M&A Might Not Fix the Industry’s Problems, but Asset Manager Mergers Are Barreling Ahead

The downturn at the end of last year demonstrated just how much investors could be slaughtered after a very long bull market — and asset management firms are panicking.

There were 49 merger and acquisition deals between asset and wealth managers worth $1.2 billion in the second quarter, according to PwC’s quarterly report on financial services deal-making. This level of deal-making is more than double the amount of M&A activity from the same period a year ago, PwC said in the report released Thursday.

The audit and advisory firm reported that wealth management deals rose 58 percent during the first half of 2019 compared with the same period last year, and that M&A activity among wealth managers was the highest in five years. Given the evidence that it sees, PwC said it expects the pace of ventures between wealth managers to continue for the remainder of the year.

According to PwC, firms are eager for deals, keeping prices — which are generally expressed as a multiple of earnings — high.

“When multiples are announced, people see it, and say, ‘what are they thinking,’” Greg Peterson, deals leader for PwC’s U.S. financial services group, said in an interview. “But if firms have the right operating model and can eliminate a lot of fixed, and even variable, costs, then the multiple doesn’t look as frothy,” Peterson said multiples have been in the range of 10 to 14 times earnings before interest, taxes, depreciation, and amortization. 

Merging with another firm to gain assets, lift out a star investment team, or buy a specialized manager has long been touted as one way for asset managers to survive falling fees and margins and compensate for a lack of organic growth. But the long bull market has tempered some of that activity as managers’ assets have appreciated in value, masking some of the challenges.

While markets have since stabilized, the rout at the end of 2018 may have been a wake-up call to asset and wealth managers.

According to the report, the number of second-quarter deals was up 9 percent compared to the first quarter of 2019. However, the value of deals fell from quarter to quarter because there were no huge transactions like Invesco’s purchase of OppenheimerFunds from MassMutual, which closed in May. The combined firm, the thirteenth largest global manager, has $1.2 trillion in assets. In 2018, there were only four such mega deals, or deals worth $1 billion or more. 

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Speaking to II, Peterson said that private equity firms and insurance companies are increasingly in the mix of acquirers.

“Our P.E. clients are really interested in asset and wealth management,” he said. “I expect that a lot of exits will be to sell the firm to another P.E. fund. The next owner will take growth to the next level.” 

PwC also expects to see an increase in deals in direct lending firms, which have experienced some of the fastest growth in the industry. Many of these firms haven’t experienced life during a down market. Management may want to sell while valuations are high, Peterson said.

The PwC executive stressed that a lot of the current deals are being driven by firms striving to compete. But he expects more innovative transactions in the future, such as a manager buying a technology company or vice versa. “Down the line, once people get economies of scale from their operating models, they’ll move beyond their traditional borders,” he said. 

Although consolidation within the asset and wealth management industry is expected to continue, firms aren’t always successful at wringing out cost savings and other advantages from deals.

In a recent report, Casey Quirk, a strategic consulting firm that is part of Deloitte, said that acquisitions can lead to higher profitability, but they rarely go well. In fact, badly integrated deals have cost the industry overall $6 billion to $8 billion annually, according to the consulting firm.

But when deals go well, the benefits are significant. Asset managers in the top quartile of a group of managers that Casey Quirk identified as successfully integrated had organic growth of 3.5 percent over three years. The top quartile of managers that are not integrated grew at just 1.4 percent over the same time period.