[Asset management merger and acquisition activity in the U.S. was valued at some $28 billion in 2020, the highest deal value in the sector since $29 billion in 2000, according to data from Dealogic. But if the late burst of activity in 2020 was any indication, it will be difficult for some industry players to resist acting quickly for fear of being left behind. Analysts and executives expect the wave of consolidation to carry into 2022 as sheer scale has become a necessity for fee-pressured investment managers looking for an edge. All indications suggest the asset manager arms race has only just begun.
Unlike the activity and attention being drawn to the larger fund complexes that were more focused on cost synergies, more interesting business activity has been brewing with smaller-to-mid boutique fund managers. This area is focused more on deals done for strategic reasons—such as acquiring distribution or new capabilities. It all comes back to implementing new or enhanced growth and strategic positioning.
To get a better picture of this, we reached out to Institute member Dan Sondhelm of Sondhelm Partners—an experienced provider of marketing, public relations and growth strategies for the asset management industry. We asked him to share his unique perspective and experiences in working with asset management firms exploring new growth and partnering opportunities actively in play right now.]
Bill Hortz: What have you been uncovering in your work with asset managers as to their growth strategies?
Dan Sondhelm: Distribution is even more competitive this year. Asset managers are still having to confront the fallout from Covid, continued fee compression, the growing popularity of index funds, and increased regulations. Despite the challenges, many boutique asset managers are navigating well. They have a good story to tell, they have transformed their sales and marketing models and have expanded their use of virtual and digital strategies - which will be the focus long after the Pandemic ends.
But, in addition to that, an increasing number of asset managers are looking for strategic partnerships with other asset managers. For strong manufacturers, who realize they are better money managers than marketers, they want to find a partner to help drive their assets under management (AUM). For asset managers with distribution, they are looking for scale, which will provide for the reinvestment of profits into the business. They want to find niche managers and strategies to sell. It becomes a win-win scenario.
Others are looking to partner to enter another market. Consider an institutional manager that wants to build a presence in the financial advisor space with a partner that is already there. Maybe they can find a partner with a lousy performing mutual fund, and they can be the replacement manager for those assets. Or they can launch a fund collaboratively.
As one former client said after a sale to a global asset manager with distribution, “I would rather earn 50 percent of the management fees of $1b AUM than keep 100 percent of just $100 million. I should have done this [sold to a larger firm with distribution] sooner.”
Hortz: Besides those partnership growth strategies, can you give us some examples of other strategies asset managers are pursuing and what their motivations are?
Sondhelm: Still others want to simplify their business. Consider the wealth manager that launched mutual funds believing assets would pour in. When they did not, they found a partner to take over the mutual funds and were hired to be the subadvisor. They continue to manage money and leave the operations and distribution to the partner.
Some smaller firms are looking to achieve cost efficiencies. They do not necessarily find a partner for growth but to lower operating costs to take pressure off their profit margins. More assets in the Trust can lower expenses ratios, and help returns, for both sides.
In some rare cases, a firm just wants to sell and walk away. It may be because they want to focus on their core advisory business, so they might sell all or part of the firm. Or it may be part of a succession strategy.