Integrating Asset Managers
The Executive Playbook

Integration can be the key to unlocking value in investment management M&A.

The economic case for thoughtfully integrating asset managers following mergers and acquisitions is strong. Firms that take a deliberate and strategic approach to integration experience faster growth and higher margins. Planning for integration from the beginning of the M&A process allows firms to present a compelling narrative to the market, realize revenue and cost synergies, present a unified presence to clients, provide clarity to employees, and transition to run-rate operations in a faster, more seamless way.

Competition has intensified
Dynamics leading to a consolidating industry

Asset managers are facing a set of secular drivers that have made inorganic activity more attractive. As a result, industry M&A in recent years has reached all-time highs. We believe that M&A will continue to be a fundamental component of many firms’ strategies to win in a more competitive and slower-growing industry. Firms that can navigate the unique challenges of integrating asset management businesses will have an important strategic advantage in this market.

Industry M&A Drivers

Revenue pressure
Slowing organic growth
Scale advantages
Changing investor demands

Revenue pressure

Revenue growth is challenged as discounting and an asset mix shift to lower-cost or passive strategies reduce management fees.

Mix Shift
Implied Fee
Fee Discount

Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites

Aggregate Industry Fees (basis points) 1.1% 1.0% 0.6% 2019 - 2.4% - 3.3% 2021 - 2.7% - - 2.8% 2020 2018 42 - 3.5% 43 - 1.8% 41 40

Slowing organic growth

The tepid rate of new flows into the industry is driving a greater emphasis on consolidation and market share capture as means to drive growth.

Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites

2013 - 2018 Average Annual Organic Growth Net New Flows as % of BOP AUM 3.18% 2.58% 1.29% 2019- 2021 2022 2026 Estimated -59%

Scale advantages

While firms of all size can drive strong economics, larger firms have been able to generate material advantages because of their scale. They benefit from larger absolute fixed investment in key functions and synergies that expand margin.

Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites

Operating Margins by Asset Manager Size Cohort YE 2021 25% 30% 35% 40% 45% 50% 55% 0- 300bn 300bn - 1tr 1t+ 75th %le 50 th %le 25 th %le

Changing investor demands

Investor demand is shifting toward new product offerings, favoring passives, private markets, and fixed income strategies. M&A continues to be a key component of firms’ efforts to acquire in-demand investment capabilities.

Increase
Decrease
No change

Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites,
Top1000funds.com

Projected Allocation Shifts 46% 24% 20% 43% 66% 54% 50% 90% 9% 25% 38% 11% Alternatives Fixed Income Equity 10% 0% 12% Cash Solutions

Asset management M&A has entered a new phase
Cost synergies and economies of scale are a primary driver of deals

As the asset management industry has matured, the purpose and pace of industry M&A activity has evolved. In its earliest phase, asset management could be described as a “cottage industry,” with many boutique, independent, investment-led firms. As the industry matured, asset managers pursued deals to diversify their businesses, “bolting on” new teams and capabilities. The Global Financial Crisis then led to a new rationale for transactions, as financial companies with asset management affiliates sought to free capital and solidify their balance sheets. Today, in a more mature industry, M&A is driven not only by the need for new capabilities, but also by a strategic imperative to implement a more efficient operating model and achieve economies of scale.

01

Initial Founders Exit

1980s - 1990s

To create liquidity for the founding owners of asset managers

02

Capability-Driven
Acquisitions

Early 2000s - 2007

To add new investment capabilities in in-demand asset classes

03

Post-Crisis Buyout

2009s - 2014s

To optimize parent companies’ balance sheets

04

Industry Consolidation

2015 and beyond

To realize revenue and cost synergies and build a more scaled, efficient and durable franchise

Competitive Case

Effective post-merger integration can help firms improve
growth, realize savings, and optimize the business

As we wrote in our paper More Perfect Unions - Integrating to Add Value, the advantages of effective integration are not just theoretical. Our industry benchmarking shows that asset managers that are integrated experience both faster organic growth and significantly higher profitability.

The Case
Focus Areas

The competitive and economic case for integration is real

6-8%

increase in range of margin

Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites

Financial Impact of Integration Firm Organic Growth Firm Operating Margins Non-Integrated Firms2018-2020 Integrated Firms2018-2020 Non-Integrated Firms2015-2017 Integrated Firms2015-2017 -1 . 0 % -0 . 5 % 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 28% 30% 0% 29% 37% 33% 36% 34% 32% 35% 31% 38%

Typical focus areas

Distribution

Reorganizing coverage structure and shifting spending toward client service and cross sales, technology and client experience

Leadership

Reducing redundancies and migrating to metrics and rewards that favor collective execution of the new strategy

Enterprise and Investment Operations

Identifying areas of leverage and overlap across functional support areas

Technology

Deciding where systems integration creates efficiency—and where it doesn’t

Branding

Determining the optimal way to position and promote the organization in the market

M&A isn’t easy
But it can be better

Successful integration will require executive teams
to embrace six key success factors
Historically, investment management deals favored a lighter touch on integration. Strong market returns, high margins, and high organic growth meant that acquirers saw little reason to risk change. In today’s market, however, acquirers are more likely to apply close scrutiny to cost levels and potential duplicative activities, as they seek to deliver synergies and economies of scale. Well-designed integration plans will seamlessly communicate a clear vision and narrative to all stakeholders, shepherd the organization through a fast-paced execution cadence, and reflect the technical expertise required to transition to an integrated operating model. The following six factors best position executives to succeed.

01

Defining the long-term
integrated vision

Learn more

M&A gives executive teams the right to reexamine their company’s operating model. Integration planning based on a holistic view of how the combined company will compete can deliver operating improvements as well as economies of scale.

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02

Structured decision-making
processes

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Internal and external stakeholders need clarity. Some decisions will be known from the start; others will require time. Provide as much clarity as possible and where needed provide details on how decisions will be made.

Back

03

Articulation of the strategic
narrative to the market

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Asset owners and intermediaries are not blind to the dynamics facing the asset management industry. Our experience shows that the market is more understanding and patient with transactions when the rationale and benefits to clients are both clear.

Back

04

An issue-free legal day one
(closing)

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Identification of potential issues and pre-planning of responses is key. Reaching a successful Legal Day 1 (LD1) will not earn executives credit, but missteps will certainty create frustration, failure and fatigue for team members.

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05

Dedicated resources and a
strong project management
office

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Successful integration planning and management is a full-time responsibility. Trying to accomplish it off the “side of a desk” risks short changing the integration planning process and the day-to-day management of the firm.

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06

Post-merger integration
mobilization

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Realizing the full value of the acquisition involves ensuring dedicated teams are established, empowered, and accountable to refine and execute the integration plans and the organization has realistic expectations around timing, cost and savings.

Back

Follow our integration playbook to navigate the journey and achieve deal success

We think of the M&A and integration journey as a four-step process. While the duration and depth of each step vary from deal to deal, there is a set of common initiatives and requirements to pursue before signing a letter of intent (LOI), announcement, and closing. The specific focus areas and the time required for executive team members will fluctuate throughout the process, as will the internal and external support bench needed to reach a successful close and execute on post-merger integration.

Letter of Intent Announcement Closing

01

Diligence & Negotiation

02

Future State, IMO Planning, & Deal Term Finalization

03

IMO, LD1 & TSAs, Functional TOM

04

Post-Close Integration

01 | Diligence & Negotiation

Key Tasks

Clarity on strategic rationale Path to create enterprise value Identification of key risks
Executive Leadership Operations & Technology Investments & Products Corporate Support Distribution Talent & Incentives Brand & Positioning Financial Pro Formas Due Diligence Assess current state Formulate strategic implications Future State Design

Beyond assessing the target itself, diligence should create a future state vision for the combined company

Too often, commercial diligence focuses solely on the strengths and opportunities associated with the target company. This approach works well if no significant changes to the target’s operating model are foreseen. However, when more thorough integration is the plan, executive teams should use the diligence process to challenge the existing operating model of both the target and the acquirer. This requires leadership to contemplate potentially difficult implications around talent, go-to-market approach, priority initiatives, and incentives, to inform revenue and cost synergies and to preserve the best of both organizations. Planning for an integrated operating model early in the deal process also allows acquirers to develop appropriate retention and incentive programs for leadership and key talent of both organizations. Including these kinds of integration planning in the diligence phase can be key to avoiding significant headaches later in the process.

02 | Future State, IMO Planning, & Deal Term Finalization

Key Tasks

Comprehensive Diligence Establish IMO (Integration management office) Finalize deal terms and structure Clear communication narrative

Defining, structuring and preparing to mobilize an integration management office early is key

The Integration Management Office (IMO) is typically composed of two layers: a project management layer that focuses on traditional PMO activities and an integration layer that is organized by functions. The PMO layer is designed to control and manage all integration activities, including activities that span multiple functions, such as legal-day-one readiness, synergy capture, cost tracking, communication, and reporting. Functional workstreams are run by leaders responsible for defining the future-state operating model for each function, and identifying the best approach to achieve it. Success requires that PMO and functional teams have clear decision rights and regular touch points with a defined Steering Committee (firm executive leadership that is setting priorities and approving major decisions).

Project Management Office Clients and Distribution Integration Coordination Synergy & Cost Tracking Communication LD1 Readiness Shared Service Integration Brand & Marketing Investments Legal & Tax Operations & Technology Incentives & Benefits Leadership, Governance, & Organizational Design Product Risk & Compliance Integration Management Office: Key Functions Select icon to learn more

Clients and Distribution

Prioritize global opportunities (geography, channel, strategy), design organizational structure and coverage model, and determine how to handle client and prospect overlap

Shared Service
Integration

Enable integration of core systems (e.g., ERP platforms) and shared business operations

Investments

Conduct investment capability assessment, optimize investment platforms and identify potential synergies

Brand &
Marketing

Define go-forward brand, outline marketing strategy and organization, and define differentiated client experience

Incentives & Benefits

Develop retention approach for key talent, and define unified compensation philosophy and processes for the combined organization (including an approach to cash bonuses, equity awards, and deferrals)

Operations & Technology

Integration / transformation of systems and processes to enable a unified, modernized investment platform

Risk & Compliance

Identify and execute compliance activities and risk mitigants with clients, regulators, and other parties

Leadership, Governance,
& Organizational Design

Determine new firm vision, organizational model, and governance approach (including IMO)

Product

Identify target product suite, outline organizational structure and processes, and articulate platform / product positioning

Integration Coordination

Requires centralized team to coordinate project management activities, set clear and consistent structure and cadence, enforce discipline and solve problems across functional work teams. Team is responsible for tracking risks and issues that arise throughout integration and report to the executive steering committee.

Communication

Develop and drive internal communication related to integration including steering committee updates, workstream status reports, etc. and act as clearing house for external communication that requires revisions or updates to financial guidance, timing to close, key decisions, etc.

Legal Day 1 Readiness

Work with functional teams to clearly identify minimum and desired day 1 requirements and fast followers. Define the critical path to execute against each and build and maintain detailed LD1 execution plan.

Synergy & Cost Tracking

Robust synergy model to assess financial implications, track achievement of targets, and monitor cost of integration throughout the process.

Integration
Management Office:
Key Functions

Project Management
Office

Integration Coordination

Synergy & Cost Tracking

Communication

LD1 Readiness

Investments

Brand &
Marketing

Incentives &
Benefits

Operations &
Technology

Legal & Tax

Risk &
Compliance

Leadership,
Governance, &
Organizational
Design

Product

Clients and
Distribution

Shared
Service
Integration

03 | IMO, LD1 & TSAs, Functional TOM

Key Tasks

Define integration tenets Functional future state TOM Blueprint (target operating model) Leadership roles and identification Process to ensure issue-free legal day one (LD1)

Reaching an issue-free legal day one requires defining strategic priorities and internal focus

Executive teams should not expect to get credit for clearing this hurdle, but risk serious consequences for failing to get it right. A disjointed process that lacks coordination and the right decision-making forums can make the journey more difficult than it needs to be – impacting the morale and output of all team members. Success begins with developing functional target operating models and defining integration requirements while avoiding activity that would be considered “gun jumping” in case the deal does not close. From there, specific goals for legal day one and required transition service agreements (TSAs) and any necessary cutover plans can be developed.

01

Determine desired target
operating model design

Learn More

02

Define LD1 requirements and
action steps

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03

Determine unique
deal needs

Learn More

04

Mobilize a command center
and cutover plan

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01

Determine desired target operating model design

Work with functional heads to develop the future-state requirements of the target operating model, guided by executive vision and goals

Develop understanding of the existing model, future model, and key gaps to be closed to reach the end state

Ensure smooth transition of knowledge between due diligence team and integration execution teams

02

Define LD1 requirements and action steps

Define the specific level of integration by capability required for Legal Day 1 and map out fast-followers

The requirement gathering process must consider maintaining consistent relationships, clear communications, uninterrupted operations, and consistency in service for clients, employees, suppliers, and 3rd parties

Issues and decision management can be facilitated by RAID (Risks, Assumptions, Issues, Decisions) logs for increased accountability

03

Determine unique deal needs

Determine the unique challenges and complexities to the deal that could undermine integration success

Develop mitigation strategies associated with key complexities

Establish a “clean room” for data sharing depending on specific regulatory and/or deal considerations

Design appropriate TSAs to ensure required functional support if full separation of the target cannot be achieved at closing

04

Mobilize a command center and cutover plan

Develop a detailed cutover plan with outlined communication strategies, roadmaps and blackout periods, along with designated roles and responsibilities

Create a Command Center to serve as a single point of contact and direction for managing execution of detailed cutover plans

05

Post-merger-integration

Create a comprehensive, accountability-driven post-merger integration plan with clear milestones in order to ensure shared vision and direction for functional teams executing the integration

Define what processes and activities will be maintained, redesigned, or eliminated in the target operating model, and identify the implications on people, technology, and workflow

Map timeline, milestones and resource delivery teams to implement and work toward the target operating model

04 | Post-Close Integration

Key Tasks

Alignment on end-state TOM Clear set of defined projects Launch post Day 1 IMO Relentless focus on integration

Successful post-merger integration requires detailed planning, ongoing executive accountability and clear understanding of the timeline required

Reaching a successful close is a key milestone in any transaction. From an external perspective the close may mark the end of the journey; however, internally it is the beginning of integration execution within select functions. The length and complexity of this phase will vary, but when integration exists, this period is typically the longest. Delivering on new organizational design, processes and workflows requires specificity on key milestones, timing, required resources, new technology and enterprise interdependencies. It is important to maintain the IMO for continuity and accountability, albeit the composition and cadence may change. Progress against the desired functional operating model is what allows transactions to start to unlock benefits to all stakeholders.

Throughout the process a robust communication plan is needed to help stakeholders understand the benefits

One of the most crucial components for any integration is the communication plan. All communications should be built off a core set of coordinated messages but also recognize the nuances important to different stakeholders. Most industry stakeholders recognize the secular trends leading to more consolidation, that said, uncertainty and lack of clarity in any integration is cause for concern. The best communication plans lead with facts and articulate clearly what decisions have been made and describe the decision-making process and timeline for current unknowns.

Current
clients

Corporate
board

Management
and employees

Fund board(s)

Prospects and
intermediaries

Shareholders

Service
providers

Media

People are the heart and soul of asset management

Leadership in times
of uncertainty helps
mitigate low morale

Asset management is a human capital business. Whenever uncertainty and potential change enter the equation, it is natural for individuals’ worries about the future to impact business-as-usual activities. While team members are likely experience a range of emotions throughout the process, periods of high uncertainty and low morale typically occur at similar points in the integration lifecycle. To mitigate business impact, executive teams will double down on change management and the employee experience at key points in the process.

Typical Employee Morale During Integration Low Morale Initial engagement Uncertainty Waiting Fear of uncertainty Passive aggressive Acquiescence Light at the end of the tunnel Crush of day 1 Relief Fatigue Reconstruction • teams • priorities • energy • focus Renewal High Morale
Change Management Best Practices

01

Communicate strategic
vision early

02

Involve and “hear” all key
internal stakeholders

03

Provide appropriate
transparency throughout
process

04

Communicate often in
various forums

05

Celebrate success and
acknowledge challenges

06

Proactively build toward
a unified culture

About Casey Quirk

Casey Quirk, a practice of Deloitte Consulting, is the largest management consultant in the world focused exclusively on strategy advice to asset and wealth managers. Our global team combines unparalleled industry strategy and implementation experience, proprietary research, and proven solutions frameworks to deliver value in a rapidly evolving environment. Our core consulting assignments include broad business strategy reviews, capability positioning and strategy, market opportunity evaluations, organizational design, ownership and incentive structuring, and all parts of the M&A and integration lifecycle. In conjunction with Deloitte, Casey Quirk offers the most comprehensive end-to-end consulting solution in the industry.

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About the Authors

Jeff Stakel

Principal
jstakel@deloitte.com

Kevin Quirk

Principal
kpquirk@deloitte.com

Kevin Gallagher

Principal
kjgallagher@deloitte.com

Max Bercum

Principal
mbercum@deloitte.com

Tyler Cloherty

Managing Director
tcloherty@deloitte.com

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

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