Echoing a number of other studies, consultants Casey Quirk see asset management around the world going through major consolidation and M&A activity as pressures take their effect.

Another organisation has predicted that the world’s asset management industry will see rapid consolidation as client and regulatory pressures force certain groups out of business in a Darwinian hunt for economies of scale.

According to a new White Paper from asset management strategy consultancy Casey Quirk, a practice of Deloitte Consulting, the industry is likely to experience “the largest competitive re-alignment in asset management history” through merger and acquisition activity from 2017 to 2020.

According to its new Investment Management M&A Outlook, “Skill Through Scale? The Role of M&A in a Consolidating Industry,” Casey Quirk expects strong merger and acquisition activity in 2017 with a continued historic pace of deals through 2020.

The rise in use of low-cost passive products, increasing regulatory burdens and less use – for the moment – of actively-managed, more high-yielding funds has put pressure on firms’ fees, encouraging M&A activity. A number of organisations, such as Cerulli and Moody’s, for example, have noted these trends. Moody’s, for example, said in a report last December that it had cut its outlook on the world’s asset management sector to “negative”, arguing that a flood of money into low-fee passive products from more expensive actively managed portfolios and rising compliance burdens have taken a toll. 

The Casey Quirk report said that among the factors driving brisk consolidation activity in 2017 and beyond are an aging population, affecting industry asset levels and flows, as well as a broad shift to passive management that has created pressure on industry fees and placed greater value on firms with valuable distribution platforms and those investing in technology. Forty-four deals took place in the first quarter of 2017, and Casey Quirk expects 2017’s volume to likely outpace the last two years.

“Investment management has become a fiercely competitive industry, increasingly shaped by the same winner-take-all dynamics influencing other maturing financial services sectors,” said Ben Phillips, a principal and investment management lead strategist with Casey Quirk and one of the authors. “Amid this challenged marketplace, the gap is widening between leading and lagging asset and wealth management firms. Unlike deals of the past, consolidation pressures, with a focus on scale, will likely drive the next round of M&A activity to position firms for growth.”

Most of the investment management merger and acquisition deals in 2017 and in the next few years should fall in the following categories: Transformative scale acquisitions driven by the quest for revenue and cost synergies. These deals should be larger than in the past several years and should include more global mergers of equals; capability-based transactions, mostly representing additions of innovative investment products and technology needs; and shifting value chain deals, with many asset managers acquiring firms that help them extend their capabilities in such areas as distribution, wealth management or advice. The report also referred to “pure” consolidation deals structured to spread costs over a larger client asset base and said several of these may take place in the US mutual fund marketplace.

“Economic pressure, distributor consolidation, the need for new capabilities, and a shifting value chain are the catalysts that are fueling M&A activity,” said Masaki Noda, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP, and co-author of the paper. 

“Asset managers are feeling pressure from many corners and are looking for ways to secure a competitive advantage. Strategic deals may be the answer,” Noda said.

In 2016, 133 mergers and acquisitions occurred in the asset management and wealth management industries, down slightly from 145 in 2015, but with a higher average deal value, up from $240.9 million in 2015 to $536.4 million last year. In investment management, about half of the deals rose from the need to add capabilities such as innovative investment strategies or access to new market segments. In wealth management, the vast majority of transactions - 64 out of 78 - resulted from consolidation, as various smaller wealth managers sought to improve profitability through economies of scale.