The money management industry is likely to experience strong mergers and acquisition activity from 2017 to 2020, according to a new report from money manager consulting firm Casey Quirk, a practice of Deloitte Consulting.
In fact, Casey Quirk expects 2017's M&A volume to outpace the past two years combined.
Jeffrey Levi, a principal at Casey Quirk, said that “the economic paradigm is going through a massive shift,” creating fee pressure and rising expense rates, while “many firms are earning most of their revenues through antiquated products.”
“So, with changes to the economic paradigm, changes to product demands and regulatory shifts taking place, companies are seriously looking to transform, and are doing so through a number of efforts,” Mr. Levi said in an interview. “One of those efforts is through M&A.”
Casey Quirk's report, “Skill Through Scale? The Role of M&A in a Consolidating Industry,” argues that an aging population and a broad shift to passive management has put pressure on industry fees and placed greater value on firms with valuable distribution platforms and those investing in technology. These factors will drive rapid mergers and acquisition activity over the next few years, the paper said.
The paper argues that most of the M&A deals taking place over the next few years should fall in the following categories:
- transformative scale acquisitions driven by the need for revenue and cost synergies;
- capability-based transactions, mostly representing additions of investment offerings and technology needs;
- shifting value chain deals where asset managers acquire firms that help extend their distribution, wealth management or advice capabilities; and
- Pure consolidation deals structured to spread costs over a larger client asset base.
“Economic pressure, distributor consolidation, the need for new capabilities and a shifting value chain are the catalysts that are fueling M&A activity,” said Masaki Noda, a managing director and co-author of the report, in a news release. “Asset managers are feeling pressure from many corners and are looking for ways to secure a competitive advantage. Strategic deals may be the answer.”
In 2016, there were 133 mergers and acquisitions in the asset management and wealth management industries, down slightly from 145 in 2015. But average deal value was higher, at $536.4 million last year from $240.9 million in 2015. In investment management, about half of the deals rose from the need to add capabilities such as innovative investment strategies or access to new market segments.