Feb 13 (The following statement was released by the rating agency)
European asset managers are set to rationalise
further, but a widespread M&A spree is unlikely, Fitch Ratings says. Most
managers may opt for less intrusive strategies, such as a reduction in the
number of funds and cost-cutting, to tackle margin pressure in a fragmented and
competitive market rather than face M&A challenges.
We have previously highlighted that the elimination of sub-scale activities and
the reduction in the number of funds will remain an important component of
industry rationalisation. Around 250 funds are currently eliminated every
quarter in the European market. Further rationalisation potential remains
because the market is fragmented. For example, 65% of cross-border fund ranges
do not have a single flagship fund with assets of more than EUR1bn.
We do not expect widespread M&A because there are not many large candidates left
and deals can bring considerable risks. There could be stark cultural
differences among managers and they may also face investor outflows. Other
challenges include a negative impact on an asset managers' credit profile if an
acquisition involves debt funding, regulatory hurdles in the approval phase and
over-paying in a competitive market, particularly if a bidding war is triggered.
In addition, the European landscape is markedly different from the US, with a
much larger captive business component - notably insurance assets - that is less
prone to change hands. This partly explain differences in the pace and scope of
consolidation on both sides of the Atlantic.
Nevertheless, we expect some further selective M&A activity among European asset
managers, particularly where institutional investors increasingly demand scale,
such as alternative investment, private equity and real estate. Aberdeen Asset
Management's (A-/Stable) acquisition of Scottish Widows Investment Partnership
and Schroders' (A+/Stable) acquisition of Cazenove Capital, both in the UK, are
examples of recent selective acquisitions. Aberdeen's deal will add scale to its
UK equities and fixed-income business, while Schroders expanded its private
banking operations. We expect the acquisition of smaller specialists to remain
popular ways for asset managers to add competences, products, clients or
European asset managers have also generated interest from overseas parties, such
as Bank of Montreal's recent offer for F&C Asset Management, and the sale of
Robeco to Japan's Orix and of Dexia Asset Management to New York Life in 2013.
These transactions enhanced growth platforms and increased geographical
diversification of previously North American- or Asian-focused funds.
Our "European Asset Management: Tapping Growth Through Rationalisation,
Innovation, Diversification," report at www.fitchratings.com has further details
on the sector.