Fund houses seek alts, ESG takeovers to raise income

Funds houses are acquiring niche players in order to cover weaknesses in alternatives, which is the industry’s largest revenue pool, and as ESG's importance grows.
Fund houses seek alts, ESG takeovers to raise income

Active fund houses are increasingly seeking to acquire targets that boast strong alternative asset capabilities or proven strengths in environmental, social and governance (ESG), in an effort to cater to shifting client preferences and offset the pressure they are coming under from passive rivals.

The outcome of the lower-for-longer interest rates due to the financial impact of the Covid-19 pandemic has heightened the demand for alternative assets such as real estate and private equity, as well as ESG investments. At the same time the enthusiasm for low-cost passive products is pulling assets from active managers and placing pressure on the fees they charge.

The combined pressure of fee compression, rising cost and changes in client behaviour is forcing managers to seek targets with specialised skills to boost their investment capabilities.

Earlier this month, Australia-based manager Perpetual completed its A$63.8 million ($44.8 million) acquisition of US-based ESG specialist Trillium with plans to distribute products broadly in overseas markets. Meanwhile, a division of Goldman Sachs is keen to buy a stake in private equity firm Permira, which plans to use the funds it raises from the sale to expand its market share. 

Andrew Hardie, BCG

More appear likely. “We believe asset and wealth managers have seen the importance of pure scale and differentiated investment capability in selected asset classes for a while,” Andrew Hardie, managing director and partner at Boston Consulting Group (BCG) told AsianInvestor.

“The disruption caused by Covid-19 has eroded the market share and revenues of some fund houses,” he added. That could cause more players to becoming available for sale at “more realistic valuations”. 

Rival consultant Cerulli Associates has come to similar findings. In a recently released report entitled ‘Specialisation and Diversification Drive Consolidation in Asset Management,’ the company observed that large asset managers were increasingly seeking to opportunistically acquire niche players that specialise in sectors such as alternative investments and ESG offerings.

While the investment consultant did not provide deal numbers, it said the trend had developed in tandem with firms’ desire to develop alternative investment capabilities. It said 74% of the firms it polled this year wanted to develop such capabilities to potentially increase revenues. In addition, 59% pointed to business diversification as a chief driver. 

“Alternative investment capabilities are an attractive M&A target for many asset managers given investors’ increasing interest in uncorrelated, risk-adjusted allocations and these products’ relatively attractive revenue potential,” the report noted, adding that Goldman Sachs had acquired several alternative management shops since 2016, to both “move downmarket and expand beyond its traditional banking roots”.


The desire of fund houses to acquire alternatives and ESG talent is also being driven by projections the investor interest into those areas will rise in the coming few years.

The global AUM of alternative investments stood at $15 trillion in 2019, up from about $13 trillion in 2018, with growth driven mainly by rising stock prices, according to BCG data. It projects the total AUM will keep growing by 4% annually until 2024.

At that point, alternatives will represent 17% of global AUM and 49% of global fund management revenues, which are estimated to reach $333 billion.

ESG is also rapidly gaining prominence in asset management, courtesy of improved measurable data and growing investor demand and – in some markets – heightened regulatory pressure. Top fund houses stepped up their ESG data, research and analytics capabilities throughout 2019 to reflect this rising interest. With institutional and retail investors expected to increasingly demand that ESG factors be applied to a greater percentage of their portfolios, ESG assets should continue to grow at a 16% compound annual growth rate (CAGR), totalling almost $35 trillion by 2025, according to Deloitte's calculations.

That trend has become even more pronounced as Covid-19 raised risk across the spectrum. The 'S' aspect in particular – which include monitoring worker conditions and the health of the societies in which companies operate – has become seen as being particularly more important to measure corporate success until a vaccine is found.


The desire of global asset managers to branch out essentially follows the rising desire of investor clients across the spectrum to seek out alternatives and ESG investments, plus the pressure Covid-19 is placing on the fund management business.

Globally, asset managers suffered from large performance bumps in the first half, amid the impact of Covid-19 on financial markets. Fund houses’ revenue as a share of average AUM fell from 26.2 basis points (bps) in 2018 to 25.3 bps in 2019, according to BCG data.

The wealth management industry struggled too. The industry’s profit pool remains about the same as it was more than a decade ago, having reached just $135 billion in 2019 compared with $130 billion in 2007.

The combination of changing product preferences and the current tough conditions means that more consolidations are likely, as large fund managers seek to acquire the alternatives and better ESG capabilities they cannot quickly develop.

“We would expect to see a number of interesting transactions over the coming year,” said Hardie. In fact, Marty Flanagan, the chief executive of Invesco, said in an interview with the Financial Times earlier this year that he expects a third of the asset management companies in business could disappear over the next five years.

However, consolidation is not a guarantee of success.

“Managers exploring future acquisitions aimed at quickly building scale should also keep in mind the cautionary lessons learned from Aberdeen Standard and Janus Henderson and their growing pains,” said Cerulli.

Aberdeen Standard saw some $157 billion of withdrawals the 2017 merger of Aberdeen Asset Management with Standard Life to the end of last year, reports Bloomberg. Meanwhile, its AUM had fallen to £490 billion ($865 million) as of April 30, down from £655 billion at the end of 2017. Separately, Janus Henderson suffered outflows of $27.4 billion in 2019 and reported a 21.5% year-on-year drop in AUM for the quarter ended March 31, to $294.4 billion.

Both mergers had suffered from leadership struggles and integration and reorganisation issues.

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