As the global economic recovery gains strength, higher valuations offer stronger growth, and increasing regulation turns off some firms, Moody’s Investors Service says it expects greater consolidation in the asset management business.
In a new report, the rating agency predicts that merger & acquisition activity in the asset management industry will likely pick up in the next 12-24 months. It sees a variety of factors fuelling the activity, including improving economic conditions, low capital markets volatility, stronger earnings and cash positions and favourable financing markets.
“Asset managers are motivated to buy now given an improving macroeconomic picture combined with financial positions that are back at or stronger than pre-crisis levels,” said Robert Callagy, a Moody’s senior vice president.
Moody’s notes that recent M&A transactions in the sector include Man Group’s recent announcement of its intention to purchase Numeric Holdings LLC, TIAA-CREF’s $6.25 billion acquisition of Nuveen, and Standard Life Investment Ltd’s purchase of Ignis Asset Management.
It expects to see more of these deals as asset managers make acquisitions to increase assets under management, scale up and diversify, enhance investment capabilities, and fill gaps in current business models. Additionally, Moody’s notes that the asset management industry greatly benefits from scale, and it says that, “Small groups of firms are increasingly capturing outsized share of new client flows in each of the industry’s key market segments.”
As for potential sellers, Moody’s says that it sees two types in the current environment, small players that are repositioning, and larger players such as banks or insurers that are divesting to rationalize costs or avoid regulatory requirements. “Sellers are also likely to act now since business fundamentals have improved in the past several years and valuations are also higher,” said Callagy.
Moody’s adds that it expects that larger players will continue to sell their asset management businesses, given the increased implementation of new global regulations.