‘Swollen’ asset managers face ‘years of accounting’ in the midst of desperate acquisitions

Asset managers are suffering from “bloat” due to booming pandemic markets and are facing a year of “bill” as economic stimulus is withdrawn, according to an annual health check in the industry.

As the tailwinds in public markets diminish, many traditional leaders are so desperate to expand into private markets that they are willing to “pay whatever it takes” for acquisitions, says consultants Oliver Wyman.

Julia Hobart, wealth and wealth management partner, says the industry has been relatively lucky during the pandemic, continuing its business with only minor adjustments, but the conditions that have driven markets to record highs are ready to return, as rates march higher.

“This will create an account for those asset managers who have developed bloat in their business, have become overly dependent on embedded beta, which drives inflow despite mediocre alpha, or who have been very dependent on cheap leverage to support volumes and return on funds. ”

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Working from home in the pandemic has shown that managers can operate at a much lower cost base.

“While most companies will settle for a hybrid work model, some pioneers will seriously consider abandoning the office and personal contact, relentlessly digitizing, and where it is not at the core of delivering value, outsource all aspects of their business,” says Oliver Wyman in its review of industry trends in 2022.

Prior to the pandemic, the firm had estimated that a full-fledged asset manager could reduce costs by 40%. “Experience over the last two years has highlighted that such a model may be closer to reality than to science fiction,” it says.

Meanwhile, the pace of consolidation among industry leaders will accelerate “as the needs and benefits of scaling become too great to ignore”, and some “mature, inflated companies” will be vulnerable to bids from private equity firms seeking to make the kind of changes incumbent management has made resistance.

A significant focus for asset managers will be improved distribution reach, the report says, a trend highlighted by Abrdn’s recently announced acquisition of 1.5 billion. GBP by Interactive Investor.

Traditional executives are also rushing to increase their exposure to fast-growing private markets and alternatives, many of which are willing to pay for entire companies or high-priced individuals with the right experience, track record and connections.

“The pressure to find profitable growth opportunities is built up to the point where the risk of not having these opportunities outweighs the risk of overpayment or messy integrations,” Oliver Wyman’s report said.

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The race to secure long-term capital will also intensify. Investors are increasingly willing to sacrifice liquidity for access to better long-term returns, which will drive a wave of new permanent equity funds better able to invest in illiquid assets.

In particular, there will be fierce competition between alternative and traditional leaders for insurance companies’ mandates, as companies seek to lock in new long-term sources of funding.

To contact the author of this story with feedback or news, email David Wighton

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