How Fear of Disruption, ‘Free Money,’ and the Lure of Alts Profits Drove Record M&A

Alternatives firms are outperforming their traditional peers, giving them more resources to reinvest in their businesses and spend on growth.

Chris J. Ratcliffe/Bloomberg

Chris J. Ratcliffe/Bloomberg

Plentiful funding for deals and the lure of profits in alternative investments drove the busiest asset management mergers & acquisitions environment since 2000.

Traditional managers are fearful of losing market share to competitors that offer private equity and other alternative investments, whose higher fees can result in margins far above managing stocks and bonds. Active managers believe they can better compete in a world where investors prefer passive funds by adding offerings in private investments, which are hard to replicate with index strategies, according to a new PwC report. At the same time, traditional managers are looking to respond to allocators that increasingly want to deal with a short list of firms that can offer a wide range of private and public strategies. The end result has been 296 deals in the last 12 months, the highest since 2000, according to PwC.

This year was marked by a number of high-profile deals, including T. Rowe Price’s pending acquisition of alternative credit manager Oak Hill Advisors in a transaction valued at $4.2 billion. Franklin Templeton, with $1.4 trillion asset under management, said in November it will acquire Lexington Partners, which offers secondary private equity and co-investment funds, for $1.8 billion.

The flurry of acquisition activities by mainstream managers is likely to continue in 2022 as alternatives have proved to be far more profitable than traditional strategies, according to strategy consultant Casey Quirk, a business of Deloitte Consulting.

“We expect the persistent financial success of alternatives managers will continue to attract increasing attention from traditional asset managers and result in more M&A activity,” said Scott Gockowski, senior manager at Casey Quirk.


The gap between the financial metrics of traditional and alternatives firms is wide. Alts managers delivered better results, including operating margin and earnings. For one, the median operating margin was 46 percent for the listed alternatives managers analyzed by Casey Quirk in the third quarter and 31 percent for traditional managers — a 15 percent gap. The movement in assets under management between the two sectors isn’t as stark. Assets at traditional managers declined 1 percent in the third quarter of 2021; listed alternatives managers gained 2 percent in assets, according to Casey Quirk. Better financial metrics “….has provided alternatives firms more flexibility than traditional asset managers to reinvest and spend on growth initiatives,” added Amanda Walters, a principal at Casey Quirk.

Sid Khosla, managing partner at Ernst & Young, argued that M&A activities are also being driven by growth opportunities for managers, including in digital assets and environmental, social, and governance-themed investments, that are far different than in the past. “The asset management [industry] itself is undergoing a significant transformation,” prompting managers to think about “where [their] competitive advantage is going to lie,” said Khosla during a panel discussion on Thursday. Alts managers offer a bridge to these new areas of growth. In part, that’s because traditional managers don’t always have enough of an edge or the infrastructure to invest in cryptocurrencies or ESG-related concepts, according to Khosla.

Khosla added that traditional managers increasingly view the large private equity firms as strong competitors, particularly as they’ve expanded well beyond PE into credit real estate, infrastructure, and other asset classes.

“[2021] is the first year on a global basis that we expect private equity deal values to exceed $1 trillion,” added Chris Smyth, EY Americas Private Equity Leader, during the panel. “There is an excess of $750 billion of dry power available for investments, which is also at an all-time high.” That means private equity firms have plenty of profits to reinvest and strengthen their businesses, making them even more formidable competitors to traditional managers. PE firms have also taken some large asset managers private. This year private equity firms Reverence Capital Partners and GTCR acquired Wells Fargo Asset Management from Wells Fargo & Co., which kept a 9.9 percent equity stake and will continue to distribute investments from Allspring Global, the new name of WFAM.

When thinking about the big picture of finance, investment management firms are riding the hot M&A wave that has spread to “every single sector,” according to Brian Salsberg, EY Global Buy and Integrate Leader. From manufacturers to technology firms, almost every industry is looking for ways to take advantage of the cheap cost of capital. “Money is almost free,” Salsberg said. “You don’t have to be a finance major to understand that if you can borrow money at next to nothing, then you can take more risk with that capital.”

The tailwinds behind M&A also come from the “disruption in every industry” as companies adapt to the digital economy. The surge of companies spinning off existing businesses that no longer fit their strategy into independent firms has contributed more M&A targets, Salsberg said.

And it’s not just the largest companies that are doing the acquiring. Small to mid-size firms are dipping their toes into the M&A market, according to PwC. Mega-deals have given ways to “smaller scale consolidation,” which could be the trend for 2022. Smaller managers are also increasingly taking minority stakes in alternatives firms.

“In earlier cycles, we’ve seen a very polarized M&A environment,” said Khosla. “[But] this time around, there’s been as many sub-billion dollar deals as the one-to-five billion ones, [as well as] the mega-deals.”