Fund firms see second wave of M&A

MONACO (Reuters) - The asset management industry is poised for a fresh round of consolidation as economies teeter on the edge of a fresh slowdown, leaving weaker operators rescued by the 2009 rally looking vulnerable all over again.

An investor reacts in front of an electronic board showing stock information at a brokerage house in Taiyuan, Shanxi province June 29, 2010. REUTERS/Stringer

Delegates to the industry’s annual Fund Forum in Monaco are expecting further M&A, with smaller firms struggling under the weight of new regulations before being picked off by larger rivals, while continuing financial turmoil is expected to put more balance sheets under pressure.

“The biggest threat is the macro-economic environment,” said Tom Brown, partner at KPMG and EMEA investment management head. “If we hit a double-dip recession and the markets fall again, some businesses will be under a lot of strain.”

Those asset managers which were on the brink of collapsing in the depth of the financial crisis have effectively been bailed out by the subsequent market rally.

Another bout of market volatility and panic by investors over the sovereign debt crisis, or politicians cutting fiscal deficits too quickly, could mean the end for the weakest.

“We may see some selling of distressed asset managers,” said Brown. “The most vulnerable would be those that are independent and not well-capitalized, or part of a financial group that is itself weak.”

Unicredit CRDI.MI unit Pioneer has been mooted by several industry insiders as a company under pressure and losing staff and its parent has announced it is considering options.

The most high-profile casualty of the last sell-off was New Star, which was bought by Henderson HGGH.L as it faced a run on its funds as fears mounted over its debt pile. Some hedge funds also consolidated after sustained selling pressure.

A survey of European asset managers and administrators published just ahead of the Fund Forum by Kneip, an industry services provider, found that 90 percent of respondents believe there will be an increase in international M&A activity in asset management over the coming year.

This is partly due to the trend toward greater regulation and capital requirements.

F&C Asset Management's FCAM.L chief executive Alain Grisay sees smaller firms being hit harder as they are less able to absorb the costs of these changes.

European banks are also facing further problems with worries over the early removal of lending support from the European Central Bank a threat for those that cannot get funding in the interbank market, such as some of the peripheral EU banks.


Joe McDevitt, head of the London office at PIMCO, said there were concerns about banks carrying losses on their balance sheets or loans valued at more than they are worth.

“If there is a double-dip recession and more pressure on banks, that could trigger some of the bank-owned asset manager sales that didn’t happen the first time around,” he said.

Jim McCaughan, chief executive of Principal Global Investors, which is in the market for boutiques that have been hit hard by the financial crisis, also sees banks looking to offload non-core assets.

“In the last 6-8 weeks there has been an awful lot of talk about European banks selling their fund arms. One of the motivations for that is they will need capital if there is a rescheduling of Greek, Spanish and Portugal debt. When those haircuts come that will really hit some of these banks.”

Martin Gilbert, chief executive of Aberdeen Asset Management ADN.L, added that the trend toward open architecture in distribution is driving banks and insurers to sell.

Open architecture is where a distributor of funds is open to selling any product, as opposed to just selling the funds of its parent company. In Europe, banks tend to dominate distribution.

Gilbert believes the conflict of interest for banks and insurers in this model and the level of mistrust in the market will encourage those who still own asset managers to divest.

“If you’re a distributor it’s maybe not the correct thing to own your own asset manager as well. Merrill Lynch and Citi saw this and sold their fund arms before the crisis.”

ING IM is one candidate for a regulatory-driven standalone sale or listing, as it is considered likely to be worth more divorced from its parent’s banking and insurance businesses.

But Shiv Taneja, managing director of Cerulli Associates, is less convinced. “Most European universal banking models aren’t ready for the complete disaggregation of their business.”

He sees team lift-outs being popular, rather than whole company M&A. “It’s a more elegant way of doing it. If you’re not looking to buy a brand, why do you want to pay for it?” he said.

Editing by David Cowell