Why conditions are ripe for elevated M&A activity
Strong M&A activity among asset and wealth managers around the world looks set to continue into 2022. This is thanks to conditions that range from investment capabilities to shareholder activism.
Despite the Covid-19 pandemic, 2020 was an incredibly active year for asset & wealth manager M&A – especially in the US and Australia.
Notable transactions include Franklin–Legg Mason, Morgan Stanley-E*TRADE and Morgan Stanley-Eaton Vance in the US and Amundi-Lyxor, EQT-Exeter Property Group, Jupiter-Merian Global and Amundi-Sabadell in Europe. However, we also monitored three Australia-US transactions: Macquarie-Waddell & Reed (LPL acquired Waddell's wealth manager), Perpetual (PPT)-Barrow Hanley and Pendal Group (PDL)-TSW.
Additionally, we saw heavy activity in the US Registered Investment Advisor (RIA) vertical with Focus Financial and CI Financial both very active. Finally, don't forget the biggest broker deal historically (Charles Schwab-TD Ameritrade).
Last, there also was a mini-M&A wave in the direct indexing space with BlackRock (Aperio), Morgan Stanley (Parametric via Eaton Vance), Charles Schwab (Motif) and Goldman Sachs (Folio) all acquiring custom index specialists given its attractive growth prospects and potential to disrupt ETFs.
Seven conditions that point to high levels of M&A in 2022
Conditions appear to be ripe for a continued high level of M&A into 2022.
- Investment capabilities: Many asset managers need to upgrade their existing capabilities in growth verticals – private markets, ETFs, solutions, ESG, active fixed income, direct indexing. They could pursue team lift-outs, which are cheaper or acquire a business with earnings via bolt-ons or acquire businesses that come with other products.
- Distribution scale/breadth: Many asset managers would benefit from a larger distribution effort – including with more scale in the US/European retail channel where size is a clear advantage and increased breadth in the largest markets outside of the US (Europe: Germany, France, Italy, Switzerland, UK; APAC: Australia, China, Hong Kong, Korea, Japan, Singapore).
- Earnings accretion & record low US valuations: Until the sharp rebound in equities from the 1Q20 lows, many US traditional asset managers were suffering from low or negative earnings growth and their valuations were dropping to record lows with many trading at just 5-10x earnings. The desire for firms to grow earnings through M&A and take advantages of attractive valuation multiples is a factor for many transactions.
- Visible bank/insurance buyers: Several large banks and insurers are public about their desires to acquire asset managers – Morgan Stanley was the most active but JPMorgan and State Street are now the most vocal. There are other large banks and insurance companies, which could be active but are less vocal on their M&A objectives (ex: Generali).
- Visible bank sellers: Several large banks are public about their desires to sell their asset managers – Wells Fargo just sold its asset management arm to two private equity firms and Banco do Brasil has been vocal about its interest in selling their asset management subsidiary.
- Activism in the US: There has been an increase in activism in the US asset management industry, which could encourage more consolidation – most recently Trian acquired stakes in both Invesco and Janus Henderson with M&A as one of their priorities.
- Rising US taxes: Taxes may rise in the US next year, which could encourage a pull-forward of transactions into 2021 - especially among the RIA consolidator and multi-manager models where individuals would be impacted by higher long-term capital gains taxes.
