Asset managers are at a crossroads.
Having faced the COVID-19 pandemic on top of years of pressure from shrinking fees and shifting investor preferences toward the industry's giants, money managers are debating whether to stick it out on their own or enter the deal market in search of scale or complementary products, Wall Street investment bankers, analysts and other experts say. All the while, the likes of BlackRock Inc. and Vanguard Group Inc. keep gobbling up assets.
"The stars seem to be lining up for more [deals]," said Mark Timperman, a managing director and head of asset management investment banking at Hovde Group who recently joined the Chicago-based company from Wells Fargo Securities LLC, in an interview. "After having been through a real scare with the COVID cycle, when there was another big market correction, people realized that it's time to think about where the industry ends up in five years."
M&A has played a critical role in the investment management industry's evolution in recent years. Inexpensive passive investment vehicles and exchange-traded funds have driven down fees for the entire industry, with the race to the bottom going so far that some ETFs dabbled in paying investors, not the other way around. Asset managers have been buying up their peers in an effort to expand their offerings and asset bases so they can more competitively price their products.
Active fund managers have been one of the most consistent areas of consolidation. Throughout the last decade, active managers have widely failed to outperform broad market indexes, pushing many investors to pull their money from active funds and channel it into passively managed strategies like the ETFs sold by BlackRock, State Street Corp. and Vanguard.
OppenheimerFunds Inc. was acquired by Invesco Ltd. in 2018. Franklin Resources Inc. and Legg Mason Inc., both of which are active managers, agreed to merge in February.
Up until the coronavirus-induced sell-off earlier in 2020, though, some active managers' struggles were shielded by one of the longest bull markets on record, according to Cerulli Associates Senior Analyst Ed Louis.
"If you're an active manager, you've been seeing negative flows for a long time. And while the markets have sheltered firms from some of that damage, the beginning of this year was the perfect example: Markets aren't going to go up forever," Louis said in an interview. "As that disruption sets into place and these firms start to grapple with that reality, it's probably going to create a situation where smaller firms might be more open to the conversation of being acquired."
Wall Street investment banks have also pushed into the asset management M&A talks. In hopes of tapping into the steady stream of revenues that investment management can generate compared to legacy businesses like trading and investment banking, Morgan Stanley has put billions of dollars toward building out its asset management capabilities with its acquisition of E*TRADE Financial LLC earlier in 2020 and its latest $6.5 billion purchase of Boston-based Eaton Vance Corp., a deal that will push its assets under management above $1 trillion.
Keefe Bruyette & Woods analyst Rob Lee wrote in an Oct. 8 note that he remains skeptical about the value of large consolidating asset management deals. However, the Eaton Vance deal, which Lee wrote was a surprise considering the investment manager's steady inflows, "proves that almost anything can happen at a price." Lee highlighted BrightSphere Investment Group Inc. as one manager that could already be up for sale, adding that Janus Henderson Group PLC, Federated Hermes Inc., Victory Capital Holdings Inc. and Waddell & Reed Financial Inc. could all be potential sale candidates as well.
The interest in buying an asset manager is not dying down, either.
Goldman Sachs Group Inc.'s David Solomon and JPMorgan Chase & Co.'s Jamie Dimon have both also expressed interest in asset management M&A, with Dimon saying in a recent earnings call that the nation's biggest bank was "wide open" to deal talks in the sector. Billionaire Nelson Peltz's activist investment firm, Trian Fund Management LP, recently took on 9.9% stakes in Invesco and Janus.
In regulatory filings disclosing the positions, Trian stated it plans to engage with the boards and management teams of both companies on ways they can generate value, including potentially merging or buying one or more fellow asset managers.
"Consolidation is likely to continue. It's a scale-wins environment," said Todd Rosenbluth, head of exchange-traded fund and mutual fund research at CFRA, in an interview. "It's both harder to go it alone and it's harder to work as a small provider. So we're likely to see more consolidation in the future."