Wave of consolidation in asset management expected to increase pressure on ‘squeezed’ mid-size firms

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A new wave of consolidation has started sweeping the asset management industry, and is expected to accelerate as sharper fee compression and rising costs turn up the pressure on investment firms. 

This month, US investment bank Morgan Stanley revealed plans to buy investment manager Eaton Vance, in a move that will almost double its assets under management to USD1.2 trillion. 

“Eaton Vance is a perfect fit for Morgan Stanley,” said James P Gorman, chairman and chief executive officer of Morgan Stanley, at the time of the announcement. 

Gorman explained that Morgan Stanley sees it as an opportunity to add more fee-based revenues and boost assets under management.

Bing Waldert, managing director of US research at asset management research firm Cerulli Associates, says investment managers are looking to gain greater market share as their profits come under increasing threat. 

“The overarching theme is continued compression of fees in the asset management marketplace,” says Waldert. “At a top line, that means the revenue that an asset manager is able to raise, but as you start to dig deeper, it's also about costs in a stricter regulatory environment.” 

Allocators are “looking to engage with fewer partners on a deeper level”, which means their expectations for asset manager relationships are going up, and the fees they expect to pay are going down.

Morgan Stanley’s announcement came only two weeks after news of a potential merger brewing between American Invesco and London-headquartered Janus Henderson, with activist hedge fund manager Nelson Peltz buying up stakes in both firms. 

Peltz has previously helped push investment manager Legg Mason into a deal with Franklin Templeton, an acquisition that created a fund giant worth USD1.4 trillion.

A merger between Janus Henderson and Invesco would be a “pure scale play”, says Waldert. 

“It isn't necessarily a question of complementary strengths as much as it is just getting to scale, and two management teams who know how to actually execute on this type of transaction.” 

Both firms have recent history in mergers and acquisitions, with Invesco acquiring OppenheimerFunds in 2019, and Janus Henderson being formed in 2017 from a merger of Janus Capital Group and Henderson Group.

Even in 2020, as the coronavirus pandemic crisis rocked markets, deals within asset management have grown larger.  

The value of mergers and acquisitions in the wealth and asset management industries soared to a combined USD19.7 billion in the first six months of 2020, up 47 per cent from the first six months of 2019, according to a report from PWC.

The pandemic could end up spurring on more deals, according to research from Cerulli, which forecasts M&A to continue at pace.

Waldert says: “Some of these firms that have not been as successful as they would have liked are being forced to reckon with that lack of scale in what's an increasingly difficult and narrow market.”

“We're starting to see this almost as a barbell in the asset management marketplace, where you can either be this massive mega player, or you can be a really unique boutique with investment skill in a couple of key asset classes, that enjoys a strong reputation with allocators in those asset classes,” he explains.

This is leaving a ‘squeezed middle’ in the asset management marketplace, of firms who have neither the scale, nor specialist expertise to be competitive. 

Cerulli says the deals it expects to see are not only the “mergers of equals” between the large asset managers. 

The marketplace is likely to see more of the “whale swallowing the minnow”, as big managers make selective acquisitions to round out the asset classes they offer, and “get into what allocators perceive to be higher skill asset classes”. 

This includes Franklin Templeton’s purchase of alternative credit specialist Benefit Street Partners in 2018, and ESG specialist Trillium Asset Management being acquired by Australian Financial Firm Perpetual earlier this year. 

“Non-investment capabilities” such as fintech are also on the larger asset managers’ radar, as many are looking to leverage technology to “expand the value proposition to allocators”. 

Larry Fink, CEO of the world’s largest asset manager, BlackRock, said back in 2017 that he expected within the next five years that more of the company’s revenue would come from software and technology rather than traditional money management.

The firm runs an internal risk management software called Aladdin, which has more than USD20 trillion in client assets sitting on its platform, and is considered a mainstay of the industry.

Waldert considers that further consolidation within asset management is “potentially anti-competitive”, but adds that “ultimately it is bringing cost to the consumer down”.