Despite Losing Market Share, Smaller Asset Managers Keep Battling the Giants

Boutiques and specialists, which offer benefits like higher risk-adjusted returns, still have to fight hard to make their case in an industry of mega firms.

Illustration by II

Illustration by II

It’s hard for any firm to easily compete in an industry where, by some estimates, more than a third of assets are managed by ten companies. Last year, the market share of smaller asset managers globally, those ranked 51 to 250 in terms of size, shrunk even more, according to consultant Willis Towers Watson.

But smaller managers have the numbers to prove their value: they outperform and offer better customer service than their larger peers. Many remain undeterred in their fight with the likes of BlackRock, with $9.5 trillion in assets, Vanguard with $7.1 trillion, and UBS, with $3.5 trillion.

Smaller firms also have to compete with the marketing, technology, trading, and other resources of asset managers that have trillions of investor dollars.

“When you’re talking to capital allocators, you’re comparing and contrasting yourself with the big players,” said Art Penn, founder and managing partner of $5.2 billion-in-assets PennantPark Investment Advisers, a middle-market credit manager. “So we need to clearly differentiate ourselves to show a value-added proposition versus a big brand,” Penn told Institutional Investor.

For Penn, these differentiators include his firm’s ability to invest in smaller and middle markets. As a middle market lender, PennantPark targets investments in what it refers to as the “core middle market” — companies that generate anywhere between $10 million and $50 million in EBITDA, or earnings before interest, taxes, depreciation, and amortization.


“If you’re one of the big Goliaths, it just doesn’t make sense for you to focus on the below-50-EBITDA companies because it just doesn’t move the needle for you. You can’t deploy as much capital. It’s not as efficient for you. And you’re forced to deploy to companies that are above,” that size, Penn said.

As a result, Penn said this forces large asset managers to compete against the broadly-syndicated loan market, where competition is fierce and conditions are tough. In this space, Penn said, the leverage is higher and the equity cushions beneath the deals are weaker. In this part of the market, the lender is just not as important to the borrower. At that size level, Penn said, the company has many options with other large lenders and within the broadly-syndicated market. But, in the core middle market, borrowers have fewer options and lenders like PennantPark have more opportunity. To generate returns, an asset manager needs its capital to be important to a company.

Small firms have the numbers to back them up. Last year, for example, hedge fund managers with assets of less than $100 million on average generated returns of 10.6 percent while managers with more than $5 billion returned 1.3 percent year-over-year from 2019 to 2020, II previously reported. There’s also a benefit during times of market stress. Smaller asset managers, owned by their partners, significantly outperformed their larger, non-boutique peers as well as indexing strategies during periods of high volatility, according to a study by Affiliated Managers Group on the so-called boutique premium. The study examined independent boutique performance in volatile market environments over the past 20 years.

Penn, who co-founded Apollo Global Management’s credit business in 2004, has direct experience with large asset managers. Today, Apollo manages about $455 billion. Over the years, Penn said a number of asset managers have gotten larger than ever.

“On one hand, that’s terrific, but on the other hand, that puts a lot of these players out of the core middle market, which is good for us,” Penn said. “These companies are below their radar.”

Penn argues that, without mega funds, smaller asset managers have the “luxury” of being selective about their deals.

PennantPark’s size also allows for more meaningful relationships between managers and allocators, which, in turn, can open up opportunities for strategic partnerships.

Tyler Cloherty, a managing director at Casey Quirk, said, when allocators put their capital into the hands of smaller managers, their investments are more material to the manager. This, in turn, means managers may allow allocators more access, a greater ability to negotiate pricing and customization, and opportunities for partnerships. (Large managers have also touted their ability to offer strategic partnerships, many of which are based on the broad range of investments they can offer.)

“You’re a larger, more material client to them,” Cloherty told II.

Alexia Zavos, head of client engagement at Stewart Investors Sustainable Funds Group, which manages $21 billion, agreed: “Having a small and cohesive group helps us to build meaningful relationships with our clients, and we welcome input and challenge from them on the stewardship decisions we make on their behalf,” said Zavos.

At a smaller asset manager, innovation can occur at a faster pace than at some of the larger firms, said Ognjen Sosa, chief investment officer of Breckinridge Capital Advisors, which has $47 billion in assets. According to Sosa, smaller firms are more nimble and therefore not beholden to the “legacy infrastructure” of many larger firms. For example, Sosa said it’s much easier to integrate a new technology into a smaller firm than a larger one.

“When you’re small, you can really integrate everything together well, which, I think, ultimately benefits the client,” Sosa told II.

Cloherty agreed: “If you look at smaller boutiques, occasionally that’s where the innovation in the industry is happening. That’s where you can find new, talented managers, a more diverse set of managers. Some smaller firms are less beholden to larger corporate structures and have more ability to be flexible.”