In 2020, asset managers joined up together to survive the Covid-19 downturn and industry pressures that had been mounting for years. Next year, tie-ups might be driven by more strategic motivations and new business initiatives, one firm predicted in a report issued Thursday.
The shift comes as a number of recent deals haven’t rewarded the acquiring asset manager with a higher stock price, even though the transactions have resulted in successfully integrated firms, concluded PricewaterhouseCoopers in its 2021 outlook on asset and wealth management deals. Even when some firms have reduced costs and increased earnings, they’ve still watched their price-to-earnings multiples decline in the aftermath of deals, according to PwC.
“As the Street may be downplaying the value of cost reduction, we’re already seeing a shift from deals driven by cost-cutting to deals driven by potential revenue synergies,” wrote Greg McGahan, deals leader for U.S. financial services and asset and wealth management, one of the report's authors. “These moves to broaden product offerings and expand distribution are designed to drive top-line growth, rather than expanding profit margins by reducing expenses.”
McGahan noted that both Morgan Stanley’s $6.8 billion purchase of Eaton Vance and BlackRock’s $1 billion deal for Aperio are examples of what might be in store for 2021. Aperio and Parametric Portfolio Associates, owned by Eaton Vance, both offer what's called direct indexing, which allows individuals or institutions to design a custom portfolio where they hold the individual securities. It’s an alternative to an index fund that is customized.
Still, 2020 has been a busy year for dealmaking in the industry.
The value of transactions reached $53.4 billion during the 12-month period ending in November, up almost 30 percent over the previous period and a new record, according to the consultant. Morgan Stanley was in the news twice, with the proposed deal for Eaton Vance and for the acquisition of E*TRADE Financial. In addition to the giants, there were plenty of smaller tie-ups as well. PwC reported 220 transactions in 2020, compared with 212 last year.
PwC expects some old trends to reappear, including interest from banks in asset management. Given potential barriers to acquiring rival banks, these institutions may look to asset managers for stable revenues.
During the financial crisis, many banks sold off their managers to raise cash. Barclays, for one, famously sold Barclays Global Investors to BlackRock in 2009. Although asset management can offer a source of stable revenue for banks, investors often prefer independent managers that aren’t subject to the whims of a corporate parent.
Asset managers that invest in alternatives such as private equity may look to buy more insurance companies, which are increasingly hamstrung by low interest rates. Insurance companies, as a result, are investing in more alternatives to make up for the low yield on traditional fixed income.
According to PwC, alternatives managers are valued at price-to-earnings multiples of between 15 and 20. Meanwhile, life insurance companies trade at far lower multiples, anywhere between five and 10. Asset managers that have insurance acquisitions in recent years have also been able to capitalize on the semi-permanent capital that these deals bring. The stock prices of Apollo, Blackstone Group, and KKR have all benefitted from similar deals.