Top 400: Managers pursue rationalisation
The European asset management industry has seen significant acquisitions in the past few months. However, we believe it unlikely that these herald the beginnings of an M&A spree among asset managers. Rather, we would suggest that rationalisation will continue, but the focus will be on internal cost cutting in what continues to be a fragmented industry of around 3,200 players, according to EFAMA.
So far this year, we have seen acquisitions that were both selective and driven by the evolving strategic priorities of the vendors and buyers. Aberdeen’s acquisition of Scottish Widows Investment Partnership, completed in the first quarter of 2014, will be transformational. It will also create one of the largest asset management groups in Europe.
The acquisition of Ignis by Standard Life Investment will create the largest UK asset manager, surpassing even the combined SWIP and Aberdeen. Schroders’ acquired Cazenove Capital, a selective acquisition to expand its private banking operations. Other asset managers have generated interest from overseas parties, such as Bank of Montreal’s recent offer for F&C Asset Management, and the sale of Robeco to Japan’s Orix and 2013’s sale of Dexia Asset Management to New York Life.
We do not expect widespread M&A because there are few large candidates left and deals can cause considerable risks. There could be stark cultural differences among managers and could cause investor outflows. Other challenges include a negative impact on an asset managers’ credit profile if an acquisition involves debt funding, regulatory hurdles in the approval phase and over-paying, particularly if a bidding war is triggered.
Of the two recent UK acquisitions, both were driven by evolving strategic priorities of the vendor as much as the acquirer’s appetite: Lloyds Banking Group was actively seeking to divest non-core assets, while Phoenix, the parent of Ignis, disposed of the firm as part of its strategic aim to reduce gearing. In both cases, the rationale for the divestiture was strategic rather than speculative, although willing strategic buyers were easily found.
In addition, the European landscape is different from the US, with a much larger captive business component – notably insurance assets – that is less prone to change hands. This explains differences in the pace and scope of consolidation on both sides of the Atlantic.
Nevertheless, there is interest from strategic buyers in acquiring European asset managers: Fitch was aware of at least two other bidders for SWIP and several international players were linked to Ignis prior to its acquisition by Standard Life. Improving macro-economic conditions in Europe (we forecast growth in euro-zone GDP of 1.1% in 2014) and a resumption of growth in the industry (fund flows of €410bn in 2013) will support this interest. However, given the paucity of large independent European asset managers, the scope for further consolidation is limited. Therefore, we think that M&A activity in Europe will be selective, focused on areas in which institutional investors demand scale, such as alternative investment, private equity and real estate. We expect the acquisition of smaller specialists to remain a popular approach for asset managers to add competences, products, clients or distribution channels.
Rather than significant M&A, we think that the elimination of sub-scale activities and the reduction in the number of funds will be the leading component of industry rationalisation. The number of outstanding funds in the industry has been reducing for three years, with around 250 funds eliminated every quarter. Further rationalisation remains because the market is fragmented. For example, 65% of cross-border fund do not have a single flagship fund with assets of more than €1bn.
We think the industry will remain fragmented in Europe. The nature of the asset management industry is such that individuals or teams with specific skills will be tempted to set out on their own. Barriers to entry remain low, although as the regulatory burden increases, so will barriers to entry. The industry will always have a long tail of new and specialist entities. For these new managers the ability to raise assets will be critical, by raising their profile with large investors and demonstrating the requisite standards of governance and process to allow investment. They also face the challenge of managing capacity and performance against asset growth. Bank deleveraging will drive a wave of European asset manager registrations as specialist units are spun out from banks to manage specific asset pools or classes.
At the same time, the large asset managers will keep getting bigger. This will be driven by the gravitational pull of their existing asset base and large, flagship funds, but also supported by the trend towards passive investments.
Bigger is not always better, however: Fitch’s European asset management study has found that independent specialist asset managers, typically with lower AUM, outperformed the typically larger subsidiaries of other groups as businesses (both in terms of AUM margin and cost/income ratio). The main question is what will happen to those asset managers in the ‘squeezed middle’ – without the heft of a large AUM or a real specialism their ability to compete is impaired. The result is likely to be a split between the large and specialised managers; those managers left in the middle will face competitive pressure but may nonetheless be able to succeed if they can rationalise their processes and fund ranges sufficiently.
Alastair Sewell is head of EMEA fund and asset manager ratings, and Erwin van Lumich is managing director, financial institutions, at Fitch Ratings