Key person risk means a predicted surge in merger and acquisition (M&A) activity among large asset managers is unlikely to take place, according to analysts at UBS.
Michael Werner and Alex Leng said in a research note that they viewed large-scale asset manager M&A, particularly among listed players, as “unlikely” despite a recent high-profile example in the form of Henderson’s combination with Janus Capital.
Though acknowledging that pressures from passives, margin compression and regulation make pro-consolidation arguments valid, the analysts said the risk of fund manager and client departure meant tie-ups would be difficult to justify.
“We are sceptical that we will see further large takeover deals tied to UK asset managers in the near future,” the analysts wrote.
“The potential post-deal attrition of key personnel is a challenge, and can undermine any proposed value creation resulting from the combination.”
Mr Werner added: “We would expect any consolidation to be focused on the small- and mid-sized asset managers.”
The UBS view is in contrast to the consensus following the $6bn (£4.8bn) Henderson-Janus merger. The two firms acknowledged that a tougher operating environment for asset managers was part of the rationale for the deal, leading many to expect a flurry of activity.
Investors have agreed, with the share prices of listed UK asset managers having risen between 2.5 per cent and 6 per cent on the day of the deal in the belief further M&A activity was likely.
However, Mr Werner questioned the foundations of this belief, and added the M&A premium had now been eroded for many listed firms.
He said acquiring firms had to pay a “double premium” for firms – one to owners, and one to fund managers – to prevent losing talent to rivals.
“We are cautious on the prospect of large M&A deals in any industry where human capital is the key asset. [It] can migrate to competing firms with minimal frictional costs. This ‘double premium’ often makes large acquisitions uneconomical,” he added.
The analyst continued: “Large deals are challenging because they can result in overexposure to a single asset manager by clients, especially when there is significant geographical and/or product capability overlap.”
Mr Werner argued the Henderson-Janus deal was more appropriate than other potential mergers due to “strategic reasons” such as distribution strengths, complementary products and the need to stem outflows.
Janus had seen outflows of more than £60bn over six years, while Henderson’s exposure to out-of-favour European equities had hurt its asset base in the months before the tie-up.
“While neither firm had discussed this as a strategic rationale for the deal, we believe these outflows probably played at least a minor role,” Mr Werner added.
The analyst also said his view was supported by the fact there had been very few large-scale M&A deals in the past 10 years.
However, he added that large deals could take place when an asset manager was being strategically divested, mainly by banks. One example is Pioneer Investments, Europe’s sixth largest fund house, currently owned by Italy’s largest bank, UniCredit. The firm has been subjected to several sale attempts in the past year as the bank looks to shore up its capital position.
The UBS analysts also said they expected M&A activity to continue on a smaller scale, not least because rising fixed regulatory costs will “compress margins the most” for this group.
Key numbers
£253bn
Combined AuM for Janus Henderson Global Investors
£2.9bn
Combined net outflows for the firms in 2016, according to Morningstar
