In 2009, the investment management industry saw a number of large mergers and acquisitions primarily as a result of diversified financial institutions such as banks and insurers divesting their non-core investment management capabilities. New research now out looks at emerging trends and what it means for further consolidation in the investment management industry.

Background:

The U.S. financial services industry will see continued merger and acquisition (’M&A) activity in 2010 as industry conditions continue to improve, according to a PricewaterhouseCoopers’ 2010 Financial Services M&A Outlook published on April 8, 2010.

According to the publication titled, On the Road Again – Transactions in an Opportunistic Market, M&A deals in 2010 will include continued consolidation among small- to mid-size investment and asset management firms.

Research Highlights:

While the stock market has experienced strong gains over the past year and most investment managers have increased their AUM during that time frame, a key theme for the investment management industry is to retain existing clients and capture new assets under management (’AUM’) by developing new products. Investment managers who need to fill out their product offerings will continue to look at M&A as a channel to decrease the risk of AUM outflows.

PricewaterhouseCoopers forecasts that banks and insurers will continue to sell off their non-core investment management capabilities, albeit at a slower pace than the last two years as a function of the increased balance sheet positions of most banks. It is worth noting that although the deal value increased from 2008 to 2009, the increase can be almost entirely attributed to the BlackRock / Barclays’ Global Investors (’BGI’) deal.

Looking forward, asset managers will continue the consolidation trend as a means to accomplish 3 goals:

• Reduce redundant costs
• Generate economies of scale
• Ease pressures on operating margins due to increased regulatory scrutiny

In conclusion, in order to be execute successful M&A in the investment management industry, companies will need to retain portfolio managers, improve operating leverage and successfully capture any predicted cost savings.  The findings of PricewaterhouseCoopers are sync with those of McKinsey & Company, who is also forecasting that the largest investment managers will continue to drive the majority of AUM growth.

As a whole, the industry is likely to be at the beginning of a multi-year M&A cycle as smaller managers will need to increase their scale as a means of not just protecting their AUM, but also driving efficiencies.

How do you see the industry consolidation trend playing out?
How will investment managers overcome the challenge of integrating investing processes and cultures as they merge?