Asset management M&A: Industry Outlook 2017 and beyond
M&A by industry: Investment Management
Deteriorating economics, distributor consolidation, the need for new capabilities, and a shifting value chain are combining to set off an accelerated and different round of merger and acquisition (M&A) activity in the investment management industry. Strategy consultants at Casey Quirk, a practice of Deloitte Consulting LLP, expect brisk M&A activity to continue in 2017 and beyond. What are the strategic catalysts driving this M&A activity and the characteristics of successful transactions, including integration and post-transaction growth strategies? Find out in the latest report on Investment Management M&A from Casey Quirk.
- Stubborn challenges
- The operating environment continues to shift
- How will M&A activity be affected?
- Get in touch
- Join the conversation
Investment management has become a fiercely competitive industry, increasingly shaped by the same winner–take–all and consolidation dynamics influencing other maturing financial services sectors. The gap is widening between leading and lagging asset/wealth management firms, as they deal with—to varying degrees of success—a cost and customer conundrum that is challenging revenue growth and profitability in a maturing, oversupplied market.
The operating environment continues to shift
Strategy consultants from Casey Quirk describe a shifting operating environment in their 2016 white paper, Survival of the Fittest: Defining Future Leaders in Asset Management.
Costs: Dwindling market returns, slowing organic growth, and contracting margins reveal that the industry is not as scalable as previously believed, with expected fixed cost increases (including technology upgrades to meet new compliance standards and digitalization demands) outpacing likely future revenue growth. Additionally, as long-term capital market returns become lower, and passive asset management products become more popular, fee pressure will rise.
Customers: As individuals, rather than institutions, begin to power revenue growth, investment management is starting to resemble other consumer-focused industries facing dramatically changing buying patterns, requests for innovative products, expectations for a personalized experience and customized outcomes, and fee sensitivity.
With the investment management industry's traditional cost and operating models under pressure, forward-thinking asset and wealth managers are looking for new ways to differentiate, expand capabilities, and increase revenues. One way to do this is through cost-cutting, finding new sources of funds for transformation. Those investment management organizations that focus on amassing and using available capital to invest in mergers, acquisitions, and partnering arrangements—rather than those that pay out free cash as compensation or dividends—will likely be better-positioned to manage marketplace challenges and opportunities, and build the capabilities and scale they need to power revenue growth. Unlike previous transactions in the investment management industry, consolidation pressures—a focus on scale to combat deteriorating economics as well as support necessary reinvestment in new skills—will drive the next round of M&A.
How will M&A activity be affected?
Most investment management M&A deals in 2017 and the next few years are expected to be strategic, driving valuations upward, with the following primary deal types:
- Transformative scale acquisitions, driven by the quest for revenue and cost synergies that will help fund the infrastructure and operational changes necessary to compete. These deals will be larger, include more mergers of equals, and likely continue to be global.
- Capability-based transactions, mostly representing bolt-on additions of innovative investment products and technology solutions, either to meet investors' evolving service expectations or tap new markets.
- Deals that reflect a shifting value chain, with many asset managers securing firms that extend their capabilities in direct distribution, wealth management, and other advice services to differentiate from competitors.
- Pure consolidating deals structured to spread costs over a larger client asset base; several may take place in the US and European mutual fund marketplaces.
In this report, Casey Quirk reviews 2016 investment management M&A activity, shares expectations for 2017 through 2020, and reviews selective trends and issues that have the potential to influence sector M&A.