‘Bloated’ Asset Managers Face ‘Year of Calculating’ Amid Desperate Wave of Acquisitions
Asset managers are suffering “bloat” from booming pandemic markets and face a year of “tallying” as economic stimulus measures are withdrawn, according to an annual industry health check.
As favorable winds in public markets recede, many traditional managers are so desperate to expand into private markets that they are willing to ‘pay whatever it takes’ for acquisitions, say consultants Oliver Wyman.
Wealth and asset management partner Julia Hobart says the industry has been relatively lucky during the pandemic, continuing to operate with only minor adjustments, but the conditions that pushed markets to record highs are over. the point of reverting as rates rise.
“This will create a balance sheet for asset managers who have developed bloat in their business, become too reliant on built-in beta generating entry despite poor alpha, or who have been heavily reliant on cheap leverage to support transaction volumes and fund returns. “
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Working from home during the pandemic has shown that managers can operate with a much lower cost base.
“While most organizations will embrace a hybrid work model, some pioneers will seriously consider ditching the office and face-to-face contact, relentlessly digitizing and, where it is not essential to delivering value, d ‘Outsource all aspects of their business,’ says Oliver Wyman in his review of industry trends in 2022.
Before the pandemic, the firm estimated that a fully virtual asset manager could cut costs by 40%. “The experience of the past two years has shown that such a model may be closer to reality than to science fiction,” he says.
Meanwhile, the pace of consolidation among industry leaders will accelerate “as the needs and benefits of evolving become too great to be ignored” and some “mature and swollen companies” will be vulnerable to market offerings. Private equity firms seeking to make the kind of changes the incumbent managements have resisted.
A major focus for asset managers will be improving the reach of distribution, the report says, a trend highlighted by the recently announced acquisition of Interactive Investor by Abrdn for £ 1.5 billion.
Traditional managers are also rushing to increase their exposure to fast-growing private markets and alternatives, with many willing to pay for entire companies or high-priced individuals with the right experience, track record, and money. good relations.
“The pressure to find profitable growth opportunities has built up to the point where the risk of not having these capabilities will outweigh the risk of overpaying or messy integrations,” says Oliver Wyman’s report.
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The race for long-term capital will also intensify. Investors are increasingly willing to sacrifice liquidity to access better long-term returns, which will lead to a wave of new permanent capital funds better able to invest in illiquid assets.
In particular, there will be stiff competition between alternative and traditional managers for insurance company mandates, as companies seek to secure new sources of long-term funding.
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