Markets may have recovered much of their lost ground over the past couple of months, but fund flows have remained lacklustre for the European fund management industry.
According to Refinitiv Lipper, €125.9bn left the sector in the first quarter of 2020. Against this backdrop, further consolidation among European asset managers would appear an inevitability.
There are plenty of other pressures for the industry.
Fees are under scrutiny as passive managers gain ground and performance remains unconvincing. Meeting regulatory hurdles in the wake of Mifid II has become increasingly expensive.
At the same time, value assessments may be exposing the limitations of active asset management.
M&G recently admitted that three of its major funds provided poor value for money and many other managers may be forced to make similar admissions in the months ahead.
But there are also positive reasons for consolidation: the focus on environmental social and governance criteria is a welcome development for the industry but comes at a price.
Companies that can spread costs can offer better analysis. Equally, consolidation can be a way of accelerating major investment in value-added areas such as big-data analysis.
The differing M&A landscapes in the US and Europe
In the major fund markets of the UK and US, consolidation has been a ready solution to pressures faced by the industry.
There have been mega-mergers such as Janus/Henderson, Invesco/Oppenheimer and StandardLife/Aberdeen; but also significant smaller deals, such as Premier/Miton and Jupiter/Merian as mid-tier fund managers have sought to build scale and fend-off larger, predatory rivals.
There are also a number of larger players still publicly ‘on the table’.
In November last year, private equity owner TA Associates hired Goldman Sachs to explore a sale of Russell Investments, currently considered to be worth $293bn.
Yet, in Europe, consolidation remains piecemeal.
There is plenty of talk and all the same pressures appear to remain in place, but there have been few large mergers across the continent.
For all the discussion of a dramatic reduction in the number of stand-alone fund management firms, there have been no large transactions in Europe within the last 12 months.
So, what is happening?
There are plenty of smaller deals: Federated Investors bought a 60% interest in Hermes Fund Managers for $350m; Julius Baer acquired the remaining part of Kairos IM ($115m).
Spain’s Banco de Sabadell agreed to sell its asset management arm to French asset manager Amundi for €430m. Ostrum Asset Management and La Banque Postale also agreed the merger of their asset management operations.
Yet the killer deal remains elusive.
Amundi is one of Europe’s largest asset managers and has been public about its search for deals.
It has been linked to DWS, Allianz Global Investors, Natixis IM and Generali.
While its deal with Banco de Sabadell’s asset management business is certainly a chunk of change, it’s not on the scale of DWS (€700bn in AUM) or Allianz (€535bn in AUM).
Equally, while merger talks between DWS and UBS Asset Management were greeted warmly by markets, they have, as yet, come to nothing.
How much will Covid-19 change the M&A scene
Why is it not happening? Perhaps things are not bad enough? Certainly, it’s been a benign few years in markets.
While new business flows have been lacklustre, asset managers have still been able to boast growth in assets thanks to rising stock and bond prices.
As such, the Covid-19 crisis may be the catalyst for change.
But Will Riley, co-manager on the Guinness Global Money Managers Fund, said: “Asset management companies tend to be well equipped to weather serious downturns.
“Firstly, they tend to maintain healthy balance sheets with little or no debt. And secondly, they have a flexible cost base, with their main asset (people) being paid less while profitability is lower.
“Assuming a reasonable recovery in broader equity markets post the worst of Covid‐19, it seems reasonable to assume that underperformance on the downside should be recovered on the upside.”
Fund managers have also found a number of other solutions to their problems.
There has been a growth in outsourcing arrangements, for example, such as State Street’s provision of investment management services to Lazard Asset Management.
Detlef Glow, head of Emea Research at Lipper, says fund liquidations were up in the first quarter of 2020 over 2019 as companies get rid of under-performing funds.
Partnering arrangements are also on the rise: in June, Italian investment bank Mediobanca and US fund manager Russell Investments launched their third private markets fund together.
There is also an argument that the really big threat has not yet materialised.
In Asia, fund managers are seeing a major challenge from Big Tech companies.
Alibaba spinoff Yu’e Bao has gone from a near-standing start to 370 million account holders and over £200bn in assets in just over four years, leveraging its strong platform and retail client access.
Should the US technology giants mount a challenge, the asset management industry may need to act with a little more vim to defend their position.
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