Magazine Issues » June 2018

LEGAL EASE: At last, the shakeout

Gavin_WeirWags have predicted consolidation fever in the asset management space for a good half-decade, but few seem to have looked back at whether history followed the tarot cards.

History shows that the Great Asset Management Shakeout has not materialised… or hadn’t, until recently. Consolidation-driven M&A activity in asset management has indeed been on the rise, marked by Standard Life’s £3.8 billion marriage to Aberdeen Asset Management and Amundi’s €3.55 billion purchase of Pioneer. That trend will continue, even accelerate. But the reasons are more varied and complex than many of those who foresaw the trend may realise. Sure, smaller asset managers hope to use M&A to bloom into larger players, enabling them to offer attractive, lower-cost services while maintaining reasonable margins. But there’s more to it than that.

For one thing, some smaller companies are bucking the trend, choosing to grow organically through pricey boutique service offerings and forming one end of the ‘barbell effect’ that delivers a bulge of successful small companies at one end and a bulge of thriving giant companies at the other. Mid-sized companies find themselves in the squeezed middle, struggling to compete with the giants or to leverage the value of potential targets who prosper contentedly in the boutique space.

For another, some asset managers have been shifting to passive investment strategies delivering lower margins – margins that can’t meet profitability targets absent increased volumes and economies of scale.

Expanding regulatory burdens, such as those imposed by MiFID II and GDPR, incentivise consolidation. Firms find themselves under incredible regulatory pressure, which raises costs and can affect their entire business model. More nimble players and robo-advisory firms are often better placed to deal with these pressures. Mid-size and larger firms need to adapt, and are attracted to the synergies and growth opportunities which only inorganic growth can offer.

With the fintech fetish rising among customers, having the muscle to field state-of-the-art investment technology has become mission-critical, and bigger players are better positioned to build or acquire such platforms. Non-consumer-facing fintech, and regtech, are helping fund managers keep service delivery and compliance costs in check.

But tech is also disrupting the sector from without. Robo-advisory platforms like Nutmeg are not only beating traditional asset management companies at the fintech game, but also drawing customers from a growing market of young investors who are mistrustful of traditional financial institutions.

Besides driving the consolidation surge, these trends will push some weaker banks to dispose of their asset management operations, while others will ramp up their high-margin asset management arms to offset low-margin traditional banking operations. The same trends should drive up the proportion of cross-border deals, as asset managers seek not only increased scale but also instant growth from fast entry into new markets.

In this disrupted market lies a myriad of opportunities. Ferreting out the most lucrative among them requires a deep understanding of the multiple, divergent trajectories the future winners in this market have only just begun.

Gavin Weir is partner with White & Case

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