Asset and wealth management deals insights: Year-end 2018

Deal value and volume overview

Asset and wealth management recorded 140 deals in 2018 for a year-over-year increase of 5%. Four mega-deals in 2018 helped push up the total announced value of deals year-over-year by 72% to $14.9 billion. That is the highest year-over-year total since 2009.

Nearly 40% of wealth management and asset management deals in 2018 occurred during the fourth quarter. The total deal volume for the quarter more than doubled the number during the third quarter.

Announced deals totalled $9.9 billion during the fourth quarter, with three transactions exceeding $1 billion.

Key opportunities and challenges that will influence deal activity in the US AWM sector 

Crowded space: Industry experts estimate the US mutual fund and ETF count to be in excess of 10,000 and raise the question of whether there is room for so many managers which could imply that consolidation may be inevitable.

Fee and margin pressures: Both active and passive managers face fee pressure. According to PwC research, actively managed mutual fund fees are expected to drop by approximately 19%, from an average of 54bps in 2017 to 44bps in 2025. As in the past, passively managed funds will face the biggest decline, with management fees projected to decline 20.7% by 2025. Price will probably be the key differentiator amid intense competition for market dominance. Fee pressure is expected to persist until asset managers improve their performance. Investors are increasingly looking to derive greater value from fees, and there is more consideration these days by traditional asset managers to switch to outcome-based fee structures.

Flows into ETFs: Low cost passive funds and ETFs continue to attract assets at a record pace. Over the long run, ETFs have proven their ability to beat indices. Although current volatility may boost returns for some active managers, we do not expect that ETFs will lose their momentum.

Bid-ask spread: The Dow Jones Asset Managers Index dropped approximately 30% in 2018. The decline comes with a silver lining—private market valuations may start to fall, helping to spur M&A activity. One of the biggest hurdles to completing transactions in recent years has been the bid-ask spread.

Performance and product expansion: A vast majority of active managers have underperformed their benchmarks. According to S&P Global’s SPIVA scorecard for mid-year 2018, approximately 85% of all US mutual funds lagged their benchmarks over a 10- and 15-year period. Now, with markets volatile, active managers have an opportunity to ease concerns about fees and prove their alpha-generating abilities. Without improving their performance, they risk facing greater outflows than before. We also expect active asset managers will offer a wider variety of products and multi-asset capabilities and expand into alternative alpha-generating classes such as energy, real estate, infrastructure, and ESGs. Technology and data, such as model-driven separate accounts, will probably also play a role in new product expansion.

Minority interest activity: Although M&A activity in the alternatives sub-sector dropped in 2018, minority interest activity focused on alternative managers continued as an offsetting trend. Private equity continues to be a favored sub-sector for established minority investors such as Blackstone, Goldman-owned Petershill Funds, Neuberger Berman-owned Dyal Capital, and Carlyle-owned AlpsInvest. This deal structure has benefited both buyers and sellers. As the founders and GP partners near retirement age, their attention to liquidity and succession planning has bolstered the appeal of this transaction structure. We believe the momentum behind such deals will be strong in 2019 and beyond.

Distribution: While facing pressure to grow AUM, asset managers are increasingly looking to expand their distribution in international markets. This opens an opportunity for outbound M&A or joint ventures with asset management firms based outside the US.

Insurance players: Insurance companies continue to pursue the acquisition of asset and wealth managers, a complementary line of business. Insurance firms that buy asset and wealth management can grow their services and client offerings and improve their general account investments. We expect this trend to continue into 2019 and beyond.

New normal: Challenges create opportunities and the asset management industry, despite its headwinds, remains a cash-rich, high-margin business. The “golden days” of asset managers enjoying margins of 35% or more may be over. Still, the industry retains a strong appeal--not many industries can generate margins of 25% or more. Private equity firms love the cash-generating ability of this sector. We expect to see more deals as valuations normalize and owner managers adapt to a “new normal” regarding margins and perceived enterprise value.