2018 could bode well for the investment management (IM) sector. The industry could see an increased effort by strategic buyers and investment firms to bolster technology infrastructure through add-on acquisitions, according to an M&A outlook study by Deloitte Touche Tohmatsu Ltd.
Overall, 2017 delivered solid M&A activity for IM businesses, with the average deal value increasing to $324.4 million from $191 million in 2016. To the same effect, the number of deals increased from 186 to 219 last in 2017. SoftBank Group Corp., led by CEO Masayoshi Son, acquiring alternative-asset manager Fortress Investment Group LLC for $3.3 billion in cash was among 2017's largest deals in investment management. KKR & Co. (NYSE: KKR) and Stone Point Capital’s purchase of Focus Financial Partners for $2 billion also made the list as one of the larger deals in the sector in 2017.
“We anticipated the increase in deal volume based on three key factors,” the study says, touting “collapsing margins experienced by IM players in general; internal cost pressures arising from long-overdue front- and middle-office technology upgrades; and external regulatory demands.”
Dealmakers surveyed by Mergers & Acquisitions in 2017 also anticipated M&A in financial services and IM to pick up, citing the uncertainty regarding regulatory matters to be “short-lived.” Pricing pressure and regulations constraining leverage for investment management firms will continue to be major factors in 2018, forcing key players to “include M&A in their toolbox of 2018 cost transformation levers,” according to Deloitte’s study.
Potential buyers and sellers should anticipate firms to pursue bolt-on acquisitions to strengthen infrastructure, drive back-office efficiencies and fill gaps in core product offerings to customers. The uptick in M&A and consolidation can be seen as a “means to build much-needed scale, especially with more businesses being sold to non-bank owners given the more challenging and restrictive regulatory environment for investment managers owned by banks.”
2018 deals involving financial services and investment managers include: Veritas Capital’s purchase of the U.S. public sector business from PricewaterhouseCoopers LLP; Oaktree Capital Management making a $250 million joint-investment in asset management firm Kudu Investment Management LLC; Blackstone Group LP (NYSE: BX) leading a majority stake acquisition deal for Thomson Reuters Corp.’s financial and risk division; and Goldman Sachs’ (NYSE: GS) potential purchase of personal finance startup Clarity Money.