Money management merger and acquisition activity slowed a bit in 2020 compared with 2019, even as some of the industry's largest players, including State Street and Vanguard, were said to be eyeing asset management deals and opportunities.
While there were fewer deals last year, deals appeared to be larger overall, representing more transacted assets. There were 214 global asset management transactions during the year ended Nov. 30, down from 247 transactions from January through November in 2019, data from Piper Sandler Cos. shows. During the 11-month period last year, $2.59 trillion in assets under management were transacted, up from $1.18 trillion in AUM transacted from January through November in 2019, Piper Sandler found.
Jeffrey B. Stakel, principal at Casey Quirk, a business of Deloitte Consulting LLP, said the pandemic temporarily slowed M&A activity last year, but secular challenges in the industry continued to fuel new deals in the second half of 2020.
"The reason we said that we'd see increased consolidation (in 2020) is the relative slowing growth dynamics in the industry — the oversupply of providers in the industry, the challenge for providers to differentiate, the increasing operational costs … and at the same time, there's revenue pressure that creates a more compressed margin for managers," Mr. Stakel said.
Increased operational costs were driven by an "imperative to invest in new technology, data and analytics," as well as regulatory compliance costs that continued to rise, he added.
"Clearly, the pandemic hit and everything froze up for a while. But from my perspective, you saw the thaw of the pandemic hit in late summer and some deals were announced after that. To me, it was a sign that COVID didn't change the strategic imperative for managers to think about M&A as a way to differentiate in the market," Mr. Stakel said.
Looking forward, Mr. Stakel expects asset management consolidation to increase in 2021.
In last year's biggest deal, Morgan Stanley agreed in October to acquire Eaton Vance in a $7 billion deal that will create a money management firm with nearly $1.2 trillion in AUM. The move represented a strategic combination "of two companies (that) can complement each other," said Dean Ungar, vice president, senior credit officer, at Moody's Investors Service Inc., New York.
With the addition of Eaton Vance, Morgan Stanley makes its "business more balanced between the three legs" — institutional securities, wealth management and investment management.
Another noteworthy deal announced in the fourth quarter was BlackRock Inc.'s $1 billion acquisition of Aperio Group, a provider of customized, tax-optimized indexed equity separate accounts for ultra-high-net-worth investors.
The year began with a blockbuster deal in February when Franklin Resources Inc. announced it planned to acquire Legg Mason in a $4.5 billion deal. The combined firm, which became Franklin Templeton upon the deal's closing on July 31, created a money manager with $1.42 trillion in assets under management as of Sept. 30, joining the ranks of the largest U.S. money managers.
The fourth quarter also brought a flurry of speculation that the industry's largest players, including State Street Corp., were seeking deals.
Last month, industry sources who spoke on condition of anonymity confirmed that Goldman Sachs Group Inc.'s New York-based investment banking unit had been discussing State Street Global Advisors Inc. with potential acquirers, merger partners or collaborators, including Invesco Ltd., UBS Group AG and The Vanguard Group Inc.
Mr. Stakel at Casey Quirk noted that most money managers, regardless of size, will be considering inorganic growth opportunities — the industry's largest players included.
"I think that the question of scale for anyone in the industry is a really important question right now … (This) means that providers of all shapes and sizes are thinking about whether there are partnerships and acquisitions (that can be had)," he said.
"I don't know that there's a part of the asset management industry that says because of our size, we are not a part of the inorganic growth conversation. I don't think there's a size cohort that's not thinking about it," he added.
Catherine Seifert, a vice president and equity analyst at CFRA Research, New York, said that due to the secular changes money managers are facing, the industry may see an increase in private equity buyers looking to buy, "particularly (assets) that can be bought at a discount."