Schroders’ acquisition of Cazenove Capital and Royal London Asset Management’s purchase of Co-operative Asset Management are part of a wider uptick in M&A activity. Corporate finance boutique IMAS puts the value of transactions announced in the first quarter in the fund management industry at 90% of the total for the sector in 2011 and 2012 combined.
Kevin Pakenham, founder of specialist advisers Pakenham Partners, expects this to continue. His firm’s figures show the number of transactions worldwide has been steadily increasing since 2010, when it touched a low of 138. That increased to 155 in 2011 and 180 in 2012. Pakenham expects a similar increase in deals this year, driven by rising markets.
He said: “There’s always a relationship with easy money conditions, strong equity markets and the level of transactions.”
Despite this buoyant backdrop, respondents to this year’s CEO Snapshot Survey have mixed feelings on M&A. While a higher percentage, 42% this year compared with 35% last year, said they are not interested in acquisitions, more are actively pursuing a strategy of growth by acquisition – up to 15% of respondents from 3% last year. Nor has respondents’ risk appetite for M&A increased markedly since last year, with 79% saying they felt the same about M&A as a year ago.
Mike Karpik, head of EMEA at State Street Global Advisors, believes the rapidly evolving regulatory landscape and sluggish economic growth have increased the challenge of big acquisitions. He said: “Given how difficult it is to integrate these businesses as well as the clouded regulatory environment, I think the appetite for large M&A is pretty cold right now.”
A third of survey respondents said they were open to acquisition ideas as an acquirer. Karpik added: “As the industry begins to focus on client needs in the market environment, there is more likely to be a market for building up capabilities with deliberate and targeted acquisitions.
Survey respondents also submitted lower estimates for the fair valuation of the European asset management sector, which is counter-intuitive given the brighter outlook overall for the industry.
Last year, almost half put the fair value of the European asset management sector at eight to 10 times earnings before interest, taxes, depreciation, and amortisation, 24% said 10 to 12 times ebitda and only 16% gave a valuation of less than eight times ebitda. This year, a third offered a valuation of eight to 10 times and 30% said less than eight times ebitda.
Dan Mannix, chief executive of boutique RWC, said: “There is definitely a trend that the gap between acquirers’ and sellers’ expectations is coming down. Increasingly, smaller, single-manager businesses believe there is value in a larger group absorbing them, to allow them to continue to operate their business. It is particularly acute in businesses that are subscale and lack diversification.”
According to Fred Hansson, partner at IMAS, valuations for most deals are being concluded between eight and 10 times EBITDA, a level at which “they are quite fully valued”.
Andrew Carter, chief executive of Royal London Asset Management agrees this level of valuation is fair. He said of prices: “They’ve recovered along with the equity markets, so it was a damn sight cheaper a few years back, but people weren’t in a position to buy.”
Prices do not yet seem to be hampering activity, which Pakenham says is being driven by wealth managers whose businesses have been challenged by regulation such as the Retail Distribution Review. Pakenham thinks transactions could even be back up to the 2007 record of 243 deals by 2014.
Whether that equates to consolidation in the industry is another question, though. According to European Fund and Asset Management Association figures, the number of asset management firms registered in Europe increased during 2011, just as did M&A activity. Last year, meanwhile, there was a fall in the number of firms – but not by much. It was down just 20, leaving 3,201 firms at the end of 2012.