Consolidation Looms For The US – What Asset Managers Need To Know

TMF Group BV


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A wave of consolidation is on the horizon as US fund managers look to achieve the scale necessary to compete for client mandates. According to data provider IBIS World, there were 13,668 private equity.
United States Finance and Banking
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A wave of consolidation is on the horizon as US fund managers look to achieve the scale necessary to compete for client mandates.

According to data provider IBIS World, there were 13,668 private equity, hedge funds and other private investment vehicles businesses in the US as of the end of 2022. Moreover, this number has grown 0.9% per year on average over the five years between 2017 and 2022. These numbers suggest that there has not been consistent or concerted consolidation in the US investment management industry in many years.

But experts predict this could soon change, and change rapidly. "We have not seen a large wave of consolidation yet, but I think we are approaching the precipice where we will," says Daniel Max, Head of Global Solutions at TMF Group.

Achieving scale and growth through mergers and acquisitions is not unknown in the fund management industry – but private fund sponsor mergers tend to be one off events rather than formal practice. That could all be about to change.

A shifting landscape

A survey of 250 fund managers and 250 institutional investors conducted by PwC in the summer of 2023, showed the expected level of consolidation that is to come. The respondents estimated that by 2027 the ten largest asset management firms will control half of all assets. The other half will be fought over by all the rest, including alternative investment firms. As a result, 16% of all current fund management firms are expected to have been consolidated (either bought or shut down) by 2027. 'Nearly three-quarters of asset managers (73%) are considering a strategic consolidation with another asset manager in the coming months,' concludes the report.

It has been a challenging environment for traditional asset manager fundraising for many years, as ever larger competitors and passive strategies have delivered ongoing fee compression. This is now affecting private fund managers too .

"The capital raising environment is now much more challenging for private equity funds in particular," says Max. "The large alternative investment managers still have the leverage to raise money for new funds but mid-sized and smaller firms do not have the same ability."

Operational gearing

One of the key attractions of consolidation is the ability to merge operational costs, thereby enjoying economies of scale. Significant additional operational gearing can come from outsourcing to a third-party administrator which spreads the operational costs over a much larger base of funds - specifically the hundreds or thousands of funds served by that third party administrator. What's more, the administration costs are typically allocated to the funds, driving additional cost-saving benefits to the manager while simultaneously giving investors the independent reporting they prefer in their own operational due diligence. Building this level of efficiency into a consolidation program can ensure optimal success and growth.

Strategic transactions

Undertaking a consolidation exercise can be a sensible strategic move due to a recent shift in valuation methodologies. Historically, fund managers were valued based on a percentage of the assets under management (AUM). This directly rewarded scale without considering efficiency. However, recently, the valuation methodology has shifted to one where fund managers are valued on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). This rewards not only scale, but also profitability and efficiency.

Those firms who may be seeking a strategic transaction should consider optimizing their cost structure in anticipation of any transaction to maximize value.

This article is based on information found in TMF Group's 'Growth Playbook for US fund managers', a new report that offers exclusive insights into strategies that can help transform your business. For further information on US consolidation, download the full report today.

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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.

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