Consolidation in Asset Management

Shopping malls and stores were closed for consumers for the better part of 2020, but that did not stop Wall Street firms from going on a shopping spree. And shop they did – with a frenzy of deals in the Asset Management space hitting the market throughout the pandemic. Franklin Templeton kicked off 2020 by acquiring Legg Mason in February and many others followed suit throughout the year.

2020 was an unprecedented year, both from a global health perspective, as well as for asset managers. For those who can act fast – and did, it provided opportunity and leverage to find the right match in the ever-evolving industry of Asset Management. Larger players surfaced, some well recognized names faded away, and it became quite clear that new players will shape the future of this industry.

Based on the joint study between Thinking Ahead Institute and Pensions & Investments, “232 names in our 2009 list of 500 largest asset managers are not in our 2019 list. There seems to be a quickening of the pace of consolidation.”(1)

After limited activity in the early part of the last decade, industry players wasted no time to close out the decade with a few interesting and large acquisitions – Janus/Henderson in 2017 and Invesco/Oppenheimer Funds in 2019. The industry landscape is changing and when firms are trying to stay competitive and weather the pandemic to come out stronger on the other side or cease to exist, is the right answer consolidation? Will we see this trend continue? Many believe this trend is here to stay and the industry will continue to see additional activity in 2021 and beyond, with top players having expressed open interest in possible targets.

Simply said, firms need to stay competitive. With pressure on fees, rising operational costs and an underlying desire to scale, asset managers have turned to M&A to grow their asset base and remain relevant in the industry. Managers need to focus on more than just the size of the transaction as it creates an opportunity to evaluate their current needs with future opportunities for growth. Product offerings focused diversity and technology are two key areas that allow asset managers to remain competitive. And with competition comes value for both the asset managers and investors alike.

A. Diversification

Asset managers are looking for ways to increase returns for their investors/clients by expanding into new or lightly covered sectors and industries. The fastest way to do that is to look for boutique firms with expertise in these niche areas and to build upon that foundation while leveraging existing scale, resources, and internal capabilities to evolve and grow. Diversification takes many shapes including, both geographical and asset class diversification. Having a more diversified product offering provides opportunities for clients to maximize returns through different market cycles, while also responding to the demand for social responsibility to better serve clients in an already highly competitive industry. The increased interest and focus on Environmental, Social and Governance (ESG), new sectors like renewable energy, and climate change have increased the demand for investment strategies aligned to social responsibility. Moreover, clients are also riding the wave of consolidation and looking to engage with less partners. They are looking for managers who can provide deep expertise and access to a broad range of solutions for their ever-evolving needs.

B. Automation & Disruptive Technology

Throughout the pandemic, firms across all industries were forced to re-evaluate their technology and operating models. An increased investment in technology and shifting operating models have accelerated the need for transformation and automation initiatives. Those looking to create operational synergies and efficiencies have pursued disruptive technologies such as artificial intelligence and robotics process automation to help offset the revenue impact from reduced management fees. Firms that already possessed these leading technology platforms made themselves attractive targets during the pandemic-driven buying spree. The increased scale and ease of integration drove many of the recent mergers. Companies that are willing to adapt and implement new technologies have positioned themselves for greater innovation, expansion, and operational efficiencies for their clients. Asset managers that rely heavily on manual middle and back office operations, will lag in the industry as technology enables completion of core functions more accurately and in less time.

A. What Does Consolidation Mean for the Market?
 

Asset Management continues to be one of the most fragmented financial services sectors. According to Morgan Stanley, two-thirds of assets under management – approximately $60 trillion – is sitting with smaller firms in the industry. With some of the drivers mentioned above, we will continue to see the larger players scooping up boutique firms to further drive consolidation and do it quickly to attain market share. Larger firms with strong balance sheets and excess capital will continue to get bigger and become key players in the sector. The question remains – will small players be equipped to withstand the evolving asset management industry?

B. Considerations Before and During an Integration

Navigating through the consolidations era in the asset management space has put a focus on what it takes to ensure a successful integration. Considerations range from the regulatory environment, effective change management plans, to technology impact, and future operations. Every detail is of paramount importance in the execution as it will ultimately determine the success of the deal and the future of the company.

Sia Partners understands the challenges companies face during this unprecedented time. It is important to structure a well-planned roadmap to ensure the right governance, frameworks, and protocols for a successful integration. We have been helping our clients with mergers and acquisitions during all phases of their transactions, beginning with due diligence all the way through integration activities (i.e., understanding how to plan for a Legal Day 1 or successfully integrating operations and technology).

Sources: 

(1).Thinking Ahead Institute: The world’s largest asset managers – 2020