Why smaller asset managers are on the prowl for M&A deals
Of the 18 deals announced so far this year, the average size has tumbled to just $121m
Competitive pressure and rising regulatory costs have spurred mergers and acquisitions in the UK investment market recently.
While consolidation has long been predicted, few large deals have taken place so far. But under the surface, smaller managers — including Liontrust Asset Management, Neptune Investment Management, Premier Asset Management and Miton — have decided it is better to join forces than face challenges on their own.
“Growth through acquisition is a lot more certain than organic growth,” says Kevin Pakenham, co-founder of Pakenham Partners, an adviser specialising in asset management M&A. Brexit uncertainty and global trade tensions mean a number of smaller outfits are more open to being taken over, he adds.
The average value of disclosed M&A deals involving European investment companies has fallen to a four-year low, according to Dealogic, the data provider. Of the 18 deals announced this year where the value was made public, the average size was $121m, down from $465m last year and $367m in 2017.
One factor skewing the trend is a lack of mega deals. By comparison, 2016-17 saw the announcement of three significant tie-ups: the £11bn merger between Standard Life and Aberdeen Asset Management, the $6bn union between Janus Capital and Henderson Global Investors, and Amundi’s €3.5bn capture of Pioneer Investments.
“Smaller deals are now very much the trend — this is something we expect to continue into the new year,” says Will Riley, co-manager of Guinness Asset Management’s Global Money Managers fund, which invests in fund managers.
Since the summer, several small and midsize British asset managers have decided to club together.
In July, Liontrust, the FTSE Small Cap listed group, agreed to buy Neptune for £40m. The deal, which completed at the beginning of October, lifted Liontrust’s assets from £14bn to £17bn.
Liontrust has taken over Neptune’s 19 funds and its investment team, managed by Robin Geffen, the City figure known for his interests in racehorses and Tudor tennis. At the time of the announcement, Liontrust chief executive John Ions said the deal allowed Mr Geffen and his team to concentrate on managing their funds rather than be “distracted by the day-to-day aspects of running a business”.
In September, Premier and Miton, two Aim-listed fund groups, agreed an all-share combination, with Miton investors owning a third of the enlarged business. Miton’s shares surged 24 per cent on the day the deal was announced.
The merger, which is expected to complete by the end of the year, creates a company known as Premier Miton with assets of £11.5bn. The combined business would have had the fifth best sales in the UK retail market for 2018, the companies said when announcing the deal.
They added there was little overlap between the two companies’ fund ranges, but plenty of savings to be made, with up to £7m of annual costs to be trimmed within three years of deal completion.
“It is about positioning the combined group for future growth by giving it a stronger financial and operating base, with broader investment and distribution capabilities and an increased flexibility to invest in product development and people,” Mike O’Shea, chief executive of Premier, tells FTfm.
“Different businesses will have different drivers behind their M&A strategies, but the key to any successful combination is the fit between the merging businesses,” he said, adding Premier and Miton were complementary in terms of their respective investment capabilities, culture and distribution focus.
This month Merian Global Investors, the £26.4bn boutique spun off from Old Mutual, agreed to buy Kestrel Investment Partners’ multi-asset business, which would bring an additional £123m of assets. The deal was the first for Merian since Richard Buxton led its management buyout last year. Mr Buxton has since stepped back from managing the business to concentrate on running his investment portfolio.
John Ricciardi, the joint chief executive of Kestrel, who co-founded the business in 2011, will move to Merian along with his team of fund managers and analysts. He will report to Mark Gregory, Merian’s chief executive. Merian did not disclose terms of the deal.
Merian and Kestrel expect to complete the deal by December, subject to regulatory approval, at which point Kestrel’s business will be solely focused on managing £250m in UK small-cap equity strategies.
Merian said the deal would add a new area of specialism to the business, while widening the distribution reach for Kestrel’s funds.
“A theme that repeatedly comes up in our conversations with boutique fund managers is the increasing time and cost pressure of regulation, particularly as downward price pressure intensifies,” says Warren Tonkinson, managing director for distribution at Merian.
“To ambitious, but under-resourced fund managers, established firms with a developed brand and strong distribution, operations and compliance functions are increasingly attractive,” Mr Tonkinson said. “However, at the same time, they’re keen to avoid being swallowed up by a ‘giant’, where they are unlikely to get significant distribution attention and cultural alignment.”
Mr Riley says the impact of European Mifid II rules, brought in at the start of last year, were also playing a part in industry consolidation. The market reforms introduced additional costs for fund companies around paying for research and reporting requirements. “That has been an expensive change — especially for smaller managers,” Mr Riley says.
“UK-domiciled managers have also had to grapple with Brexit. Those who have been most proactive have had to deal with expensive preparations.”
This year’s dealmaking has not been confined to pure asset managers. Last month Tilney and Smith & Williamson agreed a £1.8bn merger to create the UK’s largest wealth manager with assets of £45bn.
When the deal was first mooted in August, wealth industry specialists told the FT it was being driven by rising compliance costs within the sector as the Mifid II rules on reporting and communicating with clients began to bite. One executive said the deal signalled “the death of the old-style stockbroker” as wealth managers were having to prioritise scale and process over personal relationships.
But another factor driving the deal is Permira, the private equity firm that owns Tilney, which bought the business in 2014 with the intention of pushing through consolidation in a fragmented market that was going through regulatory upheaval.
Tilney’s chief executive, Chris Woodhouse, was installed in 2017 having spent his career working for retailers, some of which were backed by Permira or rival buyout groups.
When Permira bought Tilney from Deutsche Bank in 2014, it had just merged with Bestinvest and had £9bn under management. After a series of small acquisitions, Tilney’s asset base grew to £24bn, which is set to nearly double with its merger with S & W.
Mr Pakenham points to several other wealth management deals this year, including Canaccord Genuity’s acquisition of Thomas Miller, Brewin Dolphin’s capture of Investec’s Irish wealth business and Brown Shipley’s £1bn buyout of NW Brown.
“These deals are aimed at providing a full wealth management service — something clients are increasingly demanding,” he adds.