Institutional money managers are competing with each other for the same piece of a pie that is not growing.
That means a growing number of traditional equity and fixed-income management firms are likely to close in the next few years, say consultants and analysts.
“There is an oversupply of managers in the market right now relative to demand,” said Kevin Quirk, a principal with Casey Quirk by Deloitte in New York. “We're just not convinced that there is room for the number of managers that you see out there.”
Especially vulnerable will be firms with less than $5 billion in assets under management and prolonged weak investment strategy performance, said Samiye Yildirim, leader of U.S. asset management deals, at PricewaterhouseCoopers LLC in New York.
Ms. Yildirim said she believes an industry shakeup will happen quickly. “I suspect it would take two or three years for the weaker firms with no differentiation to weed out,” she said.
Data from eVestment, Marietta, Ga., shows that as of Dec. 31, there were 375 money management firms based in the U.S. with less than $5 billion in assets under management.
Even firms with more than $5 billion in assets could be in jeopardy if their performance falls out of the two top quartiles. While she has not estimated the number of money management firms that will close, “it would be more than dozens,” Ms. Yildirim said.
Existing pressures include the ongoing move by institutional investors to passive equity strategies as active strategies have underperformed and increased compliance costs as the result of regulators' increased scrutiny of money managers since the financial crisis.
Ms. Yildirim said firms with a high percentage of institutional assets will face comparatively less pressure because those assets tend to be more sticky — but poor performers that also run retail assets might see a difficult road ahead.
While some managers might get absorbed by larger firms as part of a merger or acquisition, others will just die. “No one will acquire a manager if the assets are going out the window,” she said.