Even as volatility returned to equity and bond markets in 2018, asset managers entered into 140 M&A deals valued at $14.9 billion — up 72 percent year-over-year and the highest annual increase since 2009, according to a new report from consultant PwC.
Forty percent of the tie-ups came during the fourth quarter, with three worth more than $1 billion each, according to PwC's most recent quarterly report on asset manager deals, released Thursday.
The value of transactions was primarily driven by four huge mergers, including Invesco’s announced acquisition of MassMutual’s OppenheimerFunds in a $5.7 billion all-stock deal, the biggest in the asset and wealth management sector in 2018. As part of the deal, MassMutual will become Invesco’s biggest shareholder.
Other deals last year include Victory Capital Holdings’ purchase of Harvest Volatility Management and USAA Asset Management, which provides services to the armed forces and their families, and Franklin Resources’ acquisition of credit firm Benefit Street Partners.
Consolidation in the industry has been long anticipated, particularly among traditional managers.
“Several forces impact transactions, including fee pressures from low-cost passive managers, the challenge most active managers face in beating benchmarks, and significant pressure on margins and AUM,” according to the report’s authors, who included Greg Peterson, U.S. financial services deals leader at PwC, and Gregory McGahan, who leads U.S. asset and wealth management deals.
Although 2018 was a busy year for M&A overall, volume among alternative investment firms declined 13 percent, according to PwC. The largest was Golub Capital BDC’s acquisition of Golub Capital Investment Corp, a $1.8 billion stock deal.
PwC noted that while deal volume declined, investors — such as private equity firms — continued to purchase minority interests in alternatives managers. PWC expects firms such as Blackstone, Petershill Funds (owned by Goldman Sachs), Dyal Capital (part of Neuberger Berman), and Carlyle-owned AlpsInvest to continue to buy stakes.
The number of wealth management transactions didn’t rise in 2018, but the value rose to $3.3 billion from $2.4 billion. Hellman & Friedman’s $3 billion purchase of advisory firm Financial Engines, which was one of the earliest providers of robo-advice, was the largest transaction last year.
PwC expects that M&A will continue to rise this year. Publicly traded managers that can use stock to purchase rivals are likely the ones that will enter into transformative mergers, the firm says.
“One of the challenges last year with deals was pricing,” said McGahan. “Multiples were still significant, in the 12-14 [times EBITDA] range. That’s pricey. But think of the market at the end of the year, values came down and that should be reflected in pricing. There will be more reasonable multiples going forward.”
McGahan expects that deal making to continue into 2019.
“There’s still plenty of capital available — there’s excess capital on balance sheets and tons of pressure on CEOs to find growth. If they can’t find it internally, they’re forced to look at what’s in the market,” he said.
Private equity firms are also sitting on record amounts of cash. Some of the cash has fueled acquisitions of insurance companies, said McGahan. “They’re buying AUM and a platform to invest permanently in their investment vehicles,” he said.
Other insurance companies such as MassMutual are getting out of asset management and focusing on their core businesses, while others are considering buying asset managers. All these changes are setting the stage for a healthy M&A market, he said.
The consultant adds that a number of issues will influence the market, including the still-rising use of passive strategies, fee pressure, and the increasing number of insurance companies that are looking to buy asset managers. Fees for actively managed funds, according to PwC, are expected to drop almost 20 percent by 2025, to 0.44 percent on average. Traditional firms with scale will be best positioned to weather pressures on revenue.
Other drivers of M&A are firms’ need to expand internationally, an expensive but potentially profitable distribution opportunity for both traditional and alternatives managers.