As the dust from Brexit clears, a wave of merger activitymay beckon for a slowing European asset management sector which is seeing fees,profits and assets under management all going into contraction.
Aberdeen AssetManagement Plc's chief executive Martin Gilbert has fueledspeculation his company may be sold by sayingin a television interview he had received interest from Australian and Europeanpotential purchasers. The company witnessedEurope's largest net outflows of €33 billion year-on-year, with its share pricedown by 27% since this timelast year.
Analysts have speculated a top 40 global asset manager, one thescale of BlackRockInc., JPMorgan, Mitsubishi, Macquarie or —would make an ideal matchfor AAM. This would be particularly soif it sought a franchise in emerging markets and Asia, where AAM is strong, aNumis research note quotedin The Guardian last month suggested,adding it estimates a "realistic take out" offer of about £5 billion.
In size, AAM occupies "that middle ground, where it caneither buy or be bought—and things having been quite difficult for the companyrecently, it's not in an acquisition mood," Laith Khalaf, senior analystat Bristol financial services company Hargreaves Lansdown, said in aninterview.
While speculation involving AAM continues, the end of Junesaw the Swiss asset manager GAMHolding AG buy the $4 billion quantitative hedge fund managerCantab Capital for $217 million in cash and an estimated $75 million indeferred consideration, its second acquisition in two months. GAM, having said June14 that a decline in its AUM would hit profits, management fees and commissions, was seeking toexpand into algorithmic strategies which GAM chief executive Alexander Friedmancalled"the future of investing."
A time to rend, and atime to sew
A difficult first three months to the year, which saw €16billion in outflows, and a 10% decline in profitability in Europe's fund groups,has been followed by post-Brexit tumult. Deutsche Asset Management, and have allseen outflows in recent months. Fund managers' net value is at its lowest level since the 2008financial crisis, said McKinsey in its 2016 Asset Management Survey. Staffcutbacks, chiefly so far in back offices, have commenced in firms such asMunich-based Allianz GlobalInvestors, whose earnings dropped 17% in the first quarter. Thespace is "ripe for faster change," Fitch said last month.
The contraction follows a heady 2015 in which European assetmanagers grew 10% to reach an all-time high. Global AUM reached €61 trillion,and the €216 billion of net inflows to Europe's fund groups were the largestsince at least 2007. The growth, though, was driven by net new assets ratherthan by asset performance. With greater fragmentation and more limitedeconomies of scale than in the U.S., "European investors pay more fortheir asset management services than U.S. investors," says Mick McAteer,chairman of the European Commission's Financial Services User Group, in aninterview.
Consolidation, then, is a way of responding to a threatposed by the consistent growth since 2009 of trackers and ETFs, as well as aworld of lower returns.
"Scale, branding and enhanced access to distribution isincreasingly important and that in itself will ensure M&A activity in thesector continues apace," Justin Bates, analyst at boutique investment bankLiberum, said in an interview.
Smaller asset managers have greater ability to cut costs,and larger ones the scale to develop new revenue streams.
"But you don't want to be in the middle, between 1 and10 billion, with a lot of overhead, but not big enough to compete on a globalscale," Stuart Alexander, chief executive of Gemini Investment Management,said.
"I think you will see a general period ofconsolidation, there's no doubt about it," he said in an interview.
European asset management has seen periods of consolidationbefore, following the stock market crash of 1987 and in the wake of the 2008financial crisis.
In periods between, boutiques have spun out from largerfirms, such as when Robin Geffen departed Orbitex to launch in2002.
In lean times such as the moment, "if you can't groworganically, you have to grow through acquisition," Alexander added,saying medium-sized general firms will seek to acquire the niche expertise ofboutiques.
Mergers will be helped by low interest rates and reducedweight of debt to finance acquisitions, but many of these deals may in theshort term require the volatility from Brexit to stabilize, said Khalaf, notingthat it would take "quite a brave and opportunist investor" not to waitfor greater clarity.