Asset Managers Can No Longer Just Buy Competitors and Leave Them Be

Asset managers have been going after deals to diversify their offerings. But now they are entering into transactions to create efficient operating models and economies of scale. 

“What we’ve seen is a shift in the reasons why investment managers are pursuing deals,” said Kevin Gallagher, principal at Casey Quirk, commenting on a report the strategic consultant published on Tuesday called, “Integrating Asset Managers.”

“Today the industry is not just about getting a liquidity event for the sake of liquidity. It’s not just about the catch them all approach to asset classes or client channels. It’s much more about building a coherent business out of different parts,” Gallagher added. 

The markets are pressuring asset management M&A. “Historically, investment management deals favored a lighter touch on integration. Strong market returns, high margins, and high organic growth meant that acquirers saw little reason to risk change. In today’s market, however, acquirers are more likely to apply close scrutiny to cost levels and potential duplicative activities, as they seek to deliver synergies and economies of scale,” according to the new report. 

Asset managers have long been using M&A to meet the evolving demands from investors who are moving toward private markets, passive strategies, and fixed income, the report stated. Forty-six percent of investors are expected to increase their allocations to alternatives, while 24 percent will add to fixed income, 20 percent will increase their equity exposure,12 percent will add to cash, and 10 percent will put more funds into so-called solutions such as liability-driven investments. 

The numbers underscore not only the demand for industry M&A but the opportunity for managers to integrate key business functions of their firms during the initial phase of the deal process. Casey Quirk’s data shows that successful integration can add between 6 percent and 8 percent to margins. “It has to begin in parallel with the diligence stage, which is figuring out how the integration is going to happen and too many times that hard work is deferred until after the deal is closed,” Gallagher said. 

A key element of that effort includes fusing the functions of back, middle, and front office teams. The most successful deals, the report noted, mobilizes this management early on, where project management teams control integration activities — such as legal, cost tracking, and reporting. Leaders can help identify the best approach to achieve these goals. Some of the key functions managers should look to integrate are clients and distribution, product, investments strategies, brand, and marketing, Gallagher added.

Integration is becoming increasingly important in a merger of equals, where each firm has strong capabilities in certain asset classes. Managers can no longer afford to keep two versions of multiple strategies. The question now is whether to merge investment capabilities or try to create a better version of one. “It’s often the right way to pursue a merger because it can give both clients a better result and create better economics for the acquiring firm. But it’s a significantly more disruptive way to approach the merger of investment teams,”Gallagher said. 

None of this can be achieved effectively without the proper messaging and communication, however. A firm can have the right plan but if the market and clients don’t understand it, it won’t be successful, Gallagher cautions. 

“It’s not just the volume and frequency of communications, but you actually have to work pretty hard to make sure that everyone understands the rationale for the integration and why it’s making a better firm.”