Most managers may opt for less intrusive strategies, such as a reduction in the number of funds and cost-cutting, to tackle margin pressure in a fragmented and competitive market rather than face M&A challenges.
Lack of flagship scale
The elimination of sub-scale activities and the reduction in the number of funds will remain an important component of industry rationalisation. Around 250 funds are currently eliminated every quarter in the European market and further rationalisation potential remains because the market is fragmented. For example, 65% of cross-border fund ranges do not have a single flagship fund with assets of more than €1bn.
We do not expect widespread M&A because there are not many large candidates left and deals can bring considerable risks. There could be stark cultural differences among managers and they may also face investor outflows. Other challenges include a negative impact on an asset managers' credit profile if an acquisition involves debt funding, regulatory hurdles in the approval phase and over-paying in a competitive market, particularly if a bidding war is triggered.
In addition, the European landscape is markedly different from the US, with a much larger captive business component – notably insurance assets – that is less prone to change hands. This partly explain differences in the pace and scope of consolidation on both sides of the Atlantic.
Company-specific M&A
Nevertheless, we expect some further selective M&A activity among European asset managers, particularly where institutional investors increasingly demand scale, such as alternative investment, private equity and real estate.
Aberdeen Asset Management's (A-/Stable) acquisition of Scottish Widows Investment Partnership and Schroders' (A+/Stable) acquisition of Cazenove Capital are examples of recent selective acquisitions. Aberdeen's deal will add scale to its UK equities and fixed-income business, while Schroders expanded its private banking operations. We expect the acquisition of smaller specialists to remain popular ways for asset managers to add competences, products, clients or distribution channels.
European asset managers have also generated interest from overseas parties, such as Bank of Montreal's recent offer for F&C Asset Management, and the sale of Robeco to Japan's Orix and of Dexia Asset Management to New York Life in 2013.
These transactions enhanced growth platforms and increased geographical diversification of previously North American or Asian-focused funds.
