Investment banks have had a rough time over the past decade, but a busy period of M&A in financial services, coupled with other forces in play, bodes well for them, a Swiss firm argues.
European asset managers will see further mergers and acquisitions, creating two increasingly contrasting models of behemoths focused on scale on one side and boutique specialists on the other, a Swiss bank predicts following yesterday’s announcement of the Standard Life and Aberdeen tie-up.
The M&A activity seen in wealth and asset management also bodes well for investment banks, which have traditionally found lucrative business from such corporate moves, Mike Clements, head of European equities at SYZ Asset Management, part of Geneva-headquartered SYZ Group, said in a note. A possible normalisation to interest rates and capital markets activity could also be positives for such players, he said.
Yesterday, Standard Life, the UK-listed insurer engaging in business lines including wealth management, and London-listed Aberdeen Asset Management said they had agreed to merge, after confirming at the weekend they were talking about a possible £11 billion ($12.5 billion) all-share deal, creating a business with £660 billion of assets under administration. The deal is one of the largest of its type in the UK for years.
“Why the sudden rush of deals? It has been a long time coming, but the collective headwinds for the sector are proving too much to bear alone for many asset managers,” Clements said.
Standalone, and “sub-scale” asset managers are pressured by the rise of low-cost, index-tracking exchange traded funds, a desire to keep fees down, struggling fund performance and higher capital and compliance costs, he said.
“We see the sector bifurcating between the large-scale, diversified players and the niche or boutique houses. While the former will provide a supermarket of investment solutions, the latter will continue to be alpha generators and key to innovation in the sector. We like these types of businesses. Ashmore [a UK firm] will remain a high-quality EM specialist. Burford Capital [UK] will continue to pioneer and develop litigation finance, an uncorrelated asset class with staggering returns. These types of boutiques, of which there are many, will earn their place in a consolidating sector and perhaps see even greater opportunities if the diversified giants lose their inventiveness and alpha-generating capabilities."
“The need for scale has never been more apparent in a sector which is dominated by a few global giants, but has an incredibly long tail of smaller players. Finding the right partner and coupling up seems to be the strategy pursued by many management teams,” Clements continued.
“Boom times are back if you happen to be an M&A banker, especially one that specialises in financial services. After a decade of sluggish deal activity since the ill-fated bank mega-mergers that preceded the financial crisis, FIG (financial institutions group) M&A is back with a bang,” he continued.
Clements cited examples of asset management marriages such as those of Janus/Henderson and Amundi/Pioneer in 2016. More recently, there was the acquisition of Fortress, the US private equity business, by Japan’s SoftBank group.
Standard Life, Aberdeen
“It is no secret that Aberdeen, itself a product of acquisitions, has been in the market for another game-changing deal,” he said of this week’s announcement.
The agreement between the firms will “catapult the combined entity well ahead of the likes of Schroders or M&G to create a regional asset management powerhouse and globally relevant player. The one drawback for Aberdeen and [CEO Martin] Gilbert is that for the first time since it was founded, it finds itself as the junior party to a tie-up. Still, this is no time to be choosy, especially when the rationale stacks up so well,” he wrote.
Clements added that Standard Life, which he said is suffering outflows from its “blockbuster” Global Absolute Return (GARs) product, gets access to Aberdeen’s emerging market and Asian equity franchise at a time when sentiment looks to be improving. The deal also bolsters Standard Life’s product range in solutions, property and alternatives, he said.
Recent financial sector M&A is making for busy times at investment banks, he said. “We think sector consolidation has some way to play out. Investment bankers are no doubt busily assembling pitchbooks of every conceivable company combination, and beating a path to the various chief executives’ doors. In the rush to couple up, the fear of being left behind, single and unwanted, may force management teams into unwise transactions. Executing a deal is tough in a people business where cultures are strong and personalities forceful,” he said.
"Mega deals are back and trading activity has been surging on the back of the [Donald] Trump reflation trade. The question we have been asking ourselves is whether we would want to own an investment bank at this stage? Within the financial sector, we have had a clear preference for asset managers for their strong cash generation and solid balance sheets, and on the whole they have outperformed the other sub-sectors," said Clements. "However, with markets at or near all-time highs and structural pressures weighing, the outlook for the asset management sector is challenged. Investment banks on the other hand have been a value trap in recent years but with volatility near its low, as contrarian investors, we need to ask ourselves whether our preference for asset managers still holds."