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Asset Management M&A Is Here To Stay 

by Christopher Henry

Published: June, 2017

Submission: August, 2017

 



There’s a lot of sound reasoning behind the idea that asset management mergers and acquisitions are likely to slow in 2017 after several very busy years, including $17.1 billion in transactions last year alone. Global equity market and political uncertainties abound — and as more investors flock to passive investments, there will be continued pressure on managers to lower fees and yet find ways to increase operational efficiencies to maintain profitability. Meanwhile, small, regional and mid-sized managers are beset by giant players on one side and boutiques on the other. All of this means asset management M&A will have bright spots, even if the overall dollar volume of deals falls in 2017. Private wealth management “aggregator” firms will continue rolling up smaller and regional practices. Hedge fund and private equity managers will continue to sell minority, passive stakes as a path to liquidity for their owners, and increased use of technology and machine learning should continue as forces disrupting traditional investment advice delivery methods for retail and retirement plan investors.

M&A purchasers will continue to target asset management firms to gain operating efficiencies through consolidation and to seek to plug holes in their product offerings by acquiring managers in diverse or complementary strategies, especially Iower-cost platforms like exchange-traded funds (ETFs). Since the end of the financial crisis of 2007-08, we’ve seen the equity markets rise and recover (with some bumps along the way) while interest rates have remained historically low. That has caused investors to continue to look for higher yields in equity funds and is a boon to assets under management (AUM) levels and asset managers. At the same time, however, investors have consistently shown their appetite for lower-fee alternatives — like passive strategies and ETFs— as the world increasingly becomes accustomed to fee transparency and access to free or very low-cost information.Hence the continuing trend of asset outflows from active management strategies (and their corresponding higher fees) to more passive strategies (and lower fees).

The California Public Employees’ Retirement System — the largest public pension fund in the United States — is re-evaluating its investment strategy, potentially embracing a more passive approach. Indeed, CalPERS is even reportedly considering internalizing its own private equity firm, in part to manage and control costs of investment advice.Part of the expense of investment advice comes from the cost of complying with regulations and oversight — and those costs have only been increasing since the financial crisis. It’s unclear where regulations will go under the still relatively new Trump administration, and there is added uncertainty about a stock market that has mostly stagnated in 2017 after strong post-election gains last year, to say nothing about uncertain tax reform efforts and ever-present geopolitical uncertainty and their impacts on equity markets in 2017.A substantial part of the asset management M&A activity in recent years has been about capturing operating efficiencies in an increasingly costly regulatory operating environment.

As with most industries, consolidation can create synergies through the elimination of redundancies in back- and middle-office functions. For years, this has been a way for asset management firms to trim costs and meet investor demands for lower fees, while also attempting to sustain firm profitability levels.That consolidation motivation also persists for private wealth management roll-up firms — Focus Financial Partners, Buckingham Asset Management and Telemus Capital are among the active participants. These larger players benefit from their size and the standardization and scalability of their processes and platforms. Despite the consolidation to date, the private wealth management market still retains much of its regional and local character. Aggregator firms provide a way for financial advisers approaching retirement to monetize their practices and, at the same time, benefit their clients through access to the acquirer’s online platforms with stronger and more intuitive tools and client interfaces and reporting.ETFs passively track indexes — meaning they have lower fees — and remain in demand among investors and as acquisition targets.

Larger firms could certainly create their own ETFs, but doing so from the ground up can take up to a year or more, compared with months to roll up and integrate an acquired operation. And by buying an ETF manager rather than building, these acquirers immediately secure the talent who knows the space best and their track record rather than luring away or building a team from the ground up. For the ETF managers, becoming part of a larger organization typically offers the benefit of greater access to marketing and distribution channels, to drive AUM levels.

Also look for investment funds to continue to seek to buy minority, passive stakes (20 percent or less) in hedge fund and private equity management companies. Private equity fund Dyal Capital Partners, part of money manager Neuberger Berman, has been very active in such deals, including its recent purchase of part of credit investor Sound Point Capital Management LP.


 



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