Of all the players in the financial services, Asset Managers (AMs) would appear to have the biggest appetite for Mergers and Acquisitions (M&As). Various industry surveys highlight the fact that more than a fifth of asset management CEOs planned to get into either domestic or cross-border mergers in 2015, which was more than for any other financial business area.
On paper, this trend appears to rely on solid drivers:
- asset managers have been taking over more deals with a minority stake (instead of being the main stakeholder) than banks used to, benefitting both the seller (increasing their liquidity whilst remaining in control) and the buyer (giving them access to a fast-growing portfolio and allowing them to diversify)
- sellers are becoming more accepting of “earnouts” where a valuation cannot be fully agreed on, allowing more acquisitions to go through
- banks selling their asset management arm to meet their regulatory capital requirements (CRD IV mainly) will attract more asset managers looking for economies of scale
- diversification is a huge driver as asset managers want to match their clients’ demands for sophisticated and niche portfolios with both active and passive funds, and M&As offer a quick way to diversify an existing portfolio and enter new geographies. Furthermore, extending the range of products fits the need of investors for minimised administration over numerous funds.
However, contrary to predictions, the market hasn’t shown an upswing in M&A. What are the reasons behind this phenomenon?
One of the first showstoppers is price. Buyers and sellers tend to disagree on the valuation, with sellers often having inflated expectations regarding the value of their business. There is also a strong incentive to cut costs in the asset management industry, given muted returns and investors’ downward pressure on fees. Add to this the fear that the potential bubble of inflated global stock markets might burst, on the equity market horizon. As for entering new geographies; the rewards might be many but so are the local regulatory hurdles to clear, especially in the developing economies of Asia and Latin America. China only allows minor stakes in their businesses and Brazil’s central banks impose a very lengthy approval process for local deals.
In addition to these challenges, new ones emerge. The Financial Conduct Authority is starting to show an increasing interest in the world of Asset Managers. The Globally-Systemically Important Financial Institutions (G-SIFI) regime could be extended to asset managers which could pose a new threat to potentially sizeable M&As. Large, globally interconnected asset managers could put themselves at risk of falling under its stringent rules: additional capital requirements and enhanced regulatory supervision, which could hit their profits and freedom. Even If this discussion has recently been put on hold by global regulators, it will remain a valid consideration for any asset manager keen to expand globally.
While the benefits of consolidation seem attractive, asset managers willing to exploit the opportunities for growth will have to tread carefully, to ensure they don’t find themselves stuck in detrimental or lengthy transactions. Caution: long-term planning and detailed strategies will be key.
So Asset Managers, go forth and multiply, but not too much.