Asset management merger and acquisition (M&A) activity has lagged previous years in terms of deal volume so far in 2020, but the value of deals is expected to pick up as consolidation continues and boutique firms face growing pressures to sell up.
Recent years have seen a trend of active managers merging or buying smaller competitors in order to drive cost savings amid increasing regulatory burdens and competition, while standing alone has become more difficult for boutique firms.
The past two weeks have seen high-profile examples of asset management M&As, with link-ups between Franklin Templeton and Legg Mason, and Jupiter and Merian Global Investors, in addition to Polar Capital's acquisition of the International Value and World Value equity team from First Pacific Advisors.
However, globally there have been 67 M&A deals in the industry between 1 January and 18 February, the fewest over the same period since 2012, Refinitiv data shows.
The drop off in M&A is particularly prominent in the UK, where there have been just five deals over the period, the lowest for this period over the last decade. However, the data does not yet include the £390m tie up between Jupiter and Merian.
Director of manager research ratings at Morningstar UK Jonathan Miller described the Jupiter-Merian deal as "symptomatic of the pressure active managers are finding themselves under".
He added: "Active managers are closely mapping out their future trajectory amid fee compression, outflows and the threat from passive."
The 'squeezed middle'
Despite the drop off in volume, the value of deals has increased on the previous year. To date, global deals in 2020 have been worth $6.1bn, up from $2.8bn in 2019 and the second highest of the same period of any year over the last ten. This was largely driven by the Franklin Templeton-Legg Mason deal, which is worth just under $5bn.
While all five UK deals were for undisclosed fees, the Jupiter/Merian deal alone was larger than the $410m of transactions seen over the same time last year.
Strategy partner in KPMG's asset management team Ian Smith explained the increased value of deals reflects a change in the focus on M&A, which is no longer centred on larger firms buying up boutiques or specialists to expand offerings in terms of asset classes, geographies or particular client types.
He said the industry is now seeing greater pressure on the "squeezed middle", comprising of slightly larger businesses now "starting to consolidate", and further deals of this kind are inevitable.
Smith added: "The asset management sector has all the characteristics of an industry ripe for disruption. It is highly fragmented, relatively mature and has great margins.
"The squeezed middle really needs to do something to remain competitive, particularly with regard to cost synergies.
"But the winners will likely be those that not only look for those scale economists, but are also going to start to thinking about how they differentiate themselves."
Pressure on boutiques
In recent years, the uptick in M&A activity has led to a shrinking boutique market, which is quickly being hoovered up by larger firms in a drive for cost efficiency and the need to acquire specialist talent.
While the CFA Institute defines a boutique as a firm managing less than $100m in assets, the term is often applied more broadly.
Under increasing cost pressures, investment consultant at Fairview Investing Ben Yearsley argued that the "days of the £100m boutique are numbered", with few firms smaller than a "£1bn AUM boutique" regarded as being "perfectly feasible to prosper and thrive".
He added that selecting boutiques now "ultimately comes down to cost", with the very smallest firms unable to offer preferential pricing even with larger allocations, in addition to a "huge long-term track record".
Yearsley also questioned the capacity of new boutiques to come into being, noting that the birth of firms like Blue Whale Capital, which was launched with a cash injection from Peter Hargreaves, was only possible under exceptional circumstances.
He added: "[Blue Whale] is an example of a boutique that has launched in the last few years but it is unusual, particularly with that scale.
"You do not get many of those businesses. You have to differentiate, you have to have a premium or specialist product to make it work, or you take parts of the franchise."
Evidence suggests the shrinking boutique space should be of concern for investors, with research from the CFA Institute suggesting boutiques on average provide better returns, creating "11% greater wealth" over 20 years to 2015.
Manager of Quilter Investors' Cirilium multi-asset portfolios Paul Craig said that amid consolidation boutiques "will continue to play a crucial role for investors", with the very best small firm's "successful in their own right… meaning it will take a lot for a larger business to acquire them".
He added: "Smaller managers can often give investors access to unique and interesting strategies that have the potential to add considerable value to a portfolio, as well as being nimble and adaptable to market environments.
Craig said that "rather than worrying about differentiating themselves" from much larger counterparts, boutiques should focus on ensuring they do now "overstretch themselves and launch esoteric and unusual strategies", which are high risk or not of interest to investors.
He added: "If this were to happen then consolidation could come into play as these businesses often don't have the financial backing of others."