As fear that one or more European countries will default on their debts rises, and economic growth falls, so asset managers appear to be holding back from making acquisitions. If this persists, it might seem natural to assume that the recent pick-up in the number of deals was a blip rather than the beginning of a trend.
Yet the powerful catalysts that sparked a steady rise in the number of deals over the past two years are becoming more pressing than ever. When financial markets recover their footing, and risk appetite gradually returns, we believe that consolidation will resume, causing the number of mergers to run at a high level for three to five years.
Why are we so sanguine? While commentators have predicted a wave of consolidation for some time, the strategic issues forcing asset managers to act are becoming too strong to resist. Many asset managers’ revenues have fallen considerably in the past few years, and fees are under pressure as investors’ faith in active management dwindles. As a result, some asset managers need to find new sources of high-margin growth – and acquisitions are one way of doing so.
Global Asset Management Transactions (USD bn)
Transactions by type
Today’s uncertain financial and economic conditions are only fortifying the reasons for acquisitions. Firms’ assets under management are declining as financial markets fall, and in some cases investors are redeeming. In Europe, fees are under fire and low-cost products are being launched. Yet, the falling markets are also reducing acquisition prices. Indeed, an acquisition might cost 15–20% less than it did just six months ago.
Acquisition trends show how – until the recent escalation in uncertainty – the need to find new sources of growth was beginning to lead to increasing numbers of deals. The 225 deals completed globally in 2010 were up from 167 in 2009 – while the 58 deals of the first half of 2011were up from 54 in the same period of 2010.1 The last 18 months’ acquisition targets were typically small to medium-sized strategic deals, often bringing entry into areas with resilient fees and good prospects, such as alternative investments and emerging markets.
By nature, these ‘growth’ acquisitions tend to be smaller, specialist boutiques. The firms acquired in the first half of 2011 had an average of US$6.7bn under management and those in 2010 just US$3.2bn.2 By comparison, in 2009 the average acquisition target managed US$28.0bn. The biggest single acquisition target alone managed US$1.5trn of assets.
With investors increasingly adopting a barbell approach, asset management’s two growth product areas are exchange traded funds (ETFs) and specialist actively managed funds. Under the barbell approach, ETFs form the passive core of a portfolio, and specialist funds are used to boost returns. Illustrating the trend, ETFs account for US$1.4trn of assets and are expected to grow by 20–30% annually for the next three years.3
Specialist asset managers such as alternatives managers are proving productive acquisition targets. In spite of building strong investment credentials in their niche areas, which justify relatively high fees, the rising burden of regulation has made some boutique managers keen to join larger groups.
Geographically, emerging markets are expected to be a source of growth as the economies of Latin America, Asia and the Middle East continue to be healthier than the developed world’s. Yet, having a trusted local brand is essential when entering these markets. In some countries asset managers might be able to acquire a local presence, but in others they will have to seek joint ventures and distribution arrangements instead.
When weighing up whether to move forward with an acquisition now, some asset managers are clearly waiting until the severity of today’s sovereign debt crisis subsides. But others might recall that the deals struck in the depths of the 2008 credit crisis looked exceptionally cheap once financial markets started to stabilise. If an acquisition was good value before the current crisis materialised, it should be even better value now.
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