M&A trends from 2021 not expected to lose steam

Money management mergers and acquisitions held their own in what was a record-breaking year for M&A deals overall, with asset and wealth managers ending 2021 with 296 transactions.

That was the highest level since 2000, according to a report from consultancy PricewaterhouseCoopers.

Activity in money management M&A was especially robust in the third and fourth quarters of 2021, which included high-profile announcements such as the $4.2 billion acquisition of private credit manager Oak Hill Advisors LP by T. Rowe Price Group Inc., and Franklin Resources Inc.'s purchase of private equity secondaries and co-investment specialist Lexington Partners for $1.75 billion.

P&I's own reporting in 2021 tallied 111 transactions, with $3.23 trillion in assets under management, when provided, changing hands.

PwC and other sources expect that money manager transaction volume will remain elevated in 2022.

Large investment platforms are looking to bring on unique investment strategies as well as increase assets under management. Private equity firms also are flush with cash and are increasingly looking to asset management as an industry where they can put money to work, PwC's annual report said. And traditional managers are looking for ways to break into or expand their footprint in private markets, the report noted.

"What we're seeing right now is a lot of long-term trends that are driving deal flow and likely will for the foreseeable future," said Gregory McGahan, New York-based deals partner for PwC. "Many firms are thinking through succession planning, scaling the business or are looking for unique investment strategies. All of those things are very capital- and resource-intensive to do organically."

Mr. McGahan noted that many of the current generation of successful, independent portfolio managers went out on their own when they were midcareer. Now, as they get closer to retirement they are looking at ways to create a graceful exit over time by merging their firms with a larger platform that can keep the business going after they retire.

New technologies are also making it more appealing to join a larger firm.

Large asset managers have dedicated online marketing and customer engagement teams. Or, they can provide support for including machine learning and other artificial intelligence in investment strategies. All of these capabilities are expensive and time consuming to create organically. Merging with a firm that has one or both can mean gaining new operational capabilities to scale the business almost immediately.

"A lot of firms are looking toward the future and trying to figure out how they win right now," said Jeffrey B. Stakel, Stamford, Conn.-based principal at the Casey Quirk practice of Deloitte Consulting LLP. "When you look at where the growth is, a lot of it is technology-driven. Clients expect an engaging, easy online experience as much as they want to see differentiated investment strategies. If you don't already have those capabilities, joining a company that does starts to make a lot more sense than it might have a few years ago."

Mr. McGahan said another significant driver of deal activity is the move by traditional asset managers into alternatives strategies, specifically private credit.

For now, private credit is dominated by specialized money managers financing or investing in pools of deals. Asset managers that have successful strategies in this space are quickly becoming preferred targets for both private equity firms with asset management platforms and large, traditional money managers that want exposure to private credit.

The U.S. private credit market currently stands at about $700 billion in assets under management, and PwC predicts that it will more than double to $1.8 trillion by 2025.

"If you look at the state of the market today and how much money private equity funds have raised to put to work, they typically finance those deals through direct lending and banks have stepped away from that," Mr. McGahan said. "Alternative asset managers are filling that gap. There's an opportunity set there for asset managers that want to increase their footprint in that space."

A similar trend is underway in private real estate and infrastructure, two strategies that have seen an influx of assets over the past few years. Mr. McGahan said recent federal funding increases for infrastructure as well as elevated demand for housing could drive deal flow to money managers that have successful strategies in either area.

Looking ahead, other emergent trends could keep consolidation going over at least the medium term. Money management firms are trying to figure out how to incorporate environmental, social and governance capabilities as well as digital assets into their platforms, and firms that have developed a specialty in either area are likely to be targeted for acquisition, industry sources said.

"A lot of organizations are trying to figure out how to bolt on ESG," Casey Quirk's Mr. Stakel said. "It's clear that ESG is here to stay but the industry as a whole is still working on standardization. If an asset manager can demonstrate that they have a consistent and valuable framework, that would be a differentiator."

PwC's Mr. McGahan said that the same is true for digital assets.

"Crypto and blockchain technologies are still emerging and require a bit of specialized knowledge," he said. "If you're a successful firm in that space, it's only a matter of time before large platforms are going to start looking at the winners and trying to figure out how to bring that capability onto their platforms."

PwC's 2021 data also showed increasing interest from private equity managers in insurance companies, which are flush with large portfolios and manage significant assets.

In March, for example, Apollo Global Management Inc. announced it would merge with insurance company Athene Holdings Ltd. in a deal valued at $11 billion. That same month, Blackstone Group Inc. announced it would buy Allstate Corp.'s life insurance business for $2.8 billion.

Money managers have said the moves produce a perfect match, adding a big influx of permanent capital to their assets under management and diversifying their limited partner base.

All of these trends in asset management can create a long-term opportunity set, Mr. McGahan said.

"My team has been looking at this space since the '90s and we don't think it's cyclical. There have been some fundamental shifts in the business of asset management and they are driving change. We don't see any reason why deal flow would slow down."