How Outsourcing Can Boost Asset Management M&A Success

Asset and wealth management mergers and acquisitions activity is booming, and the sectors are ripe for more. Asset management M&A success can boost profit margins, thus pleasing stakeholders, but failures though can be crippling, so it’s vital that participating firms focus on limiting their risks. And one of the best ways is through operations outsourcing.

Asset Management M&A Going Strong

Last year, mergers and acquisitions among investment managers hit their highest levels since 2009, as market participants came under intense pressure to consolidate. That trend continued into 2018, with total deal count in the first quarter up 32% on 2017. And while PwC pointed to a slowdown in asset and wealth management transaction activity in Q2, the firm suggests this is a blip, and that it expects “a bounce back in deal volume in the coming quarters.”

Merger Drivers Continue to Gain Force

Firms’ reasons to consolidate are numerous and compelling, and show no sign of letting up – especially for smaller and mid-sized managers that lack the firepower and profitability of the industry’s behemoths and boutiques.

These drivers include:

Revenue pressures

According to Boston Consulting Group, asset managers face reduced average fee income, as pressure from clients and regulatory demands for transparency put pressure on the pricing of individual products.

Regulatory reform

Complying with the vast sweep of ongoing global regulatory changes is forcing firms to increase specialist staff and invest in technology, driving up compliance and wider operating costs. The EU’s MiFID II has also effectively shifted research costs onto asset managers.

Digitalization and service expectations

The emergence of lower-cost disruptive new technology and digital solutions are raising investors’ service expectations. In response, firms have to acquire or develop new capabilities at an ever-increasing pace.

Diversification

Changing client needs and intensifying competition are driving managers to further differentiate their offerings by introducing new products and asset classes, expanding into different markets, and accessing additional distribution channels.

Market cycle

Markets, especially in the United States, have enjoyed a phenomenal run, but fears we are reaching the end of the bull market are encouraging smaller and less profitable asset and wealth managers to sell out to larger rivals.

Economies of scale

Revenue pressures, along with growing regulatory demands, back-office costs and technology spending are inciting firms to seek operational synergies and achieve greater economies of scale to boost their already-squeezed profitability. And if AUM growth falters as underlying asset markets stagnate or tumble, BCG predicts profit margins could fall from 38% at the end of 2017 to 30%, or even as low as 27%.

“Given the uncertainty of asset flows in the sector, we expect firms to continue to seek bolt-on acquisitions that offer scale and known cost savings from back-office efficiencies,” says Mercer Capital.

International law firm White & Case agrees, and predicts high levels of deal activity will be sustained over the medium term.

Why Investment Manager Mergers Fail

Yet despite the prospective benefits, many asset and wealth management tie ups fail. Two major banana peels prevent M&A success, as these hindrances commonly trip up partnering fund firms, according to Institutional Investor:

1. Culture – Investment firms’ different cultures, and their potential incompatibility, have been of underappreciated importance historically, but have been the undoing of many deals over the years.
2. Technology – IT systems integration is critical to a merger’s success, requiring extensive due diligence in advance, and rapid execution to embed the identified benefits. Without platform consolidation, all those cost and efficiency gains won’t materialize. Worse, the potential for data failures or problems in accessing information or accounts can quickly destroy a brand, especially in today’s digitalized world.

Operations Outsourcing Enhances the Odds of M&A Success

Organizations can do little to reduce the risk of culture clash, other than carefully assessing potential M&A partners in advance for the best possible fit.

But they can minimize the challenges, costs and potential failure points involved in their technology integration. And outsourcing offers the most effective and reliable answer.

As asset management becomes ever more complex, fast-paced, globalized and technology-driven, specialist outsourcing providers can offer important and proven benefits:

• Highly-trained operational teams have extensive experience of working with multiple clients and system infrastructures. This gives them the skills and knowledge to cope with the merged entity’s legacy operating environment and procedures, and helps foster the introduction of more best practices.
• Technology integration headaches are minimized, as firms no longer need to undertake the painful and lengthy process of amalgamating their disparate, often outmoded and incompatible IT systems.
• Operating efficiencies and cost reductions – one of the biggest reasons for engaging in M&A – can be increased and achieved faster than by trying to meld and streamline IT infrastructures and operating teams in-house.
• On-tap scalability gives investment managers the middle- and back-office infrastructure flexibility and knowledge to comfortably support their existing business volumes, as well as grow going forward without needing to invest in new technology, facilities and staff.
• Future diversification becomes easier, since the outsourcing provider’s experience of working in multiple geographies and with a wide range of asset classes, instruments and fund structures provides the merged manager with the ready-made operational capabilities to expand into new areas.

According to White & Case, the rise in “outsourcing of back and middle office functions, together with increased deployment of fintech solutions” will be key industry trends to watch. The flexibility that outsourcing affords asset managers, enabling them to take advantage of M&A opportunities and grow their business, is just one (compelling) reason why.