M&A deal numbers flat, values down in tepid 2019

The number of merger and acquisition deals within the money management industry was flat in 2019 compared to the year before, but data show that the value of deals was only half of what it was in 2018.

The year featured few big deals, fewer deals involving alternative asset managers and fewer corporate divestitures from the year before.

Equity market increases, a scarcity of opportunity and high pricing expectations served as dampers on potential large-scale merger deals.

"The market still needs to consolidate, but people are cautious about how to go about doing that. Big deals are harder to do," said Aaron H. Dorr, a managing director at Piper Sandler Cos. and head of asset management investment banking.

Data from Piper Sandler Cos. show 263 merger and acquisition deals took place globally in 2019, compared with 262 in 2018. Meanwhile, deal value as of Dec. 31 reached $13.3 billion, compared with $27.2 billion the year before.

Acquired firms had to have at least $100 million in assets under management to be included in the firm's data. (Sandler O'Neill & Partners and Piper Jaffray Cos. merged to become Piper Sandler on Jan. 6.)

Apart from Brookfield Asset Management Inc. agreeing to acquire 62% of Oaktree Capital Group's business for $4.7 billion, which was the largest money management M&A deal of the year, 2019 didn't produce as many large deals like Invesco Ltd. buying OppenheimerFunds for $5.7 billion in 2018 or the merger between Standard Life Investments Ltd. and Aberdeen Asset Man- agement PLC in 2017.

Piper Sandler recorded two deals that had more than $100 billion in AUM in 2019, vs. eight in 2018.

"Most top-line integrations have taken place. The big deals have been completed," said Lee Beck, managing partner at Kudu Investment Management LLC, a New York-based a capital provider for asset and wealth management firms. "The question is, where do we look within the middle or smaller markets?"

Kudu made five investments in partner firms in the U.S. and Europe in 2019, including Versus Capital Advisors in March and EJF Capital in September, managing more than $50 billion in combined assets as of Dec. 31.

Following the Brookfield/Oaktree deal, announced in March, the second-largest transaction during the year (as measured by the assets under management of the target) was Natixis Investment Managers in May agreeing to buy an 11% stake in Fiera Capital, a $144.9 billion manager.

Third on the list was Charles Schwab Co. agreeing in July to acquire USAA's $90 billion investment management business for $1.8 billion.

Rounding out the top five largest deals were Nippon Life Insurance Co. agreeing in May to increase its ownership stake in Reliance Nippon Life Asset Management Ltd. which had 2.3 trillion rupees ($33 billion) in assets under management at the time of the announcement, to 75% from 43% for $785 million; and Epiris LLP announcing in March plans to acquire IFG Group PLC, a firm with £31.2 billion ($41 billion) of assets under administration, for $272 million.

Although there was a lot of talk in 2019 about large-manager consolidation, it mostly seemed to be just that for the time being — talk.

"While there's a lot of discussion around broader scale M&A hitting the industry, right now it seems to be more talk than activity," Jeffrey B. Stakel, a principal at Casey Quirk, a practice of Deloitte Consulting LLP, said in a phone interview.

Mr. Stakel attributed the lack of larger M&A deals occurring to strong markets reducing the sense of urgency and a large gap in the bid-to-ask spread between buyers and sellers.

"This industry is primed for more consolidation," Mr. Stakel added. "But it doesn't seem that consolidation has taken place at the rate that people are expecting."

Though large M&A deals were scarce, there were several deals where traditional managers bought smaller alternative firms to expand their investment capabilities, such as Liontrust Asset Management PLC buying Neptune Investment Management Ltd. for £40 million ($49 million) and First Eagle Investment Management LLC acquiring THL Credit Advisors LLC for an undisclosed amount to create an alternative credit platform with $23 billion in AUM, with $16.8 billion from THL Credit and $6 billion from First Eagle (which manages a total of $99 billion).

"We saw a fair amount of deal activity focused on (managers) acquiring new investment capabilities in 2019," Mr. Stakel said.

Kudu's Mr. Beck, meanwhile, said: "Finding and building your own expertise internally or organically has proven to be difficult." So, acquiring specialist boutiques is an easier and more efficient way for a manager to augment its services and abilities, he said.

Even though interest among buyers continues to lean toward alternatives managers rather than traditional firm, there was significantly less transaction volume among alternatives firms in 2019.

Piper Sandler recorded 61 deals centered on alternatives firms in 2019, vs. nearly 100 from the year before. And while activity across all types of alternatives firms were down, the most pronounced drops were among real estate managers, due to a greater scarcity of opportunity and higher price expectations from sellers.

And while deal activity within alternatives firms dropped considerably in 2019, Mr. Dorr noted that 2018 was a particularly active year for alternatives, while 2019 "is more to the historical norm."

He added that buyers of minority stakes within private equity managers, which accounted for "some portion of the uptick in 2018," were "less active this past year."

While M&A activity among alternatives managers lagged in 2019, appetite for traditional long-only institutional and diversified money managers remained flat during the year, with 40 such deals occurring in 2019, about the same from the year before according to Piper Sandler's data.

Many transactions centered around pure institutional managers were divestitures such as Janus Henderson Group PLC selling Geneva Capital Management back to the management team, or Stifel Financial Corp. selling Ziegler Capital Management LLC to 1251 Capital Group Inc.

Cross-border activity was also significantly lower in 2019, with Piper Sandler recording about 60 such deals this year, vs. about 80 the year before. Still, the raw data shows that the number of cross-border deals in 2019 is in line with those of 2017 and in previous years.

Looking forward, Mr. Beck believes "the number of deals will remain high, but the value of the deals will come down."

The Kudu executive also predicts there will be "a lot more competition in the space" going forward.

Meanwhile, Casey Quirk's Mr. Stakel said he also believes M&A consolidation will continue to be "more pronounced in the future."

"Increasingly organizations are trying to distill their competitive advantage. One way to do that is to think about scrutinizing current cost bases, which can lead to internal consolidations," Mr. Stakel said.

Mr. Dorr noted the money management industry has "had another year of strong performing equity markets, which lets sellers hold on a bit longer," and how consolidation and M&A activity unfolds "hinges on what the markets do."