The past two years have seen a spate of consolidations among asset managers, particularly in the boutique space. David Stevenson finds out why.
It’s a tough market for asset managers. Not only does the current barrage of regulation mean greater costs, but clients are also putting pressure on fees. For smaller players without economies of scale, additional costs can eat into profit margins.
Though some firms have looked to partner up or sell, forced sellers of asset managers are rare – though arguably Legg Mason’s acquisition of Scotland’s Martin Currie in 2014 may have fallen into this category. Martin Currie had lost a star fund manager and assets. It also had a large infrastructure base.
Sean Geraghty, a partner at law firm Dechert, and a member of the firm’s M&A team with a focus on financial services, advised Legg Mason.
“Last year , there was a lot of consolidation,” he says. “The boutique side of the business is where most of the activity is taking place. The RDR [Retail Distribution Review] has cut a lot of the commission-making ability away.”
In a recent State Street survey, 46% of asset managers polled were pursuing acquisitions. That said, consolidation in asset management – an industry rife with players – is taking much longer than some expected.
Naim Abou-Jaoudé, chief executive officer at Candriam, says it’s the fragmented nature of asset management industry that is slowing the process down.
He says the top five asset managers control 21% of their combined worldwide assets, which is a small percentage compared to other industries. For instance, the top five car-makers control more than 50% of the market.
“Barriers to entry remain low compared to more capital-intensive industries. You can create your asset management company with less capital then many other businesses,” says Abou-Jaoudé.
While increased costs may be one driving force for consolidation, acquisitions are driven by many other factors. Larger firms look for diversification, and acquiring a firm with a speciality might achieve this faster than organic growth would.
David Boyle, head of acquisitions at Aberdeen Asset Management, says the FTSE 100 firm’s acquisition of Scottish Widows Investment Partnership in 2014 was to reduce Aberdeen’s reliance on its equity offerings. In 2015, Aberdeen strengthened its alternatives capability with the acquisitions of both Arden Asset Management and Flag Capital Management in the US.
“The idea of the deals was to give us a global presence in both alternative spaces [hedge funds and private equity],” says Boyle.
Aberdeen is one of the more acquisitive firms in the market, having completed more than 50 deals since inception, an average of about two a year. Boyle stresses Aberdeen looks at acquisition targets that will complement its growth profile.
Vincent Bounie, managing director of Fenchurch Advisory Partners, has been involved in some of the standout M&A deals in asset management over the past two years. Fenchurch advised TwentyFour Asset Management on the sale of a 60% stake to Vontobel; he also advised TA Associates and its management on the sale of French firm DNCA to Natixis Global Asset Management (NGAM).
Bounie says one driver for firms to engage in M&A is that for those looking to do something strategic, a minority partner can help them be better positioned for growth. This was the case for DNCA (see ‘The French resistance’, Funds Europe, November 2015). Its deal with NGAM, which runs a multi-boutique model, provided it with an extensive distribution network, while the quid pro quo for NGAM was access to new markets.
Another plus for NGAM was DNCA’s status as a sophisticated firm, with €17 billion in assets under management, whose products were not reliant on market direction.
Under one brand
Acquiring boutiques has been a way for firms practising the multi-boutique model to grow. But firms attempting this approach face the challenge of M&A each time a deal is struck. In this type of set-up, there are invariably differences in terms of how closely aligned the firms are.
Andrew Wilson, head of asset manager sector solutions in the UK and Nordics at State Street, says the loose multi-boutique structure allows asset managers to act fairly independently and this may help with attracting talent.
A closely aligned multi-boutique model has centralised infrastructure, technology and distribution and can leverage off the brand on a global basis.
Pierre Servant, chief executive officer of NGAM, says his firm benefits from both models. He does not like the idea of a centralised chief investment officer (CIO). “Everybody is doing the same. [It’s a] problem with a large centralised organisation. If you want something truly distinctive, you can’t have a [centralised] CIO,” he says.
However, NGAM does have a chief risk officer, a chief compliance officer and centralised distribution. Servant says the model is designed to attract talented people who crave independence but also want to utilise economies of scale.
Abou-Jaoudé at Candriam also sees the multi-boutique model as offering the “best of both worlds”. He says it offers managers the chance to be entrepreneurial as well as attain a global reach. Last year, Candriam was acquired by New York Life, one of the world’s largest insurers, with a wide range of boutique asset management firms under its wing.
The issue arising here is one of cultural compatibility. In any M&A deal, making sure such a fit exists is crucial.
“Getting the culture right is half the battle,” says Boyle at Aberdeen, “not just the due diligence, but spending time with the management teams and the investment managers of the firms to understand what motivates them and how they fit in Aberdeen’s culture.”
Servant is equally focused on the cultural fit. “If you put in a newcomer who is fighting with distribution, it creates a lot of problems. We spend a lot of time discussing with management if the culture is going to fit. If they’re coming for a quick buck, we’re not interested in those guys,” he says.
Cultural fit, or lack of it, partly explains why particularly big deals are quite rare in asset management, says Geraghty at Dechert. Problems arise with people who suddenly have to do things differently and who are unable or unwilling to adapt.
State Street’s Wilson says this can happen where a large asset manager takes over a boutique. Both infrastructure and culture can be very different.
“If they’re aligned before the integration, there’s more chance of success. If they’re radically different organisations, it’s more of a challenge,” he says.
Apart from the deal drivers of business costs and expansion of product ranges and geographies, succession issues are also a factor in asset management M&A. If the founders of a firm feel they’ve taken it as far as they can, or want to retire, they may wish to sell their stake in the business.
In an example of a transition deal, Northill Capital – a private equity firm that invests in asset managers – took a majority interest in Longview Partners last year. Northill bought 100% of the shareholding of Keith McDermott, Longview’s co-founder and chief executive officer, who retired on completion of the transaction.
As Bounie notes, the high valuation of Longview made an internal solution difficult. The firm was managing around $19.5 billion (€18 billion) in assets when the transaction took place.
Wilson says a merger is one way of achieving continued success for an organisation.
An asset manager does not have to acquire an entire firm to manage succession; it could instead cherry-pick a team it wants. It may be possible to hire a star manager, though this is a tactic some would wish to avoid. Although, it can’t be denied stars can give business momentum a huge boost.
Geraghty says the star culture is important in asset management M&A, because if the likes of Neil Woodford comes into a firm, it can have a pronounced effect. This can also be achieved by the right teams.
“There aren’t many names that are big enough but there are teams of people that are big enough,” Geraghty says.
Making the switch
One reason firms engage in M&A is to broaden their client bases. Often the direction of travel is from retail, and then, after building brand and track record, to start attracting institutional customers.
The other direction – from institutional to retail – can be costly, as NGAM’s Servant points out. “In the US, if someone has created an institutional firm and wants to go into retail, this is big business and expensive,” he says. Firms might therefore need to find a company that already has this capability.
This is the type of approach NGAM used to enter the US retail market in 2000 with the acquisition of Nvest for €2 billion. At that time, retail was a small part of NGAM’s business. The firm wanted to accelerate on retail while, at the same time, boosting its international business. In the US, the firm went from investing for defined benefit pension plans, to defined contribution investment, which led to a pick-up in retail investors.
Since then, the firm has made further acquisitions in the US, including that of McDonnell Investment Management, a firm specialising in fixed income and the municipal bond sector, in 2012. NGAM has also expanded its distribution network to Canada recently with the acquisition of Nexgen and in Australia with a firm called Apostle, since renamed Natixis Australia.
The big-ticket deal of 2015 was the merger of Pioneer Investments, owned by Italian bank Unicredit, and Spanish bank Santander’s asset manager, Santander Asset Management. The deal was a long time in the making and the combined entity is said to be worth €5.5 billion, with total assets under management of approximately €400 billion.
Morningstar, which provides fund manager ratings, has said the new entity would benefit on three levels: scale, distribution and knowledge-sharing.
In terms of distribution, the two firms complement each other: Santander has a strong presence in Latin America, Spain and the UK, while Pioneer is focused on Germany, Austria, Italy and the US, though there is some limited overlap.
One stumbling block involved overlap in investment strategies. Both firms have multi-asset funds and European equity strategies, so they needed to manage duplication.
A deal that raised eyebrows in 2014 was Bank of Montreal’s £700 million (€971 million) acquisition of F&C Asset Management.
There was much speculation about the rebranding around the deal, which carried over to 2015, when the new business’s sales and distribution units were rebranded as BMO Global Asset Management.
The acquisition caused some fallout, as F&C lost a £14.5 billion mandate from insurance and pension provider Friends Life. The firm also lost its emerging markets team to Liontrust, and its UK mid-cap specialist Michael Ulrich to JO Hambro Capital Management.
Other deals in the past two years have included Standard Life Investments’ acquisition of the investment management arm of Phoenix Group, Ignis Asset Management, for £390 million. This gave Standard Life an extra £59 billion of assets under management, adding to the Edinburgh-based firm’s £184.1 billion.
As Bounie says, activity in M&A in asset management has been steady over the business cycle and the greatest level of activity is in the boutique space, rather then larger deals involving insurance and banked-owned asset managers. He does not expect activity to drop off soon.
Neither does Geraghty, who says the drivers for consolidation are here to stay. The emphasis on regulation, for instance, is pushing up business costs.
Nonetheless, he does envision a period when the “crown jewels of boutiques” have all been sold off, to be followed by a second wave of M&A that focuses on less attractive boutiques.
Perhaps the boutique crown jewels will disappear for good in the M&A activity State Street has identified. If someone makes them an offer they can’t refuse, that is.
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