With the Dow Jones industrial average finally passing the 20,000 milestone, asset managers in the middle of M&A deals will be pushing to get them signed and delivered. But once that surge of transactions is finished, mergers and acquisitions in the industry may begin to slow this year after a busy 2016 for deals, according to new research.
Even though deal making will continue, firms will likely exercise greater caution given the new presidential administration of Donald Trump, according to Aaron Dorr, principal and head of asset management investment banking at Sandler O’Neill & Partners, which just published its 2016 Asset Manager Transaction Review & Forecast. Dorr explains that buyers and sellers will go slower as the year unfolds, watching the effect the Trump administration will have on financial regulation, taxation and the global economy. Buyers will also be pickier when it comes to choosing what to acquire.
“We will see more consolidation than in the past. Buyers are being more selective, however, and focused on getting underneath the businesses that they are buying to convince themselves of the growth or cost synergies,” says Dorr.
According to Sandler O’Neill’s research, 149 deals were completed in 2016, compared with 148 in 2015 and 135 in 2014. Although the number of deals in the past three years has held fairly steady, last year’s transactions were worth a combined $17.1 billion, up 82 percent from the previous year. The increase was driven by a few large deals, including UniCredit selling Pioneer Investments to Amundi in a deal worth $3.7 billion and Henderson Group and Janus Capital Group merging in a $2.6 billion deal.
Sandler O’Neill also reports that the most popular acquisition targets have been firms operating international and global equities strategies, as well as fixed income. These strategies have not been hit as hard by investors’ move to passive funds.
This year Dorr expects sellers of all asset management firms to focus in particular on future partners that can offer high-growth sales opportunities. Many firms have not had good organic growth in recent years, and they need new ideas and capabilities for distribution. When it comes to managers that cater to institutional investors, sellers will have good options with strategic buyers only if their performance is good, says Dorr.
“If a pension fund has a mandate with a struggling manager that gets bought, they won’t stick around if the buyer is looking to reassign portfolio management responsibilities, even if it’s likely to be positive,” says Dorr. “They’ll just put out an RFP and start over.”
According to the report, there will continue to be a wider-than-normal spread between the prices that good businesses will fetch compared with more mediocre asset managers. In addition, the report points to continued interest in alternative-investment firms.
“You’ll see traditional managers going after firms that offer investment strategies with longer locks on capital. There’s less risk of investors fleeing, at least in the short term, and this can offset other outflows,” says Dorr. “These strategies, such as real estate, infrastructure, and private debt, also happen to be in demand among investors.”
Dorr says asset management transactions in 2016 were driven not just by the headwinds from the decreasing popularity of active management.
“The industry is mature,” he says. “If you decompose the growth of many traditional firms, you’ll see that AUM is being propped up by the friendly equity and credit markets of the past five years. That can’t be relied on. But one thing you can bank on is the cost savings that come from consolidation.”