For Managers, Is M&A the Path To Survival?
Fee pressure concerns, heightened distribution costs and a market heading toward passive products are contributing to a growing sentiment in the asset management industry that survival, not growth, is the reason to now consider a merger or an acquisition.
Take the years' most notable merger to date, a $6 billion takeover of Janus Capital by London-based Henderson, or the announced sale of Unicredit's Pioneer Investments - described by numerous observers as bell-weathers for further industry consolidation.
Reflecting on the Janus deal and the sale of Pioneer, Fitch analysts believe "that there may be increased merger and acquisition activity in 2017 among active-oriented traditional managers," spurred by performance issues.
But it's not good news, as Bloomberg News reports that seven top asset managers reported a total of $50 billion in third-quarter net redemptions, most of it from active funds.
"While global scale and increased product diversity are positive, investment performance and overall industry challenges for active management remain the primary headwinds to organic growth," noted analysts with investment bank Jefferies.
There was a sense of inevitability attached to Janus's deal, says Tom Florence, CEO of Denver-based boutique firm 361 Capital.
"If you're a middle market asset management firm today, with fees coming down but distribution costs not getting any less expensive, you need to think about how to survive and scale your business," Florence says.
Florence acknowledges that in recent history, "the markets haven't been kind to active management, in terms of performance and fund flows."
But he argues a focus on negatives actually blinds asset managers from the opportunity to gain value in a noisy market - the motive that his boutique firm found when it decided to acquire neighboring firm BRC Investment Management.
"Standing out in this market is all about delivering distinctive products to our clients," Florence says.
"If you can acquire a firm producing distinctive products that advisers and institutional clients are looking for, that makes sense. It made sense for us.
"It wasn't about scale, or any of the buzzwords that others are using as to why they are doing an acquisition," he adds, "although we were happy their assets put us over $2 billion in AUM. It was because [BRC was] unique."
WHAT CLIENTS WILL PAY FOR
Not all segments of the industry are feeling the same pressures of managers.
Pavilion Financial, which offers advisory services to institutional clients, struck two acquisitions this year, one creating an alternative asset advisory arm.
The motivation was primarily revenue growth, says Pavilion CEO Daniel Friedman, explaining the global firm's strategy over the past six years has been to pull together small but highly specialized firms.
Noting that, even large pensions have shifted to low cost ETFs when they deemed it strategically appropriate, Friedman echoes 361 Capital's Florence. Clients will pay for services, he says, that they deem to be valuable and unique.
"It's difficult to get paid for a highly commoditized service," Friedman says. "But if you reinvest in research and have areas of specialization - you're never going to be fully insulated, that always will be a challenge - you'll be in a much better place to withstand those price pressures."
Asset managers are not alone in feeling the strain of costs, regulatory demands or new competition, adds Bob Westrick, partner at Private Vista,
"The whole financial industry is seeing price compression," Westrick says. "We are seeing pressure now to deliver more value at less cost."
Despite a focus to add scale, Westrick is doubtful. "Only a handful of folks will be able to get the scale or size of Vanguard," he says.
Fund providers need to be aware that advisers are changing focus too, says Westrick, whose Chicago-based wealth management firm recently merged with another local firm.
"I just don't see anyone seeking a savior sort of fund anymore," he says. "You need smart people putting together portfolios that can reduce risk, and then communicating that to clients so they understand what they are paying for."