Gallagher declined to discuss specific money managers or comment on recent high-profile deals, such as BlackRock's Jan. 12 announcement that it will acquire Global Infrastructure Partners or Franklin Templeton's acquisition of Putnam Investments.
With money manager revenues so heavily geared to capital markets, sharp declines in stock prices after the U.S. Federal Reserve began to boost rates aggressively in March, 2022, made it difficult for industry executives to move forward on potential deals, he said, adding M&A activity fell off precipitously.
Amid so much uncertainty — about capital markets, where the industry was going, what margins are going to look like over the next few years — it was hard to come to agreement on prices and hard to understand how the business case for some of these deals would work, Gallagher said.
Interestingly, deal activity remained at low ebb in 2023, even though last year's sharp rebound by equity markets could have provided a more conducive backdrop. But the consensus for much of 2023 was that a "serious bear market" might be coming, depressing money manager appetite for considering transformational deals, he said.
Now there's growing confidence in the industry that a "soft landing" can be achieved, and Fed rate cuts later this year, which many market participants anticipate, would be a catalyst for industry executives to move forward on big strategic moves or transformational deals, Gallagher said.
But to some extent the situation remains fragile, as recent optimism could be scuttled by one or two bad economic reports, he said.
Gallagher said big consolidation deals combining managers with large public stock and bond businesses "aren't going away," although growing attention will likely be paid to the "hard work of stitching those into a single, more scalable, more efficient business going forward."
Meanwhile, M&A deals focused on adding capabilities in segments such as private markets "never stopped" and there are new signs of interest in deals "at scale," he said.
Predictions that interest in adding private markets capabilities would fall off should treasury yields rebound from the rock bottom levels of the past decade haven't panned out, Gallagher said.
That view was premised on the idea that money managers were adding private markets capabilities as a yield replacement strategy. But even as treasury yields jumped to a healthy 4% or 5% last year, "demand for those investment products and the desire of asset managers to add those capabilities to their lineup has not diminished," he said. "It's been very persistent."
And that, Gallagher said, suggests it's more accurate to conclude that with private markets becoming an ever-more important part of "the capital stack of a mature economy," money managers are increasingly reluctant to abandon that part of the opportunity set.
While almost all of the biggest public markets managers have begun adding private markets capabilities, that transformation likely remains in its early stages, Gallagher said.
