Change is afoot. Mergers & Acquisitions (M&A) in Asset Management is becoming the norm.
The UK Asset Management industry has seen two major merger announcements in the last six months. Blackrock CEO, Fink said in a Reuters interview in April 2017 ‘this is definitely not the end’ and a further wave of industry consolidation is expected. Recent PwC research among 185 global CEO’s in Asset and Wealth Management (February 2017) indicates 52% are considering strategic alliances, while 42% are planning a merger or acquisition. So why is there this focus on consolidation in the industry?
The rise of passive
Within a world of overall low investment return, active management loses its appeal against the low fee passives and puts pressure on the active fees or even moves the active houses towards more passive investment strategies.
The regulatory environment puts significant (cost) burden on the industry and in the last few years the number of staff within risk and compliance departments has grown exponentially. The regulator would like to see fewer players on the market to control them easier and make the risks more transparent. And last but not least, when within active managed funds the performance is not above average, the regulator is challenging the justification of the fees charged.
Being stuck in the middle
An Asset Manager can find themselves in a situation where their offering is simply not broad or scaled enough and hence they often can’t deliver the investment performance, equally they are too big to be an efficient and lean niche player.
The valuation of asset managers
A third factor within the UK specifically is the low valuation of UK Asset Managers. Within the above scenarios, M&A can create economies of scale for reducing cost by combining back offices, investment offices and research capability and thus higher valuations.
However, there are also other considerations for M&A. Diversification of product, clients and geography make the Asset Managers less volatile and more resilient to changes in the environment and/or economy.
Is M&A the solution to market challenges?
M&A is not without its own challenges of execution. Integrating two organisations has vast operational implications and raises many questions. Can the economies of scale be realised within a short time frame? Can investment strategies efficiently be combined? Even with the same key investment systems in place, have they been set up similarly or does one of the parties effectively have to redesign its operations to fit the other parties set up. Does the ‘on paper’ fit of company cultures match also when staff is brought together.
The list of potential obstacles is endless and the full benefits realisation through M&A often take two to three years to materialise. Existing management time can get (fully) absorbed during this time, whereas the world keeps moving on. Market, technology and regulatory changes continue to demand highest attention to stay with the pack, let alone keeping or getting ahead of the pack.
M&A is never an easy road to travel. It will often result in an organisation being in flux and with it a heightened risk of losing employees. Fund managers with established track records may see this as an opportunity to break away from their motherships and set up their own shops.
As the M&A trend becomes more entrenched in the Asset Management industry, it will be interesting to see where we are at the end of the first wave in three years’ time and if by that point, will they have seen the full benefits materialised?