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Money Management

Alternatives firms fuel 2018’s increase in M&A

Jeffrey B. Stakel said increasing scale is an important consideration for firms looking to keep their businesses viable long term.

Industry consolidation also cited as big factor; mutual funds fall on list

Merger and acquisition activity within the money management industry grew in 2018 from the year before.

The boost was driven by an increased interest in alternative investment managers, partially offset by tepid interest in acquiring traditional long-only managers and a declining desire to acquire mutual fund businesses.

In addition to buyer appetite for alternatives managers increasing, consolidation also drove M&A activity among asset managers, as exemplified by the largest deal of the year. In October, Invesco (IVZ) Ltd. announced its intention to buy New York-based manager OppenheimerFunds from Massachusetts Mutual Life Insurance Co. for about $5.7 billion in stock in a deal expected to bring the Atlanta-based firm's total assets under management to more than $1.2 trillion. OppenheimerFunds managed about $246 billion.

"It's clear that M&A activity is up within the asset management space," said Jason Schwarz, president of Wilshire Analytics and Wilshire Funds Management, Santa Monica, Calif. "We've seen a notable uptick throughout 2018 and we think this will continue."

Data from Sandler O'Neill & Partners show 255 deals took place globally in 2018, compared to 210 in 2017. Meanwhile, deal volume as of Dec. 31 reached $26.6 billion, vs. $21.2 billion for 2017.

The M&A deals that Sandler O'Neill tracked in 2018 involved a total of $3.71 trillion in AUM, up 28.6% from $2.88 trillion in 2017. Acquired firms had to have at least $100 million in AUM to be included in the firm's data.

"It was a stronger year," said Aaron H. Dorr, a principal at Sandler O'Neill and head of asset management in New York. "And the change can largely be accounted for an increase in alternative deals."

Following the Invesco/OppenheimerFunds deal, the second-largest transaction during the year (as measured by the assets under management of the target) was Paulson & Co. in November agreeing to buy a 25% stake in BrightSphere Investment Group, a $238 billion multiboutique manager.

No. 3 on the list was Hellman & Friedman agreeing in April to acquire managed account provider Financial Engines, with $169 billion in assets, in a deal worth about $3 billion.

Rounding out the top five largest deals were Mitsubishi UFJ Trust and Banking Corp. announcing in October plans to acquire First State Investments for A$4.1 billion ($2.9 billion); and Montreal-based C$308.3 billion ($226.6 billion) Caisse de Depot et Placement du Quebec announcing in December plans to buy a minority stake in Grupo de Inversiones Suramericana SA's $135 billion money management arm SURA Asset Management for $247 million. First State Investments, known as Colonial First State Global Asset Management in Australia, had A$213 billion in AUM as of Sept. 30

Sandler O'Neill recorded 95 acquisitions of alternatives managers in 2018, up 42% from the 67 recorded the year before. Mr. Dorr noted that the demand for alternatives managers was particularly focused on private credit and real estate businesses.

Also, per data from Sandler O'Neill, acquisitions of wealth managers increased 35% to 108 in 2018 from 80 in 2017.

"Investment strategies that have a lower correlation profile to long-only are going to be attractive to buyers. That continues to drive M&A activity as well as on the private equity side," said Mr. Schwarz from Wilshire.

'Tepid' appetite

By contrast, while strategic buyers and dedicated private equity funds demonstrated a growing interest in alternatives managers, buyer appetite for traditional long-only managers "was tepid" in 2018, Mr. Dorr said. Even worse, M&A activity within the mutual funds sector had been cut in half in 2018, largely because of the outflows the sector is facing. Sandler O'Neill classifies mutual funds — and other funds such as exchange-traded funds or undertakings for collective investments in transferable securities funds — as retail managers. Sandler O'Neill tracked 15 acquisitions of such retail managers in 2018, down 48% from the 29 tracked in 2017.

"So, when buyers are looking at mutual fund managers, they're primarily looking at them as consolidation opportunities," Mr. Dorr said.

Wilshire's Mr. Schwarz also noted that "limited asset growth will continue to fuel competition among asset managers and increase industry consolidation."

That's certainly the case with the Invesco/Oppenheimer deal, of which Invesco (IVZ) President and CEO Martin L. Flanagan said in a news release announcing the acquisition that the deal will help Invesco expand its capabilities within the U.S. and global markets.

"The combination with OppenheimerFunds and the strategic partnership with MassMutual will meaningfully enhance our ability to meet client needs, accelerate growth and strengthen our business over the long term," Mr. Flanagan added. MassMutual became a significant shareholder in Invesco as part of the deal, owning a 15.5% stake.

Since money management is a mature industry, consolidation will continue to drive M&A activity, sources said.

"Across the industry there's much more realization of the headwinds facing asset managers," said Jeffrey B. Stakel, a principal at Casey Quirk, a practice of Deloitte Consulting LLP in Darien, Conn. "And because of that, there are more conversations being held about how to create a more efficient organization and more streamlined operations."

Mr. Stakel noted that going forward, successful firms will focus more on profitable growth and creating durable competitive advantages. For some, this will mean pursuing scale — not necessarily defined by AUM, but rather shrinking redundant costs — and "increasing existing contribution margins across business lines," he said.

Wanting to streamline

Money managers will increasingly want to streamline operating platforms and systems to both "create more efficiency in their cost and operating structure" as well as being "able to better serve increased customization demands from clients and offer multiasset-portfolio solutions," Mr. Stakel added.

Passive investing also continues to be a factor affecting M&A activity. Mr. Schwarz explained that as institutional investors continue to embrace passive investing, and as passive strategies continue to take the lion's share of net new assets against a backdrop of markets no longer propping up a firm's AUM, managers will continue to feel the pressure on fees and margins.

"There's an added sense of urgency associated with protecting margins and finding new ways for growth in a market environment that looks more unsteady," the Wilshire executive added.

Despite Brexit and several politically oriented headwinds, cross-border activity was consistent with 2017. In terms of European companies, including U.K.-based firms, buying into the U.S., Sandler O'Neil saw nine transactions in 2018, up from five transactions seen in 2017.

Mr. Schwarz said he believes the industry will "continue to see more of a winner-take-all paradigm," adding, "The larger managers with scale will continue to get larger and pose considerable challenges for smaller firms."

Meanwhile, according to Mr. Stakel, the industry can expect to see "a continued movement of mergers of equals," as well as "some multiaffiliate consolidation."

The largest money management transactions of 2018
Ranked by transacted assets under management. Excludes IPOs and follow-on offerings.
Acquired managerBuyerDate announced%
acquired
Transacted AUM (billions)Upfront consider-
ation (millions)
Maximum earnout consider-
ation (millions)
Maximum total consider-
ation (millions)
Oppenheimer-
Funds
Invesco (IVZ)10/18/18100%$246.0 $5,700.0 n/a$5,700.0
BrightSphere Investment Group Paulson & Co.11/19/1824%$237.7 $356.3 n/a$356.3
Financial EnginesHellman & Friedman4/30/18100%$169.3 $3,030.0 n/a$3,030.0
Colonial First State GroupMitsubishi UFJ Trust and Banking10/31/18100%$151.1 $2,929.9 n/a$2,929.9
SURA Asset Mgmt.Caisse de Depot et Placement du Quebec12/21/187%$135.0 $247.0 n/a$247.0
Nissay Asset Mgmt.Nippon Life Insurance Co.2/1/1810%$95.3 n/an/an/a
USAA Asset Mgmt.Victory Capital Holdings11/6/18100%$69.2 $850.0 $150.0 $1,000.0
Daiwa SB InvestmentsSumitomo Mitsui Financial Group5/11/18Merger$55.0 n/an/an/a
PanAgora Asset Mgmt. Putnam Investments2/1/1820%$53.9 n/an/an/a
Hermes Fund Mgrs. Federated Investors (FII)4/13/1860%$45.0 $349.4 n/a$349.4
Note: Sumitomo/Daiwa transacted AUM represents Daiwa's AUM.
Source: Sandler O'Neill + Partners