By Hanqing Chen and Xinyi Jiang
Culture remains a key consideration for asset management firms seeking to consolidate, industry sources say.
If firms are not culturally aligned, they are bound to run into issues — “it’s just a matter of when will you have [the] problem,” says Martin Flanagan, chief executive of Invesco.
Flanagan, whose firm closed the acquisition of OppenheimerFunds in an approximately $5.7 billion deal last month, was speaking alongside panelists at the Bloomberg Invest conference last week.
Though there is a need for operational scale in the asset management industry today, Flanagan says he is wary of firms fixated on chasing scale.
Scale can bring efficiency, and enable firms to negotiate better pricing and build intellectual capital, but firms are not simply acquiring to scale, as they care about reputation and a likeminded culture, Keith Bloomfield, CEO of FWM Holdings told Mergermarket. FWM agreed to acquire Optima Fund Management, which is expected to close in the third quarter.
Independent boards of directors, trustful relationships with clients, a clear business plan, willingness to accept stock rather than cash for buyouts and prioritizing business reinvestment over dividend payments are boxes to check for ideal acquisition targets, says CEO Joseph Schmuckler at Luxon Financial, which closed its acquisition of Tradition Capital Management in May.
M&A activity in asset management grew to 253 announced transactions in 2018, up from 210 deals in 2017, according to Sandler O’Neill + Partners. Disclosed deal value was up 29% in 2018, reaching $27.1 billion.
Year-to-date through April 2019, there have been 95 transactions, up slightly from 93 during the same period in 2018, according to Sandler O’Neill.
Consolidation is being driven by the move by large pension funds and sovereign wealth funds to winnow the number of external managers they work with, according to David Hunt, CEO of Prudential Financial’s PGIM, who also spoke at the Bloomberg event.
Alternative asset classes a hotbed of activity
Alternative asset manager deal activity, particularly real estate and credit-focused strategies, rose in 2018, according to Sandler O’Neill. Last year saw 36 acquisitions of real estate investment managers, nearly double the number of transactions in 2017. Interest in credit managers saw a similar surge.
The ongoing consolidation of market share in the industry is expected to have a barbell effect, according to Suni Harford, head of investments at UBS Asset Management.
This will leave niche and boutique players on one side, and those managers who are “truly unique,” have access to alternatives and can provide outsourced chief investment officer (OCIO) services on the other, she adds.
There are currently approximately $1.1 trillion of US assets under management in the OCIO industry, a number that is expected to rise to close to $1.7 trillion by 2023, according to consulting firm Cerulli Associates.
Nearly every boutique asset management firm is starving for distribution channels, Raymond James head of asset and wealth management investment banking Elizabeth Bloomer Nesvold told Mergermarket. Nesvold advised Silvercrest Asset Management Group’s $45 million buyout of Cortina Asset Management in April.
Some portfolio managers have good investment strategies, but have trouble marketing their skills, and these managers are attractive to acquirers, she notes.
Meanwhile, the importance of preserving firm culture can present a key barrier to deals in the asset management industry despite overcapacity and the need for scale, according to Hunt.
“We really believe in the people and the talent and the culture that [we have] built. And we don’t want to disrupt that [with a lot] of big mergers,” he says. This is why there are fewer mergers in the space than pure industrial logic might suggest, he notes.
Hanqing Chen covers shareholder activism for Activistmonitor based in New York. Xinyi Jiang covers financial services and fintech for Mergermarket based in Charlottesville, Virginia. Chen can be reached at firstname.lastname@example.org. Jiang can be reached at email@example.com.