Notwithstanding recent deals, such as Bank of Montreal’s offer for F&C Asset Management, Fitch Ratings says that a rash of merger & acquisition activity in the European asset management business is unlikely.
In a new report, the rating agency says that it expects European asset managers to further rationalize their operations, but that it doesn’t foresee an M&A spree. Instead, it says that “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.”
Fitch says that currently around 250 funds are eliminated every quarter in the European market, and it says that it sees potential for more because the market is fragmented.
“We do not expect widespread M&A because there are not many large candidates left and deals can bring considerable risks,” Fitch says. “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.”
Moreover, it says that the European landscape is markedly different from the U.S., “with a much larger captive business component – notably insurance assets – that is less prone to change hands.”
That said, Fitch says that it does expect some selective M&A activity among European asset managers, particularly where institutional investors are increasingly demanding scale, such as in alternative investment, private equity and real estate. “We expect the acquisition of smaller specialists to remain popular ways for asset managers to add competences, products, clients or distribution channels,” it says.