Mergers and acquisitions among investment managers last year were at their highest level since the aftermath of the financial crisis.
With a competitive fundraising environment and increased costs – driven by regulations including Europe’s new MiFID II rules – driving down profit margins, smaller players are finding themselves squeezed.
We are also seeing a change in investment approaches. Large investors tend to be consolidating more money into fewer managers and favouring those that have the ability to deploy capital across multiple products. Smaller investors, meanwhile, have become increasingly confident that they can pursue investments directly, so are often cutting out funds altogether.
This is leading to more multi-product fund managers and, driven by accumulating assets under management, a drift towards core-plus strategies, which generally mean lower returns and lower fees.
Traditionally, we have seen a split between large, branded managers with diversified product lines and impressive capital-raising ability and smaller groups that tend to be more nimble in deploying capital to secure higher returns. But scale is now beginning to dominate, leaving smaller players trying to figure out what to do.
Need for capital
Smaller funds are generally characterised by a need for capital whether for fundraising, to support growth and launch new products or because of a desire from the general partner to take some money out. Larger players, meanwhile, are often looking for opportunities to bolt on higher-margin products and additional real estate capabilities, diversify their product range or move into new geographies. Together, these factors have created a perfect environment for the consolidation we have seen in the sector.
Earlier this year, Tristan sold a 40% stake to New York Life in a bid to replace an existing investor and raise new funds. Shortly afterwards, Deutsche Bank floated a minority stake in its asset manager, DWS, receiving around €1.4bn (£1.2bn) and valuing the business at €6.5bn. Around the same time, Blackstone took minority stakes in PAG and Kohlberg & Co. We are very likely to see more sales of minority stakes in private equity real estate firms over the coming months.
Recognising the opportunity, Goldman Sachs Asset Management earlier this year closed the $2.5bn Petershill Private Equity fund and associated vehicles, to acquire minority interests in private equity managers. The fund was greatly oversubscribed, exceeding its $2bn fundraising target and showing the popularity of its concept.
Goldman is not alone in this space: Blackstone’s Strategic Capital Holdings Fund and Dyal Capital Partners are also dedicated to acquiring minority equity stakes in established alternative asset managers. Dyal has made strategic minority investments in Clearlake Capital and Vector Capital in the past couple of months alone, and just this week confirmed an investment in Round Hill Capital, the Europe-focused real estate investment, development and asset management firm.
So much M&A activity in the sector can be distracting. But in such a competitive environment, it is more important than ever to stay focused on what really matters: sourcing the best investment opportunities and delivering optimum returns.
Historically, investors were attracted to us for a specific reason, whether that was property, distressed assets or private equity. Eighteen years on, as we aim to evolve into a multi-generational business while maintaining an entrepreneurial, intellectually curious culture, investors are less concerned with allocation and more with our brand and track record.
Keeping our heads down and ensuring we deliver remains our key focus. But with investment approaches, political factors and the asset management sector constantly changing around us, this is sometimes easier said than done.