Stay current on your favorite topics
Consolidation is likely to continue apace, but there is no M&A "magic wand": The right business pairing, efficient execution and post‑deal integration are key
Megadeals in the asset management industry have been coming thick and fast: Standard Life's £3.8 billion tie-up with Aberdeen Asset Management, Amundi's €3.55 billion acquisition of Pioneer and Henderson and Janus Capital joining forces, to name but a few. Activity is likely to continue as MiFID II comes into force.
Our 2018 M&A forecast
Exponential growth in consolidation at all levels underpinned by regulatory change.
Three key drivers for consolidation in the asset management sector in 2018:
1. Keeping up with compliance
Asset managers have faced a wave of regulatory change since the financial crisis. MiFID II and GDPR are arriving imminently and will materially increase the volume of regulation asset managers need to manage. Firms that fail to do so run the risk of huge fines.
The Financial Conduct Authority, meanwhile, following a review of the industry, has clamped down on commission-based fee structures and the charging of dealing commissions for research. This has squeezed fee revenue further.
Ultimately, what this means is that more resources are needed to ensure and demonstrate compliance. M&A has been an obvious strategy for achieving synergies and attempting to benefit from economies of scope and scale.
2. Expanding strategy, geography and appetite in alternative assets
Customers are becoming more demanding and are no longer satisfied with single-strategy products restricted to a handful of geographies.
They want access to developed and emerging markets and there is appetite for exposure to alternative assets like real estate, infrastructure and private equity in addition to traditional bonds and equities. Schroders has backed alternatives specialist Adveq, and M&G has expanded in Europe.
More deal activity is anticipated as asset managers actively seek to build themselves into "one-stop shops", offering investors exposure to a variety of strategies across a wider range of geographies.
3. Rise of the robots
'Robo-advisers' have disrupted the asset management model, providing cheap, diversified portfolios based on client risk profiles that can be managed online. They have been especially popular with younger investors. Traditional managers are having to move fast to keep up.
Steep upward trajectory in M&A activity at all market levels, in line with growing international buyer interest. A significant number of notable market players have already started to implement their consolidation strategies.
- Upward, significant
We are seeing
- Consolidation at all market levels, in multiple forms: mergers of equals, bolt-on acquisitions and intra‑group reorganisations
- Growing polarisation between global players with diversified offerings and local niche players
- Some banks stepping back from asset management, while others step up
- Profitability squeeze from passive strategies, movement away from traditional fund management models (i.e., commission-based to fee-based)
- Cost escalation from increasing regulatory burden:
- MiFID II, which will lead to higher overhead costs due to restrictions on commission-based arrangements with brokers, stringent fee transparency requirements and payment for equity research
- GDPR, which will necessitate significant upfront investment and lead to higher ongoing compliance costs from direct obligations on both customer data controllers and processors
- AIFMD, which has brought conduct of business, safekeeping of investments and delegation of certain functions within the regulatory perimeter
- Operational synergies, economies of scale, expertise, enhanced product offerings and new distribution channels
- Global players moving to and/or upscaling in key growth markets
- Response to increasing competition from fintech and 'alternative' service providers
- Growing international, private equity and 'non-traditional' buyer interest
- Deployment of existing M&A war-chests
- Uncertain regulatory environment, exacerbated by greater EU and local regulatory intervention
- Competition for attractive targets resulting in over-valuation of robo-advisors and other fintech businesses
- Few 'mid-size' assets remain available, which may mean M&A polarises at the top and bottom of the market, resulting in higher valuations
Trends to watch
- 'Winner takes all'—becoming the go-to provider of high-margin products/services
- US inbound investment into Europe—weaker L/€ creates more opportunities for US buyers
- Competing with international fund managers in EU markets
- Technological development (e.g., AI, machine learning, big data and analytics)
- Outsourcing to reduce costs, but MiFID II may disadvantage some European asset managers
- Use of passive investment strategies—is the movement away from active fund management models permanent?
- Investors are more demanding and have higher expectations
- EU fund managers are expanding into international markets to meet growing customer demand for global products
Key deals and situations
Click here to download PDF of this chapter.
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2017 White & Case LLP