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."