of AM champions – including Russell. Any reasonable-sized firm picking up either of the firms on the block would similarly propel itself into the upper echelons of the market.
To be sure, it’s not all about global scale. Amundi’s acquisition of Banco de Sabadell’s asset management arm in Spain was far from transformational for a firm that’s already a global top 10 player, but it does give Amundi an additional retail dimension in a heavily bank-intermediated wealth management channel as well as a 10-year distribution agreement.
In the United Kingdom, Jupiter Asset Management’s summer acquisition of Merian Global Investors (the former Old Mutual business renamed following a TA Associates-backed buyout) won’t do much to give Jupiter a global foothold but it will give the firm some reasonable firepower among UK active managers and, it is hoped, put an end to recent outflows and fund manager exits suffered by both firms. Observers expect Andrew Formica, the Jupiter boss of not quite two years and former co-CEO of Janus Henderson, to keep his track record of takeovers intact.
Taking over a business where a chunk of the assets walks out the door every evening will always be a risk in asset management. As will issues of cultural mismatch, or making sure the interests of fund managers and other key personnel are aligned with the business. But being sub-scale in a consolidating market is arguably the bigger risk.