04 July 2014

Hedgeweek: Confidence among asset managers will drive greater industry consolidation, says Moody’s

Over the next 12 months, there will likely be a significant increase in deal volumes, which have been slow to recover since the global financial crisis as the market is replete with motivated buyers and sellers, Moody’s says. Asset managers are motivated to buy now given an improving macroeconomic picture combined with financial positions that are back at or stronger than pre-crisis levels. Buyers’ goals vary, but include: increasing AUM to gain scale and broader diversification; enhancing investment and distribution capabilities; filling gaps in the business by expanding into new channels or product types, particularly specialised product categories such as Smart Beta or liquid alternatives.

Sellers are likely to act now since business fundamentals have improved in the past several years and valuations are also higher. There are two distinct types of sellers: 1) smaller, boutique players that are selling or merging to achieve access to new distribution channels, scale and/or diversity, and 2) banks or insurance companies, selling either because it would be too expensive to grow the asset management business to a point where it would have critical mass, and the business is deemed non-core; or regulation-driven selling – because the business requires holding uneconomic levels of regulatory capital, for example.

M&A activity in the asset management industry will likely pick up in the next 12 to 24 months. Improving economic conditions, low capital markets volatility, stronger earnings and cash positions and favourable financing markets will increase acquirers’ appetite for M&A. Stronger risk appetite will drive up deal volumes; however, deal sizes are likely to remain small to moderate in size as acquirers remain cautious of the large execution and integration risks that accompany large, transformative M&A transactions, Moody’s says.

Asset management is increasingly becoming a “winner-take-all” industry. Similar to the music, film, publishing and information technology industries, small groups of firms are capturing outsized share of new client flows in each of the industry’s key market segments. A driving force behind this dynamic is a growing trend among institutional investors and distributors to reduce the number of managers they work with and consolidate assets with a few select managers. Given a shift in the industry’s competitive dynamic, acquirers should be more motivated to consider M&A in pursuit of growth. 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.

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