Will Europe’s asset managers defy the mantra that big is better?
By Robin Wigglesworth and Harriet Agnew
As US asset managers strain to prove that big is better, Jean Pierre Mustier, one of Europe’s best-known bankers, believes competitors on the continent are better off leaving that mantra to Americans.
“European asset managers should not have a ‘US complex’,” the former head of UniCredit, Italy’s largest lender, told a recent Financial Times conference. “The US has a deep capital market, a deep base of investors, and it is extremely difficult to compete with this.”
Casting off any inferiority complex, however, is easier said than done as US investment groups embark on a series of mergers and acquisitions designed to shield profits from rising costs and falling fees.
In the aftermath of the global financial crisis, eight European companies made the list of the world’s 20 biggest asset managers compiled by Willis Towers Watson, accounting for 37 per cent of the group’s total assets.
A decade later and only five remain, controlling just 19 per cent of the assets managed by the top 20. It is why expectations are rising that European asset managers will have little choice but to execute their own deals or be left further behind.
Revenues from traditional asset management vehicles such as actively managed mutual funds will shrink by almost a third — equal to about $16bn in fees lost — by the end of 2024, according to Morgan Stanley, intensifying the trend of the last decade.
“Everyone under the sun, whatever the size, is being shopped around by the banks,” said a senior executive at a US investment group. “From the pitch-books we get, there is a disproportionate amount of focus on Europe.”
But as pressure builds on the European industry to pursue deals, the perils of doing so have never been clearer.
“I think there’ll be a lot more deals in asset management this year, but it won’t necessarily make them any better or easier to pull off,” Peter Harrison, the chief executive of Schroders, the London-based group that manages £574bn, told the FT.
Schroders earlier this year considered a bid for M&G Investments, attracted by the private assets business of its London rival, according to a person familiar with the matter. Schroders had ultimately decided against pursuing a deal because of concerns over a clash of cultures, the person said.
With buoyant financial markets offering asset managers a cushion, tie-ups have so far this year been limited in scope. Amundi bought Lyxor’s €825m exchange traded fund business in April, and NN Investment Partners, a €293bn bond-focused Dutch asset manager, has been put on the block by its insurer parent. Final bids are imminent and UBS and Germany’s DWS are among those that have registered their interest.
Given the advantages scale can bring, some industry insiders expect deals to be ambitious. Many big institutional investors increasingly want to work with a narrower club of asset managers, while retail investors gravitate towards well-known brands. Greater heft also helps absorb the mounting costs of technology, cyber security and back-office work such as regulatory compliance.
“After the end of the global pandemic, the consolidation wave in the asset management industry should gain momentum again,” Asoka Woehrmann, the chief executive of DWS, told shareholders at the €820bn group’s annual general meeting last month. “We want to be an active player in that field.”
Despite the pandemic briefly unleashing mayhem across financial markets in the spring of 2020, the US industry pulled off two notable deals last year. Morgan Stanley Investment Management and Franklin Templeton’s acquisitions of Eaton Vance and Legg Mason, respectively, catapulted both into the $1tn-in-assets club.
Nor is it only in the industry’s top flight that Europe has lost ground. A decade ago, 20 of the 50 biggest investment groups in the world were European. Today, Europe accounts for just 11. Credit Suisse data indicate that BlackRock alone is bigger than the five largest European investment groups combined.
US passive giant Vanguard has one investment vehicle — the $1.2tn Total Stock Market Index Fund — that is bigger than the entire asset base of Schroders, Axa Investment Managers and Abrdn. Despite charging a management fee of only 4 basis points, the Vanguard fund generates revenues at a similar level to the UK’s Jupiter Fund Management.
Set against the benefits of scale are the hazards in trying to achieve it. Anne Richards, the head of $738bn asset manager Fidelity International, put it starkly. “There are more examples of M&A in our sector that haven’t worked out well than have worked out well,” she told the FT’s Future of Asset Management conference.
Dealmakers caution that defensive transactions driven primarily by cost synergies are among the most challenging to pull off. Lay-offs and mergers can disrupt the investment culture, hurting performance and resulting in outflows.
Troubled mergers leading to poor share performance — including Invesco’s $5.7bn acquisition in 2018 of Oppenheimer and the tie-up between Standard Life and Aberdeen Asset Management — have spooked many executives contemplating bigger deals.
“Consolidation in a people business is very hard,” said Vincent Bounie, senior managing director at Fenchurch Advisory, a specialist investment bank for financial services. “It can look good on paper — you think businesses can be complementary, and you can take out costs and run more assets. But if you destabilise your key teams and people, you risk destabilising clients, which leads to significant risk of value destruction.”
If the need for scale is regarded as paramount, it is not the only dynamic set to shape deals in a European industry increasingly bifurcated between specialist boutiques and larger players who can keep costs low.
Credit Suisse analysts expect M&A to be driven by strategic considerations: either to sow the seeds for future organic growth by bringing in investment skills in fast-growing areas such as private assets, exchange traded funds and ESG, or to add new distribution channels. For example, foreign asset managers are rushing to capitalise on regulatory changes that are opening up China’s vast pool of savings.
Notably, assets classes that cannot be easily replicated by low-cost exchange traded funds, including direct lending, private equity, real estate investment and venture capital, are now some of the most prized targets.
Within Europe, groups such as Schroders, Abrdn, Edmond de Rothschild Group and RWC Partners have all earmarked private markets as an area for expansion.
“Private markets are structurally growing and the economics are very attractive,” said an investment banker that specialises in finance industry deals. “These funds have locked-up capital, charge high fees and are under no threat from passive replication. It’s a great business model.”
Private assets strategies are growing fast thanks to enormous demand from institutional investors such as pension plans who are hunting for yield. Morgan Stanley estimates that the private capital industry now manages over $7.4tn, and expects that to grow to $13tn by the end of 2025.
Mustier argues that smaller but strategic deals in areas such as private markets make far more sense than simply getting larger in a vainglorious attempt to compete directly with American competitors.
The next year is likely to show whether European asset managers decide to resist the pressure.