Money managers are increasingly turning to mergers and acquisitions in the face of a tough economic environment and investors’ continuing shift away from active management.
In a report released Wednesday, Casey Quirk, a practice of Deloitte Consulting LLP, predicted asset management firms would soon experience the “largest competitive realignment in the industry’s history” as a need for scale pushes more managers toward M&A.
“A different breed of transactions has started to happen,” said Jeff Levi, principal with Casey Quirk, by phone. “That new breed we’re seeing is deals that are truly transformational.”
According to the Casey Quirk report, greater numbers of asset managers are seeking to combine in order to combat challenges including “dwindling” market returns, slower organic growth, lower margins, and fee pressure arising from the growing popularity of passive investment products. As a result, deal valuations are on the rise, the consultant said.
Last year, 133 mergers and acquisitions took place in the asset management space, a slight decrease from 145 in 2015. However, Levi noted that M&A activity in 2016 and 2015 represented an uptick in deals in the asset management space overall.
“Transactions are hard to look at on a calendar year basis,” Levi said. “The big point is that we’re seeing an upward trend.”
That uptick looks set to continue through 2017. Already, 41 deals were announced in the asset management space in the first quarter of this year, according to a PricewaterhouseCoopers report. PwC did not return calls requesting comment.
Japan’s Softbank inked one of the largest deals during that quarter, acquiring Fortress Investment Group for $3.3 billion. Other recent deals include last year’s mega-merger between Janus Capital and Henderson Group, and the combination of Standard Life and Aberdeen announced in March.
Beyond cost pressures, asset managers face client demand for more innovative products, Casey Quirk said, including adopting new technology. Some firms will need to tap their peers in order to keep up, the report said.
In addition, rising deal valuations could entice some money managers to sell themselves, according to Levi.
“There’s such a large dose of strategic buyers,” he said. “As a result, M&A is a bit on the expensive side today.”
Casey Quirk said asset management deal values averaged $536.4 million in 2016, more than twice as high as the $240.9 million average reported in 2015. The report’s authors don’t see this trend slowing down.
“Most investment management M&A deals in 2017 and the next few years will be strategic, driving valuations upward,” the report concluded.
