Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. Today we focus on consolidation in the asset management industry.

Will we see at least two mega-mergers in the investment industry this lunar year (deals that form asset managers with at least $1.5 trillion under management)?

Answer: Yes

It seems an accepted consensus that scale confers major benefits on the investment industry – as in other sectors – and that more mergers of asset managers are thus inevitable in today’s markets.

As recently as five years ago, assets under management of perhaps $1 trillion were seen as a sufficient size to mark out a firm as a truly global player with investment capabilities covering the waterfront.

That is probably the bare minimum these days. BlackRock seems likely to hit the $10 trillion mark within months rather than years.

There are various drivers of this trend, including inexorably falling fees as passive investment strategies continue to attract capital; clients’ rising demand for managers able to satisfy most, if not all, of their needs in one place; and the increasing necessity and cost of technology for investing and providing services.

“[Asset management] firms that are not prepared to spend 10%-15% of revenues to invest in and maintain technology resources will soon find themselves in the proverbial Stone Age,” said investment bank Piper Sandler in a report published in November.

Weighted average expense ratio of funds, 2011-2019
(Click for full view)

Moreover, consolidation has been gaining pace among not only fund houses but also their institutional investor clients and indeed service providers to the industry.

Witness the proliferating mergers of pension pools in markets such as Australia and the UK in recent years, and the concentration of investment assets with ever fewer and larger investment consultancies (most recently with the Aon-Willis Towers Watson deal) and technology platform providers.

Even huge institutions recognise that joining forces can further improve their access to transactions, boost bargaining power and reduce investing costs. Witness the real asset-focused tie-up between Dutch and Korean pension fund giants APG and NPS last year.

In short, more M&A is on the way in the asset management industry. How will that pan out in the coming lunar year?

AsianInvestor expects to see at least two more so-called mega-mergers unveiled in the coming year – ones that will form fund houses with $1.5 trillion. After all, the trends mentioned above are well-established and if anything look to be accelerating.

Some potential buyers may have held back in the past year as a result of the Covid-related uncertainty, but Morgan Stanley's acquisition of Eaton Vance announced late last year indicates that big transactions remained feasible.

The likes of Invesco, JP Morgan Chase, Janus Henderson and others are being touted as parties to potential deals. Various other big names are also understood to be open to the right offer.

There’s widespread sentiment that asset managers with the cash to make purchases will come out of this latest crisis very strong and that the environment is favourable for potential buyers.

As one senior lawyer told AsianInvestor last week: “The perception is that there are relative bargains to be had and the window is closing [to get them].” 

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