Asset and wealth management mergers and acquisitions activity is booming, and the sectors are ripe for more. Asset management M&A success can boost profit margins, thus pleasing stakeholders, but failures though can be crippling, so it’s vital that participating firms focus on limiting their risks. And one of the best ways is through operations outsourcing.
Last year, mergers and acquisitions among investment managers hit their highest levels since 2009, as market participants came under intense pressure to consolidate. That trend continued into 2018, with total deal count in the first quarter up 32% on 2017. And while PwC pointed to a slowdown in asset and wealth management transaction activity in Q2, the firm suggests this is a blip, and that it expects “a bounce back in deal volume in the coming quarters.”
Firms’ reasons to consolidate are numerous and compelling, and show no sign of letting up – especially for smaller and mid-sized managers that lack the firepower and profitability of the industry’s behemoths and boutiques.
These drivers include:
According to Boston Consulting Group, asset managers face reduced average fee income, as pressure from clients and regulatory demands for transparency put pressure on the pricing of individual products.
Complying with the vast sweep of ongoing global regulatory changes is forcing firms to increase specialist staff and invest in technology, driving up compliance and wider operating costs. The EU’s MiFID II has also effectively shifted research costs onto asset managers.
The emergence of lower-cost disruptive new technology and digital solutions are raising investors’ service expectations. In response, firms have to acquire or develop new capabilities at an ever-increasing pace.
Changing client needs and intensifying competition are driving managers to further differentiate their offerings by introducing new products and asset classes, expanding into different markets, and accessing additional distribution channels.
Markets, especially in the United States, have enjoyed a phenomenal run, but fears we are reaching the end of the bull market are encouraging smaller and less profitable asset and wealth managers to sell out to larger rivals.
Revenue pressures, along with growing regulatory demands, back-office costs and technology spending are inciting firms to seek operational synergies and achieve greater economies of scale to boost their already-squeezed profitability. And if AUM growth falters as underlying asset markets stagnate or tumble, BCG predicts profit margins could fall from 38% at the end of 2017 to 30%, or even as low as 27%.
“Given the uncertainty of asset flows in the sector, we expect firms to continue to seek bolt-on acquisitions that offer scale and known cost savings from back-office efficiencies,” says Mercer Capital.
International law firm White & Case agrees, and predicts high levels of deal activity will be sustained over the medium term.
Yet despite the prospective benefits, many asset and wealth management tie ups fail. Two major banana peels prevent M&A success, as these hindrances commonly trip up partnering fund firms, according to Institutional Investor:
Organizations can do little to reduce the risk of culture clash, other than carefully assessing potential M&A partners in advance for the best possible fit.
But they can minimize the challenges, costs and potential failure points involved in their technology integration. And outsourcing offers the most effective and reliable answer.
As asset management becomes ever more complex, fast-paced, globalized and technology-driven, specialist outsourcing providers can offer important and proven benefits:
According to White & Case, the rise in “outsourcing of back and middle office functions, together with increased deployment of fintech solutions” will be key industry trends to watch. The flexibility that outsourcing affords asset managers, enabling them to take advantage of M&A opportunities and grow their business, is just one (compelling) reason why.
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