The report, issued by the credit rating business of Moody's Corporation, also said that M&A activity in the asset management industry will likely pick up in the next 12-24 months. This is largely due to improving economic conditions, low capital markets volatility, stronger earnings and cash positions.
Signs of M&A optimism has been finding its way into the asset management sector. Recent deals such as Standard Life Investment’s purchase of Ignis Asset Management in March, Aberdeen Asset management acquiring SWIP and F&C being bought by the Bank of Montreal emphasize increased buying and selling activity.
Motivation
Having strengthened their financial positions, asset managers are motivated to buy for various reasons. Buyers’ goals include gaining AUM scale, enhancing investment and distribution capabilities, and filling gaps in the business by expanding into new channels.
Meanwhile, asset managers are likely to sell now since business fundamentals have improved and valuations are higher. Smaller players are selling in order to gain access to new distribution channels or gain scale and diversity. Banks or insurance companies are selling either because it would be too expensive to grow or they are driven by regulation to sell, the report said.
Seizing opportunities
Increasingly, small groups of firms are gaining momentum in client flows in key market segments. This is driven in part by decreasing number of managers and consolidated assets of selected managers.
“In today’s market, the opportunity to strengthen and diversify investment capabilities and/or expand and strengthen distribution through M&A can help accelerate firms’ competitiveness in key market segments,” senior analyst Robert Callagy said.
Another area of opportunity is smart beta, where Moody’s Investor Service expects even more M&A activity. “In the past three months we have seen a number of M&A announcements centred on smart beta/quantitative investment capabilities,” Callagy noted.
Examples include Man Group’s recent acquisition of Numeric Holdings, Goldman Sachs Asset Management’s acquisition of Westpeak Global Advisors in April and Legg Mason’s acquisition of QS Investors in March.
Pros and Cons
The report offers investors a few considerations for asset managers on the M&A front.
On the positive side, M&A acts as a tool that can help asset managers diversify AUM thus improving a firm’s overall revenue and earnings mix. M&A transactions can boost economies of scale. M&A joint ventures can also help asset managers enhance asset gathering capabilities through access to new distribution channels.
A few cons include major risks that are involved in M&A transactions. One risk is overpaying, for the acquired asset or incurring high levels of debt to acquire the asset. Overlapping client basses may in turn lead to client leakage. And, announcements of M&A transactions can slow new sales volumes if clients question the transaction.
“Given these risks, consistent and transparent external and internal communication around the transaction and the rationale is also essential. Most importantly, deals need to be completed efficiently, and the regulatory environment to be carefully considered before the transaction takes place,” Callagy concluded.
