Asset Management M&A May Not Slow Down — But the Deals Will Be Different

Still, tightened fiscal policies, rising interest rates, and shrinking available capital “are all terrible factors,” says Sid Khosla of Ernst & Young.

Nathan Laine/Bloomberg

Nathan Laine/Bloomberg

While the overall mergers and acquisitions environment may look a lot less rosy than it did in 2021, don’t expect asset managers to back away from dealmaking.

That’s because they need new capabilities to keep up with the competition and trends like alternative investments and direct indexing. Firms engaged in a record level of M&A transactions last year, many of them driven by alternatives, with the number of deals involving asset and wealth managers increasing 50 percent between 2020 and 2021. Notable deals included Franklin Templeton’s $1.8 billion acquisition of Lexington Partners, which invests in secondary private equity stakes, and Vanguard’s purchase of direct indexer Just Invest.

“I think transformation, change, and consolidation [will] continue,” Sid Khosla, managing partner at Ernst & Young, told II. “[And] I think it will continue at the same accelerated pace as last year.”

But he said asset managers will seek different types of deals, including transactions focused on environmental, social, and governance products and deals to improve their operational efficiency.

Khosla also believes financial technology companies are ideal acquisition targets. Fintechs can help traditional managers develop new distribution strategies and reach new customers for their investments.

Research from Deloitte dovetails with this. The consulting firm argues that managers are particularly interested in smaller buyout targets that will allow them to expand into digital technology.


But Khosla cautions that there are still headwinds in the financial services M&A market. Tightened fiscal policies, rising interest rates, and shrinking available capital “are all terrible factors,” he said. The mounting geopolitical tensions have also put a damper on cross-border transactions. In addition, he said, COVID-19 continues to be a source of concern, despite the fact that most financial institutions have adapted to remote work.

“My best guess at this time is that there may be a slight pause [in M&A activities],” Khosla said. “[But] I think it’s going to come back, much [like] the last few recessions.”