Consolidation Is Coming for the Asset Management Industry
The market recovery this year has masked underlying industry challenges, Morgan Stanley says.
Fee pressures, growing costs, and a desire for scale are signs that the fragmented asset management industry is ripe for more mergers and acquisitions, according to Morgan Stanley.
The top 10 asset management companies hold just a 35 percent share of the $90 trillion market, Morgan Stanley said in a research report dated October 25. The only industry more fragmented, the bank said, is the capital goods sector.
Although strong financial markets have helped assets under management swell, this growth has masked problems like outflows, fee pressures, and lower revenue growth, the report said. The market downturn and investor exodus in March revealed some of these problems, but after the market bounced back, they stabilized.
Still, Morgan Stanley expects that the market crisis will accelerate these existing trends, motivating some asset managers to make M&A decisions more quickly.
The report suggested that firms like T. Rowe Price, JPMorgan Chase & Co., Goldman Sachs Group, and Schroders are among those with enough excess capital and balance sheet capacity to be buyers in the current market. Attractive targets could include the Man Group, BrightSphere Investment Group, and WisdomTree Investments, all of which have niche product offerings, according to Morgan Stanley.
The bank noted in the report that these are all hypothetical targets and acquirers given their characteristics and what some of them have signaled to the market.
For certain managers, Morgan Stanley expects operating margins to decline one percent on average during the next four years. But a scale-driven deal could help to cut costs, improving these margins.
While there are certainly opportunities for traditional deals, an asset management firm doesn’t have to swallow another whole.
A manager could, for instance, structure itself as a multi-boutique firm, avoiding cultural challenges by preserving autonomy among the purchased companies, according to the report. But Morgan Stanley points out that this could backfire. Natixis uses this model and has recently dealt with “challenges linked to risk oversight” at one of its boutiques, Morgan Stanley said.
Minority stakes are another deal option — one that offers the investing manager access to technology or distribution. BlackRock, for instance, has taken advantage of these deals by purchasing minority stakes in alternatives fintech provider iCapital Network and advice platform Envestnet.