Large publicly traded money managers are letting their investors know they're looking to take a twirl in the M&A market and spend some of their cash.
But when it comes to making a large purchase, they're being wallflowers, sources said, and instead are buying smaller niche managers or obtaining stakes in other firms.
"The problem is that M&A has been like a junior-high dance," said Benjamin Phillips, principal and investment management lead strategist with Casey Quirk, a practice of Deloitte Consulting LLP in New York. "Everyone is standing against the wall talking about dancing, but they're waiting to see who actually is going to ask someone to dance. There haven't been a lot of big closes."
CEOs at managers such as Franklin Resources Inc., San Mateo, Calif. — as well as multiboutiques like BrightSphere Investment Group, London; Affiliated Managers Group Inc., Boston; and Victory Capital Management Inc., Cleveland — said during their second-quarter earnings calls in July and August that they were actively looking to acquire managers that could provide accretive investment strategies to their offerings.
Those strategies include illiquid assets such as private equity, real estate, credit and infrastructure, but also strategies that can't be replicated by exchange-traded funds.
"The story hasn't changed, it's just become more defined," said Christopher Browne, managing director at investment bank Sandler O'Neill and Partners LP, New York. That's in large part, Mr. Browne said, because of "the centrifugal force that increasingly passive management by institutional investors has created. It has become, particularly in a post-crisis bull market, more difficult to allocate to active management and pay the higher fees. That's hard to justify. So for managers, it's become very important to add certain capabilities to manage money so that you can justify charging higher fees."
"Public company CEOs are preparing the market to let them know they might need to do deals that might look diluted," said Peter Nesvold, managing director, chief operating officer and head of strategic initiatives at investment bank Silver Lane Advisors LLC, New York. He said while the number of manager M&A deals in the first half of 2018 is up at least 20% from the same period last year, they have centered on smaller partial or full acquisitions.
That generally reflects Sandler O'Neill data that show there were 59 money manager deals in the first half of this year vs. 45 for the first half of 2017 and 53 for the second half of last year. However, the first-half 2018 transacted assets under management total of $621 billion was below the $926 billion in the first six months of last year and $1.305 trillion in the second half of 2017.
"They might be buying at multiples of where that firms' costs are currently. It could become accretive. But they're saying that they're not bottom-fishers. They're looking for successful strategies that gain over time. They will pay for that in the beginning. Big firms like Franklin, for example, their huge distribution capability allows for growth and brings incoming managers up to speed."
Mr. Nesvold said several reasons are driving the growth of M&A activity in the first half of this year. "It's hard to point out the exact light switch that set that off," Mr. Nesvold said. "It's an aggregation of a number of factors. For one thing, there have been continued outflows over the past several years. Cumulatively in active equity strategies, there's been a constant dribble of assets out, sometimes more than a dribble. The inflows have gone into quantitative strategies, credit and ETFs."