The rapidly declining profitability of traditional asset management is driving European fund houses to accelerate their pursuit of smaller players, with private equity firms becoming key targets in a wave of consolidation.
European asset managers are increasingly looking to strengthen their foothold in private markets. While building in-house investment teams remains a common strategy, the acquisition of established firms is now making headlines.
In April, AXA Investment Managers, which was itself acquired later, bought W Capital Management (WCP), a US-based private equity firm. This year, Amundi has also been active on the acquisition front, while M&G is currently exploring similar moves.
Andrea Rossi, chief executive officer of M&G, confirmed this month that he is in talks to secure deals with alternative asset management firms. “I am determined to expand our capabilities in private assets. There is more to come,” Rossi told UK Financial News.
Amundi, Europe’s largest fund house, has acquired Zurich-based private markets specialist Alpha Associates. This move came despite Amundi’s chief investment officer, Vincent Mortier, having earlier this year likened certain aspects of private markets to a Ponzi scheme.
Risks of over-investment
The risks of over-investment in private equity are not insignificant, says Mara Dobrescu, director of fixed income valuations at Morningstar. “Many asset managers are rushing to establish a presence in alternative investments, which can result in mistakes such as overpaying for acquisitions or hiring underqualified teams,” Dobrescu told Investment Officer.
She also questioned how these products will eventually be priced for investors, noting that some firms might raise fees to compensate for declining revenues from other segments.
Falling revenues
The profitability of traditional asset management has plummeted, from 15 basis points per asset under management in 2007 to just 8 basis points in 2022, according to data from consultancy firm Bain & Co.
Managing only traditional listed assets is therefore becoming a “depleted business model,” says Markus Habbel, Global Head of the Asset Management Division at Bain. He asserts that traditional managers must invest in private assets or face closure.
Bain projects that assets under management in private markets will grow by 9 to 10 percent annually until 2032, surpassing 60,000 billion dollars. This represents more than double the expected growth in public markets, with private market assets forecast to account for roughly one-third of total assets under management by 2032.
Habbel’s assessment seems to be widely shared within the industry. “It has become an existential issue for the industry,” Peter Harrison, outgoing chief executive officer of Schroders, said earlier this year. He likened the situation to an “arms race” as firms strive to build capabilities in private markets.
Growth market
For the acquisition targets themselves, the appeal of being bought by traditional fund houses is clear. Many private equity firms lack access to the “honey pot” of cash flow available to asset managers.
“In the past, private equity firms focused on pension funds and institutional investors, but that market is now shrinking,” says Han Dieperink, chief investment officer at Auréus. “By partnering with a traditional asset manager, they gain access to the manager’s extensive network. Moreover, many private equity firms are first-time shareholders who may be willing to sell.”
Dieperink notes that consolidation is happening quickly in shrinking markets, especially as the number of active investors declines in favour of passive index funds. “Private markets, unlike active mutual funds, represent a growth market,” he observes.
Another driver of consolidation is that acquiring a private equity firm is often faster than building one from scratch. Private equity operations integrate easily into the business models of traditional long-only investors.
“The synergy lies partly with the fund managers, as both often conduct research. They may need lawyers to set up a fund, but the synergy between a private equity fund and a traditional equity or bond fund is quite strong,” says Dieperink. “Much of the operation can continue to run independently.”
Dutch and Belgian activity
Dutch firms are currently more likely to be acquisition targets than buyers. For example, Dutch real estate investor Cairn Capital has been fully owned by Schroders since this year, which also took a majority stake in UK-based Greencoat Capital, a renewable energy infrastructure specialist, at the end of 2022.
In 2022, NN Group sold its investment arm to Goldman Sachs Asset Management for 1.7 billion euro, bolstering Goldman’s presence in European asset management, including private markets. This month, European private equity firm BlackFin Capital Partners announced it had acquired Amsterdam-based asset manager IBS Capital Allies.
A similar trend is playing out in Belgium. BlackRock earlier this month announced it would partner with Belgian firm Euroclear to distribute its private market funds via Euroclear’s FundsPlace platform.
Meanwhile, other major US players are making moves in Europe. In March, Franklin Templeton acquired European credit specialist Alcentra, which manages 38 billion dollars.
Dieperink understands the appeal: “Margins in private markets are higher. Prices may be higher than in traditional asset management, but the cash flow is very predictable due to the illiquid nature of the investments. When someone invests, you essentially know how much fee revenue you will generate for the next 12 years,” he says.
Investment Officer’s Raymond Frenken contributed to this article.