The outsourced chief investment officer business has long been ripe for consolidation, according to experts.
Mercer may prove to be an early mover in OCIO M&A. On Tuesday, Mercer announced a deal to acquire Vanguard’s OCIO unit.
“Vanguard’s differentiated investment philosophy, strength in the not-for-profit sector, and client-centric approach complements our global capabilities across OCIO and managing alternative asset classes,” said Mercer U.S. Investments and Retirement Leader Marc Cordover, in a statement.
Mercer owns a massive share of the OCIO business — as of March 31, the group managed $354 billion in assets globally. Vanguard, meanwhile, has an estimated $59 billion in its OCIO business, according to consultant Charles Skorina’s annual OCIO report.
“Vanguard is a real crown jewel in the endowment and foundation OCIO business,” said OCIO search consultant Brad Alford, who runs Alpha Capital Management. He noted that Vanguard has consistently done well with endowments and foundations that have less than $100 million to invest. The firm uses a fair amount of passive investments — true to its broader mission — but does include alternatives in its client portfolios.
“Hats off to Mercer,” Alford said. “It’s quite the coup.”
OCIO assets are expected to grow to over $3 trillion by the end of 2026, according to Cerulli Associates. OCIOs had $2.4 trillion as of the end of 2021. The data provider noted this year that 14 percent of asset owners surveyed said that over the next two years, they’re likely to start using an OCIO provider for the first time.
As a result of this increasing interest, the industry has seen a wave of new players, from boutique firms to major asset managers, looking to get a piece of that pie. But experts have said that the industry is positioned for a surge in dealmaking, given the sheer number of organizations entering the market.
“I would expect more deals,” Alford said. “It’s so competitive right now.”
There have been fits and starts of dealmaking over the years, but some long-rumored transactions — like TA Associates’ potential sale of Russell Investments — have not come to fruition.
Given the context, it makes sense that Mercer would acquire Vanguard. “We know institutional investors, and not-for-profit organizations specifically, continue to face a range of challenges,” Cordover added in the statement. “They require robust solutions and global expertise to stay ahead of the curve. We are excited to welcome to Mercer the talented investment professionals already supporting this business.”
As part of the agreement, Vanguard’s roughly 120-person OCIO team is expected to transfer to Mercer as full-time employees, upon completion of the transaction, which is expected to be in the first quarter of 2024.
“We are confident our OCIO clients will continue to enjoy high-quality investment solutions, ably stewarded by the mission-driven professionals who will continue to serve them,” said John James, managing director of Vanguard’s institutional investor unit. “With Mercer’s expertise, capabilities, and commitment to driving optimal client outcomes, we believe it is well positioned to help our OCIO clients navigate the evolving OCIO landscape.”