Oliver Wyman noted in their wealth and asset management report with Morgan Stanley that they examined the global industry outlook, and have carefully looked at how mergers and acquisitions are now seemingly changing the asset management and wealth management ecosystem. In the latest report, they have outlined ways to “rethink talent” in the age of artificial intelligence.
The report added that wealth and asset management industries have long been among the “most fragmented” within financial services.
The research report also mentioned that despite the economies of scale of both industries, there was “no imperative to consolidate.”
According to the update, the bar to profitability could be “achieved with a tight-knit team and few clients.”
As noted in the report, there was enough organic growth to go around, and beta was “lifting all boats.”
Asset management clients themselves were “highly fragmented (pension funds, insurance companies, independent wealth managers) each working with a wide array of fund providers.”
The picture is changing, the report claims while pointing out that profitability is challenged with mid-sized players “displaying the lowest (and decreasing) operating margins.”
Although revenue margins continue to decline, technology and AI require evermore investment to remain competitive.
Industry professionals are taking an increasingly “disproportionate share of the net new money as they leverage their scale’s benefits to reinvest in capabilities and relationships to capture new capital- and resource-intensive pockets of growth.”
The report added that as asset management clients consolidate, internalize and shift to strategic partnerships, and wealth management clients “raise their expectations and professionalize their relationships (for example, via using multi- and single-family offices), opportunities for growth become scarcer and more concentrated.”
The update further noted that they expect the combination of these factors to drive “consolidation as mid-sized players become attractive targets for leaders seeking further scale and diversification.”
The report forecasted:
“By 2029, we expect 20% fewer wealth and asset managers and over 1,500 significant transactions.”
And as growth becomes scarcer and more concentrated, “intra-sector scale becomes paramount.”
As insurers and wealth managers reassess whether they “are the right owners of their asset manager, inter-sector opportunities emerge.”
The effects are already on display, the report revealed while noting that transaction numbers have “entered a new normal, at over 200 significant deals per year since 2022 (twice the rate of the previous decade) across both asset and wealth management.”
The report also noted:
“The asset management industry is no longer producing net new managers of mutual funds or ETFs, averaging over 150 for the past two decades, and the yearly net new additions of traditional asset managers has dropped to a handful over the past three years. Even buoyant private markets are displaying a similar trend.”
Success in this new era of consolidation will “require asset and wealth managers to consider M&A as a core lever of their growth strategies.”
Most deals so far have been intra-sector: mergers between traditional managers, traditional managers “acquiring alternatives, independent wealth managers consolidating. Success has been mixed,” particularly for asset managers:
The report also pointed out that less than 40% of flagship asset management transactions “improved cost-income ratios three years after a deal, half were in net outflows, and half of private market specialists acquired by traditional managers grew slower than the market.”
For wealth managers, multiple arbitrage has “driven most of the value creation in independent consolidation, while private banks have managed to effectively leverage acquisitions and divestitures to reprioritize onshore markets and improve profitability.”
Going forward, they expect inter-sector deals to “grab the biggest headlines, with insurance companies and wealth managers reassessing whether they are the right owners of their asset management businesses.”
The value of vertical integration has proven “elusive in practice,” either in terms of flows or valuations, leaving owners “at a crossroads: invest in convergence and maximize the value of ownership or monetize the asset through a sale to a strategic or, increasingly, financial buyer.”
This is now said to be materializing with insurers monetizing the value of balance sheets via sales or joint initiatives.
For acquirers, the execution playbook is described as being “clear yet arduous.”
As stated in the update, they will need to choose the “right target (prioritizing revenue complementarity and cultural compatibility over cost synergy potential), de-risk transactions (manage talent and asset attrition, reduce beta sensitivity in valuations), execute decisively to fend off competition, and run flawless post-merger integration to materialize ambitious return targets.”
This report, informed by Oliver Wyman’s project work and more than 30 discussions with senior executives at asset and wealth managers collectively managing “over $55 trillion of assets, delves into the drivers of consolidation, the different types of plays and their rationale, the track record of past deals and combinations, as well as their outlook for the next five years and a playbook for conducting successful transactions.”
