@Pixabay.

M&A outlook in 2024

The fund management sector is considered ripe for consolidation given attractive long-term fundamentals, the need for scale, and currently low valuations. However, market movements are low because of the interest rate situation, according to analysis.

“M&A is likely to play an increasingly important role in driving growth and creating shareholder value."

Globally, in 2023, deal value in the wealth and asset management industry dropped by about 34%, while volume was expected to sink by 25%, according to data published in January. This information also highlighted a disparity in the fortunes of asset and wealth managers. These conditions were mostly attributed to macroeconomic-level interest rate woes. 

“M&A is likely to play an increasingly important role in driving growth and creating shareholder value,” said Investec in a report published in February this year, which argued “Why M&A activity is set to rebound in the UK’s asset management sector”. 

It listed fund management trends for companies as being affected by the geopolitical conditions and the recovery from the post-Covid-19 inflation and interest rate events of 2022-23. This all meant that 2024 was the year for higher M&A. 

“While the overall macroeconomic outlook remains volatile, we expect some degree of recovery throughout 2024 driven by falling inflation and the start of base rate cuts,” said the report. “However, upcoming US and UK elections may impact market performance and investor sentiment during the second half of 2024.” 

Other trends included a focus on fees. Fee pressure is not new and could be more heightened in the tight economic climate, with numerous markets still in recession. “Traditional asset managers have experienced declining management fee margins over the past decade which we expect to remain under pressure,” said Investec. 

“This is due in part to the growing demand for alternative and passive investment products, where fee margins are resilient and are expected to remain attractive,” it added. 

In 2023, Arif Saad, Head of Investment Strategy UK, Kempen Capital Management, said fees continued to be sensitive for market stakeholders – with the downward trend, particularly for liquid asset classes, prominent over the past decade. “For private markets, investing in the asset class has become more widely accepted by a range of different investors,” he said.

“Higher costs are expected from ongoing implementation of Consumer Duty and the Financial Conduct Authority’s (FCA) announced Sustainability Disclosure and Labelling Regime.” 

Saad also said that Defined Contribution (DC) pension schemes were the latest investor that wanted access the benefits of a long-term and stable asset class – which left private markets investors with “dry powder” whilst searching for compelling opportunities to invest in. 

Investec argued that ever-increasing costs were similarly a major trend that could drive M&A. “Higher costs are expected from ongoing implementation of Consumer Duty and the Financial Conduct Authority’s (FCA) announced Sustainability Disclosure and Labelling Regime,” it said. The FCA Sustainability Disclosure Requirements (SDR) were finally announced in November 2023. 

Comparatively, M&A activity in the insurance sector was at a ten-year low in 2023 – according to the “Insurance Growth Report 2024” launched in February by law firm Clyde & Co. – but Europe managed to gain steam towards the end of the year. 

The report said that inflation and the movements by central banks on interest rates to combat rising prices were one of the main reasons for the slowing activity. 

Bain & Company said in its report on 2024 asset management M&A activity that the market was slow, but one sector of deals was seeing good traction – banks buying asset managers. “And there are vertical integration deals that marry asset managers’ products with wealth managers’ distribution,” it said. “Looming EU-wide regulations – in particular, a potential future ban on retrocessions – have sparked interest in such deals.” 

US asset managers also opted for scope deals aimed at buying capabilities or distribution, it said. Part of the reason for this was customer demand for more sophisticated investment products. This has “led asset managers to pursue scope deals that add capabilities for selling alternative investments such as private market products”. 

That was the objective of MetLife’s purchase of privately owned alternative investment firm Raven Capital Management, said Bain’s analysis. 

What does this mean going forward? 

Largely, the slowing M&A market was laid at the feet of the macroeconomic environment, with high interest rates following continued inflation. 

However, as inflation wanes again, more businesses are gearing up for interest rate cuts and a less volatile H2 2024. 

This means that M&A will likely increase. Other factors that could cause more M&A include fewer staff in physical offices due to hybrid working – which could encourage more commercial spaces being given up and the knock-on effects of eventual sell-offs and restructuring. 

What this means for fund operators is an increased focus on new deals that will increase scope and, as Bain’s report said, emphasise ways to enhance capabilities and distribution. 

This could mean additional stress on operations departments, which could feel pressure to do more with static resources or cover new markets and products at a time when a heavy administrative and regulatory burden is imminent due to new legislation.

"The study predicts that assets managed by algorithm-driven and increasingly AI-enabled digital platforms will surge to almost $6 trillion by 2027, nearly double the figure for 2022.” 

In this respect, recent Artificial Intelligence (AI) advancements could be a blessing or a curse. Whether they are able to help back-office operations cope with pressures from asset management M&A activity will be a major focus in the months to come. 

PwC’s 2023 Global Asset and Wealth Management Survey said there would be a boom in robo-advice for the industry going forward as it moved to more AI solutions. “The study predicts that assets managed by these algorithm-driven and increasingly AI-enabled digital platforms will surge to almost $6 trillion by 2027, nearly double the figure for 2022.” 

The tasks they see it performing will be AI-integrated with other rapidly evolving technologies into both office operations and market-facing services, which it says is “essential”.  

It recommended companies do so by outsourcing non-client-facing, mid-office and back-office requirements to a managed services provider with the scale and resources to ensure that both tech platforms and the people skills needed to run them are fully up to date. 

All these factors mean that as volatility wanes after the past few years, there could be a resurgence of M&A activity as interest rates begin to fall. This could in turn be an operational headache for fund management firms if they don’t get the right strategy. 

 

Please Sign In or Register to leave a Comment.