Low growth, a squeeze on fees and sweeping regulatory change are set to drive further consolidation among asset management incumbents in the U.K and beyond after Monday's $6 billion merger agreement between Henderson Group (HNDGF) and Janus Capital. (JNS)
And analysts say that the ongoing depreciation of the pound and an attractive corporation tax regime in the U.K. could also mean an increase in cross-border deals where the merged entity sets up shop in London, as the future Janus Henderson Global Investors plans to do.
The partners' merger will create a fund manager with $320 billion of assets under management. On announcing the deal on Monday they both pointed to the need for scale and diversification in order to cope with pressures on fee income as key drivers behind the merger.
"Yesterday's deal is absolutely not a flash in the pan. The asset management industry faces increasing regulation, ongoing fee pressures and a myriad of other challenges. Brand and scale is all important. We should expect to see a continuation of this trend," said Liberum Capital analyst Justin Bates.
London-headquartered firms Rathbone Brothers, Schroders and Ashmore Group have the resources to strike deals. Meanwhile Permira, through its portfolio company the Tilney Bestinvest, throws a wild card into the mix following a series of acquisitions in the sector during recent years.
Pressures on asset managers are increasing. Passive investment managers have eaten away at the share of the market held by active managers like Henderson and Janus in recent years, with offers to match benchmark performance in return for annual fees that can be less than half those charged by active managers.
Active managers still rule the roost in terms of funds under management, with $24 trillion globally, but the pot held by passive funds has swelled by 230% since before the financial crisis to $6 trillion, according to Morningstar data. Active managers' funds under management expanded by 54% in that period.
Despite choosing to de-list its shares from the London Stock Exchange in favor of a dual listing in New York and Australia, the combined Janus Henderson will be a U.K.-headquartered company. The companies cited the global nature of the city, its infrastructure and positioning in between U.S. and Asian time zones.
But Liberum's Bates added: "It is worth remembering that the U.K. corporate taxation environment is more attractive than most. Plus the weakening of sterling post Brexit has made the valuations of UK based/listed fund managers more compelling."
The pound on Tuesday fell to a 31-year low against the dollar and is now down about 14% since just before the outcome of the June 23 Brexit vote.
Meanwhile, the corporation tax rate in the U.K currently sits at 20% but this is due to fall to 19% from next April and then to 18% from April 2020.
This contrasts with the 35% corporate tax rate in the U.S. and is lower than the general federal corporate tax rate of 28% applied to investment firms in Canada.
"There has been a general trend for U.S asset managers, or North American asset managers, to want to globalize their business to some extent...I think that will be an element but at the same time there will be continued domestic consolidation as well," said Peel Hunt analyst Stuart Duncan.
Rathbone Brothers, which has £30 billion ($38.3 billion) of funds under management, is one asset manager that could be positioning itself for acquisitions.
The rate at which it attracts new funds into the business has fallen in recent times, with net inflows growing at 4.2% during the first half, down from 5.1% a year earlier. In addition, the nearly 300 year-old London-based firm is due to leave its headquarters in the upscale Mayfair area of central London in early 2017 to take up new residence in the financial hub known as the City.
It has taken on around 75,000 square feet of space, which is almost double the 44,000 square feet it has at its current location.
"We feel acquisitions are needed to deliver outperformance relative to the peer group," noted Liberum's Bates in research on the stock earlier this year.
Peel Hunt's Duncan flags a number of firms as having the cash for M&A, including Schroders and emerging markets asset manager Ashmore Group (AJMPF) . However, he also notes that whether they ultimately engage in a further consolidation of the sector is anybody's guess.
It isn't just industry incumbents which might be chasing after growth assets; private equity has an interest in the sector.
Tilney Bestinvest, a U.K. and U.S.-focused firm, announced the acquisition of Towry Holdings for $853.6 million in April this year in a deal that created an asset manager with $26 billion of funds under management.
Tilney itself is the product of a Permira private equity put-together that began in November 2013 with the acquisition of London-based Bestinvest, a wealth manager with £5 billion of assets under management at the time. It then grew to £9 billion in funds under management when Permira bought Deutsche Bank's (DB) - Get Report Tilney Investment Management in February 2014.
But increased scale might not prove to be the silver bullet for those hoping it will address the cost of increasing regulation.
"While there is no solid evidence that they pose a systematic risk or contributed to the banking crisis; the increasing consolidation of the industry into fewer, larger managers does concentrate risk," wrote Tim Thornton, chief operating officer of fund services at MUFG Investor Services, on Tuesday.
Thornton suggested that consolidation will merely beget more regulation for asset managers as the industry's titans grow in size.
He flags the prospect of central banks and other regulators eventually coming to view the larger entities in the sector as being on a par with systemically important banks and thus becoming subject to onerous capital requirements in the same way as the banking sector.