Asset managers: higher rates will not put brakes on M&A

Asset managers are on a shopping spree. After notching up $68bn worth of mergers and acquisitions last year — the biggest haul since 2007 on Refinitiv numbers — deals show no sign of abating.

On Monday, Perpetual of Australia made a A$2.4bn ($1.8bn) bid for local rival Pendal. Last month, AllianceBernstein agreed to pay $750mn for alternative investment manager CarVal, hot on the heels of a similar acquisition struck by Franklin Templeton.

Buyers, under pressure from falling margins and low interest rates, are seeking to expand their offerings and asset bases. Counter-intuitively, tighter monetary policy is likely to accelerate rather than halt the trend.

Higher rates force fund investors to reassess capital deployment, often to the detriment of fund inflows. Some investors, happy with higher Treasury or cash yields, will redirect funds parked in other asset classes. Those fretting that higher rates may tip the stock market into a bear market will also head for the exits. Funds, meantime, have to balance diminishing top lines with rising costs.

Cost savings offer a bigger pull to smaller players, whose fees are being scythed. According to Morningstar, the average expense ratio paid by fund investors has more than halved, from 0.93 per cent in 2000 to 0.41 per cent in 2020, thanks to the rise of passive investing. That explains deals such as the merger of active managers Franklin Templeton and Legg Mason.

For bigger peers, the aim is to offer more products across more asset classes to a broader geographic spread of clients. One area pinpointed for growth is alternative investment.

At BlackRock of the US, assets under management at the company’s alternative business, which includes private equity and hedge funds, have more than doubled in five years to $265bn. AllianceBernstein will use its purchase of CarVal to help build its assets in the sector to almost $50bn. The alternatives AUM of Franklin Templeton tops $200bn as a result of its acquisition of Lexington Partners, completed earlier this month.

These deals expose the struggles of a fragmented industry to find profitable growth opportunities. Expect more to come.

This article was amended after publication to reflect the closing of the Franklin Templeton/Lexington deal.