Merger and acquisition activities in 2018 in the asset and wealth management sector logged a total of 140 deals, up 5% from last year. According to an overview published by PwC, the total announced value of the M&A deals was US$14.9 billion, which represented a year-over-year increase up 72% – the highest percentage increase since 2009. Interestingly, almost 40% of deals in this sector were made during the last quarter of 2018, totalling US$9.9 billion in deal value. Specifically, there were three mega-deals that exceeded US$1 billion during the fourth quarter. With respect to deal volume, the fourth quarter of 2018 also saw more than twice as many deals than in the third quarter.
There were several drivers behind the growth in M&A activities in the asset and wealth management sector in 2018, many of which will continue to play a role in 2019. Firstly, it is estimated that there are over 10,000 mutual funds and ETFs in the U.S.. In such a crowded space, asset managers tended to consolidate by buying out competitors and strengthening their market positions. Secondly, according to the PwC research, both actively managed mutual funds and passively managed funds face intense fee pressure and are expected to drop their management fees about 20% by 2025.
Furthermore, low cost passive funds and ETFs continue to attract clients and assets and they are not showing signs of slowing down any time soon. This may be because over the long run, ETFs have typically outperformed indices. On the other hand, the vast majority (approximately 85%) of actively managed funds have underperformed their benchmarks over a 10- and 15-year period. As such, asset managers face pressure to deliver value for the hefty management fees that they charge. In addition, there are global opportunities out there for asset managers who are looking to expand their distribution in the international markets. As such, we may see more outbound M&A or joint ventures taking place in the coming year with asset and wealth management firms based outside of the US. Lastly, insurance companies also make deals to complement their line of business and build up their investment capabilities. Insurers will likely continue use deals to grow their client offerings and improve their general account investments in 2019.
The trends above notwithstanding, how are industry executives viewing the outlook in the asset and wealth management space? In an E&Y M&A report, 38% of executives at asset and wealth management firms indicated that they expect to engage in M&A activities in 2019, down from 51% in May 2018. These executives cite regulatory, geopolitical and policy uncertainties as key risk factors that may cause asset wealth managements to hold off on M&A activities in 2019. In addition, more emphasis will be placed on post-deal integration in 2019 as many executives indicate that the deals they made in 2018 achieved lower synergies after the merger than expected. As such, 45% of executives indicated that they will prepare earlier for the post-deal integration whereas 21% of them will be more careful in choosing the right leadership team for the integration process. Furthermore, 57% of executives indicated their optimism for the M&A market in 2019, expecting that private equity will become a dominant player in the market.
Given all the above developments, 2019 will certainly prove to be an interesting year for the asset and wealth management industry. Stay tuned for additional developments.
The author would like to thank Coco Chen, articling student, for her assistance in preparing this legal update.
About Norton Rose Fulbright Canada LLP
Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.
Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.
Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.
For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.
Law around the world
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.