As U.S. asset managers struggle to prove that big is better, Jean Pierre Mustier, one of Europe’s best-known bankers, believes competitors on the continent would do better to leave that mantra to the Americans.
“European asset managers shouldn’t have an ‘American complex’,” the former director of UniCredit, Italy’s largest lender, told a recent Financial Times conference. “The United States has a deep capital market, a strong investor base, and it is extremely difficult to compete with that.”
Getting rid of any inferiority complex, however, is easier said than done as U.S. investment groups embark on a series of mergers and acquisitions designed to shield profits from rising costs and lower costs.
In the aftermath of the global financial crisis, eight European companies were included on Willis Towers Watson’s list of the 20 largest asset managers in the world, representing 37% of the group’s total assets.
A decade later, there are only five left, controlling just 19% of the assets managed by the top 20. This is why expectations are rising that European asset managers will have no choice but to execute their own trades or be left behind.
Revenues from traditional asset management vehicles such as actively managed mutual funds will decline by nearly a third – or about $ 16 billion in lost fees – by the end of 2024, according to Morgan Stanley, intensifying the trend of the last decade.
“Everyone in the sun, regardless of their size, is wanted by banks,” said a senior executive at a US investment group. “From the pitch books we get, there is a disproportionate focus on Europe.”
But as pressure mounts on European industry to strike deals, the dangers of doing so have never been clearer.
“I think there will be a lot more deals in asset management this year, but that won’t necessarily make them better or easier to close,” Peter Harrison, CEO of Schroders, the London-based group which manages $ 574 billion in pounds, the FT said.
Schroders earlier this year considered an offer on M&G Investments, drawn by the private asset activity of its London rival, according to a person familiar with the matter. Schroders had ultimately decided not to make a deal due to concerns about a culture shock, the person said.
With buoyant financial markets offering a cushion to asset managers, the mergers have so far this year been limited in scope. Amundi bought out Lyxor’s exchange-traded fund business for € 825 million in April, and NN Investment Partners, a Dutch asset manager focused on € 293 billion bonds, was put on the block. by its parent insurer. The final offers are imminent and UBS and German DWS are among those who have expressed an interest.
Given the benefits that scale can bring, some industry insiders expect the deals to be ambitious. Many large institutional investors are increasingly keen to work with a smaller club of asset managers, while retail investors are turning to well-known brands. Heavier weight also helps absorb the rising costs of technology, cybersecurity, and back office work such as regulatory compliance.
“After the end of the global pandemic, the wave of consolidation in the asset management industry is expected to accelerate again,” Asoka Woehrmann, CEO of DWS, told shareholders at the annual general meeting of group of 820 billion euros last month. “We want to be an active player in this area. ”
Despite the pandemic that briefly sparked chaos in financial markets in the spring of 2020, the U.S. industry made two notable deals last year. Morgan Stanley Investment Management and Franklin Templeton’s acquisitions of Eaton Vance and Legg Mason, respectively, have both catapulted into the $ 1 billion asset club.
Nor is it just in the industry’s top tier that Europe has lost ground. Ten years ago, 20 of the 50 largest investment groups in the world were European. Today, Europe has only 11. Data from Credit Suisse indicates that BlackRock alone is larger than the five largest European investment groups combined.
Passive US giant Vanguard has an investment vehicle – the $ 1.2 billion Total Stock Index Fund – that is larger than the entire asset base of Schroders, Axa Investment Managers and Abrdn. Although it charges a management fee of only 4 basis points, the Vanguard fund generates income at a level similar to Jupiter Fund Management in the UK.
Faced with the benefits of the ladder, there are the risks of trying to achieve it. Anne Richards, head of $ 738 billion asset manager Fidelity International, put it bluntly. “There are more examples of mergers and acquisitions in our industry that have not worked well than well,” she told FT’s Future of Asset Management conference.
Traders warn that defensive deals driven primarily by cost synergies are among the most difficult to achieve. Layoffs and mergers can disrupt the investment culture, hurt performance and lead to capital outflows.
Challenging mergers resulting in poor stock performance – including the $ 5.7 billion acquisition of Oppenheimer by Invesco in 2018 and the Standard Life and Aberdeen Asset Management merger – have scared many executives considering larger deals .
“Consolidation into a people firm is very difficult,” said Vincent Bounie, senior managing director of Fenchurch Advisory, an investment bank specializing in financial services. “It might sound good on paper – you think businesses can be complementary, and you can cut costs and manage more assets. But if you destabilize your teams and key people, you risk destabilizing customers, leading to significant risk of value destruction.
While the need for scale is seen as paramount, it is not the only dynamic set to shape transactions in a European industry increasingly bifurcated between specialist shops and large players who can keep costs low.
Credit Suisse analysts expect mergers and acquisitions to be driven by strategic considerations: either to sow the seeds for future organic growth by bringing investment skills to fast-growing areas such as private assets , exchange-traded funds and ESG, or to add new distribution channels. For example, foreign asset managers are rushing to take advantage of regulatory changes that are opening up China’s vast savings pool.
Notably, asset classes that cannot be easily replicated by low-cost exchange-traded funds, including direct lending, private equity, real estate investing and venture capital, are now among the targets. the most popular.
In Europe, groups such as Schroders, Abrdn, the Edmond de Rothschild Group and RWC Partners have all identified private markets as an area for expansion.
“The private markets are structurally growing and the economic conditions are very attractive,” said an investment banker specializing in transactions in the financial sector. “These funds have locked-in capital, charge high fees and are not threatened by passive replication. It’s a great business model.
Private asset strategies are developing rapidly thanks to the huge demand from institutional investors such as pension plans in search of yield. Morgan Stanley estimates that the private capital sector now manages more than $ 7.4 billion and expects that figure to reach $ 13 billion by the end of 2025.
Mustier argues that smaller but strategic deals in areas such as private markets make a lot more sense than simply getting bigger in a vain attempt to compete directly with US competitors.
Next year should show whether European asset managers decide to resist the pressure.