Only new 'external shock' will spark deals again, experts say
While the money management industry has seen a few high-profile, transformative M&A deals over the past year, sources are waiting for a catalyst to trigger further transactions.
"There is competition from passive, pressure on fees, an increased level of regulation," said Marina Cremonese, vice president, senior analyst at Moody's Investors Service in London. "Margins are under pressure and there's a number of responses that asset managers are using."
There are typically two types of M&A: firmwide, transformative deals in the form of majority acquisitions, stakes or mergers between firms in an effort to fortify positions in the industry; and bolt-on deals where managers work to diversify offerings by buying up smaller, specialist players.
The firmwide type of M&A now is "limited to those firms in the middle of the pack, the $300 billion to $900 billion" in assets under management firms, said Dean Frankle, principal at The Boston Consulting Group U.K. LLP in London.
"It seems like we've hit a bit of a pause for the traditional asset managers — there had been some M&A, and we thought more would come," said Nathan Flanders, global head of non-bank financial institutions at Fitch Ratings in New York. "Maybe people are holding out. Some see (M&A) as a last resort. Or maybe they are thinking they can ride out the storm of passive and active flows, (and that it) will turn eventually. Or (maybe it's that) equity markets are up, maybe two (firms) can't agree on a price," he added.
Control is another reason the market has not seen many big merger deals, Mr. Frankle added. "If you are an asset manager that is bank-owned or independent, you are historically master of your own destiny. If you are a $500 billion asset manager and you decide the only way to compete is to be a trillion-dollar asset manager, you're going to agree to be 50% (of one larger firm); you almost become princes — a lot of the time (you would) prefer to be king because then you can control what you are doing," Mr. Frankle said. "It is a very strategic asset and important part of business to give away control, and not something one should do on a whim."
Mr. Frankle thinks a catalyst is needed before more firmwide M&A takes place. "The markets are still supportive, asset managers are still delivering good returns. It's a bit like going to the doctor (who says) 'your blood pressure is a bit high, do something about it.' But until you have a cardiac episode you don't realize you need to change the way you are," he said. "You need an external shock to find a way of acting — whether through a market correction or someone pulling the trigger leading to a domino effect, I'm not sure."
Recent firmwide deals
Three recent deals were cited by sources as examples of firmwide M&A:
- In April, Federated Investors (FII) said it would acquire a 60% stake in Hermes Investment Management from the BT Pension Scheme, London. Hermes will operate as a subsidiary of Federated Investors and remain in its London headquarters with no change to people, processes and organizational structures. One person familiar with the situation said other bidders included Eaton Vance (EV) Management (EV) and Australian firm Challenger Ltd.
- In August, Standard Life PLC and Aberdeen Asset Management PLC merged their businesses, creating a £575.5 billion ($792.9 billion) money manager. The firm subsequently announced in February it would sell its insurance business to Phoenix Life in a £3.2 billion deal.
- And in May 2017, Janus Group and Henderson Global Investors merged to create a $370.8 billion money management firm.
Regarding Standard Life Aberdeen and Janus Henderson, Ms. Cremonese said both deals "have commonalities. Both mergers aim at gaining scale between large and complementary organizations to fortify their market position."
Executives at Eaton Vance and Challenger said they do not comment on speculation and rumor.
However, Cathy Hales, global head at Fidante Partners, the multiboutique money management business unit of Challenger, said: "Challenger has a strong organic growth strategy and also considers opportunities for inorganic growth, such as Fidante's recent acquisition of a minority stake in Latigo Partners. Opportunities must have strong strategic alignment and achieve our return hurdles."
And Robyn Tice, vice president, media relations at Eaton Vance, said the firm "believes the asset management industry is in a period of consolidation, and that this may create opportunities to help grow our business by adding complementary skill sets and expanding our market reach. ... We continue to look for partnerships and acquisitions that fit with our strategic goals and our culture." One example of this is the firm's acquisition of the assets of responsible investment specialist Calvert Research and Management in 2016.
Examples of bolt-on deals have been more prevalent in recent times, pursued by managers "to gain product expertise or broader distribution channels, or geographic reach. We might well see more of those because it is still a challenging environment, a very competitive one," Ms. Cremonese said. "It is part of the defensive strategy of asset managers to ensure they have the right product, clients and exposure from a geographic perspective as well."
Mr. Frankle agreed: "If you look from a pure number of deals perspective, you'll find it's quite high because a lot of (firms) are buying a team or capability as a bolt-on."
This is particularly attractive because of pricing pressure, he added, with firms looking to move into asset classes they do not usually offer, such as private debt.
2018 has seen a number of smaller acquisitions by large money managers adding to their private markets capabilities in particular, including:
In May, Schroders PLC said it acquired specialist pan-European hotels investment and management firm Algonquin in a deal that added €1.8 billion ($2.2 billion) to the firm's existing £13.2 billion in real estate assets under management. Schroders has £447 billion in total assets under management.
In April, $6.3 trillion manager BlackRock (BLK) Inc. (BLK) said it will acquire private credit manager Tennenbaum Capital Partners in a deal that strengthens the firm's credit platform. Tennenbaum Capital has $9 billion of committed client capital and focuses on middle-market performing credit and special situation credit opportunities.
Measures of success
Whatever the type of M&A, sources said they look for a number of things in evaluating the success of deals.
"When we are assessing any merger, leverage (usually) picks up and (companies) use the cash flow to deleverage over time. A measure of success beyond fund performance is, are they deleveraging as planned and are there any client issues?" Mr. Flanders said.
Ms. Cremonese said it takes time for new structures to bed in. "It is not unusual with mergers (for clients) to take a wait-and-see (approach,) see how the integration is going, how the process evolves, to get a bit more comfort."
And "markets value revenue synergies more than cost synergies. The revenue synergy means you have the potential to do more than you currently do today. (One reason) is the people side, in that when you are bringing people together from a cost perspective, you are ultimately saying two becomes one; in distribution you are not — you are saying you have a product" to get out to clients, Mr. Frankle said. "It is a marriage — some marriages fail, but there are a few things you can do to try and increase the probability of success: upfront being very clear on making hard decisions early on; and clearly defining a leadership team," he said.