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Deal Activity Drops in Asset Management

The major shift to passive fund management has increased the need for M&A at the same time that it’s deterring potential buyers.

Mergers and acquisitions in the asset and wealth management industry declined in the second quarter after coming to a near halt in June, according to consulting firm PwC.

The number of deals fell 32 percent from the first three months of the year, PwC said in a report Thursday. There were 28 transactions during the second quarter, down from a surging 41 in the first quarter.

Potential buyers were concerned about low price-to-earnings multiples, poor performance and outflows of capital from asset managers, according to PwC. This curtailed deal making, which many asset managers have viewed as a way to gain scale and survive increasing pressure on fees they charge clients.

“Traditional asset managers, large and small, have been impacted the most in this environment,” PwC said in the report. “There are still certain alternative asset managers who continue to see growth and strong returns but a vast majority of players are facing industry challenges and need a strategic partner.”

Major deals in the second quarter included the acquisition of wealth-management firm Focus Financial Partners by Stone Point Capital and KKR & Co, according to PwC. Focus Financial announced the deal in April, saying the majority stake purchased by the private-equity firms valued the company at $2 billion. 

Also in April, Raymond James Financial said its asset management unit Carillon Tower Advisers was buying Scout Investments and Reams Asset Management from UMB Financial Corp. Scout, an equity asset manager, and Reams, and institutional-focused fixed-income specialist, have a combined $27 billion under management and advisement, according to the Raymond James statement.

Major active fund managers are struggling with consumer expectations for lower fees, according to PwC. The major shift to less expensive passive fund management has increased the need for M&A at the same time that it’s deterring strategic buyers, according to Andy Levine, co-chair of private equity at law firm Jones Day. 

Among the larger mergers announced in the first quarter was the deal struck between Standard Life and Aberdeen Asset Management as they faced lower returns and increased competition for assets. Under the agreement announced in March, Standard Life will pay £3.79 billion (about $5 billion) for its purchase of Aberdeen.

[II Deep Dive: More M&A Likely in Asset Management]

Levine is skeptical that the slowdown in merger activity will persist, saying the volume was so heavy in the first three months of the year that the market was likely to pause. Meanwhile, the underlying trends that have spurred M&A in the first place haven’t disappeared.

Concern about “slower organic growth or lower margins, those are all the macro factors that cause strategics to look at M&A,” said Levine, adding that he expects deal volume among asset managers to bounce back in the second half of the year.

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