Demand from global and regional fund firms to build manufacturing capabilities in Asia has reached insatiable levels, but a bottleneck is building due to lack of supply, industry sources say.
A growing number of US, European and Asian houses have mapped out the region, know where the gaps are and are on the lookout for targets, says Richard Williamson, financial services lead advisory head for Asia Pacific at Ernst & Young.
But they are being thwarted because there are so few opportunities in the asset management arena in Asia, and this is leading potential buyers to become more pragmatic, says Williamson.
Where once they might have been set on gaining majority control, some scale players are now more open to the idea of a partnership.
Moreover, firms that in the past would have sought targets of a certain size will now look at smaller deals; companies previously only interested in long-only managers are now prepared to think about hedge fund or private equity firms; and groups that had been hoping to buy globally or regionally relevant asset managers are now examining single-country shops.
Potential buyers have also become more flexible in discussing deal structures and conditions, driven by local asset managers seeking comfort that partnerships will deliver what they’re after, notes Williamson.
As things stand, what M&A opportunities there are tend to be small, independent, often alternative investment firms – with bank- or insurer-owned management firms not likely to be sold, notes Stewart Aldcroft, senior adviser in Citi’s investor services division in Hong Kong.
One of the problems with acquiring hedge fund or alternative managers is that following a buyout, “the main guy takes his money and his client, because they bought into him", notes Aldcroft. “Unless you can lock in the proprietors, there’s very little future for the business.”
That hasn’t stopped western and regional firms from making approaches – and it has made them more open as to what they will consider buying. “The breadth of buyer appetite is increasing,” suggests Alexander Moore, executive director in the Asia-Pacific financial institutions group at Morgan Stanley. “Japanese and regional Asian firms, in particular, have become more present.”
Another factor behind the limited deal activity is a mismatch between what acquirers are prepared to pay and what targets expect to receive. This is despite the fact that buyers will pay higher multiples for emerging-market firms.
Over the past 18 months, the average price-to-AUM for funds industry mergers and acquisitions in developed Asia has been less than 2%, while in emerging Asia the figure is more than 7%, says Williamson. “There’s a logic for these higher valuations, as single-market businesses can be very profitable.”
He notes that fees for global institutional mandates are down to low-double-digit basis points in some markets, while single-market asset managers in some regional markets are still charging 2% plus for retail funds and enjoy 20-30% annual growth rates.