After several years of false starts, the long-promised consolidation of the investment industry has begun to emerge in full effect. Over the past 18 months, the march of adviser consolidators has been joined by several platform deals, and a steady stream of asset managers are beginning to fall into line, too.
As margin pressures are brought to bear, three mega-mergers stand as the flagbearers of this trend for fund firms.
The first, which has seen France’s Amundi swallow up Italy’s Pioneer Investments to create the world’s 10th largest asset manager with £1.1trn in assets, has less relevance to UK intermediaries. But two subsequent deals indicate how this merger and acquisition (M&A) activity is just as prevalent at home as it is abroad. Henderson’s merger with American firm Janus Capital, announced in autumn 2016, was followed at the start of 2017 by the news that Aberdeen and Standard Life were combining to create a £660bn fund manager.
Chart 1 shows the number of deals has been relatively stable in recent years. But in its latest annual overview of the industry, Boston Consulting Group (BCG) acknowledges that the pace of change is starting to increase, and suggests the risks for providers and fund buyers may be on the rise.
“Conditions that promote consolidation have been present in asset management for several years. Flows have concentrated, distributors have consolidated their suppliers and fixed costs have risen as a result of technological and regulatory change. However, M&A activity has only slowly picked up in recent years.
“Now, with the industry’s economics continuing to deteriorate, activity will likely accelerate in quantity and magnitude. We expect deals to become larger and often cross-border, giving rise to more challenging post-merger integration.”
Big deals, big risks
As the BCG report implies, the absorption of one sizeable firm into another brings risks. Chief among these for intermediaries is the possibility that respected managers may leave, investment processes may be distorted, and reliable fund management cultures may end up changing.
“Merger announcements pressure flows, as consultants and advisers are usually reluctant to push funds from companies that are merging, due to likely dislocation among investment staff and the possibility for performance issues,” RBC analyst Peter Lenardos observed earlier this year.
James Calder, research director at City Asset Management, told Money Management’s sister title Investment Adviser in March there were other factors to consider from deals such as Standard Life Aberdeen.
“I would be gobsmacked if Standard Life Investments developed market equity managers that had to fall on their swords to accommodate Aberdeen managers. But there may be concerns about capacity, such as will the managers be comfortable managing much bigger funds [if the Aberdeen and SLI portfolios are merged]?” Mr Calder said.
Those firms that do retain their independence could benefit from investors’ growing unease regarding M&A deals.
But it is not just large companies that are seeking to consolidate their positions. Smaller asset managers are also seeking bolt-on deals, as shown by Liontrust’s deal for Alliance Trust Investments last December. Meanwhile, Invesco’s acquisition of European ETF manager Source in April indicated that the trend is also starting to play out in the passives space.