Sliding valuations should make asset managers ripe for acquisition. But private equity firms have been reluctant to bite. What gives?

Listed fund managers have been hit by a combination of falling markets and outflows from anxious investors, impacting their profits. But add strict regulatory burdens and ongoing pressure on fees, and asset managers start looking less attractive, even to the most aggressive of vulture funds.

‘You can see from the published results of listed asset managers that they’ve had falls in assets because of both markets and net outflows; because people have been removing money from active managers. From a potential investor point of view, they don’t want to catch a falling knife,’ said Hugh Elwes, a managing director at international financial services firm Stephens.

He said the pressures on asset managers existed before the downturn and would continue.

Citywire Amplify previously analysed the share performance of 30 quoted asset managers from around the world and found that their market capitalisations have plummeted 40% in total from $302.9bn to $181.4bn. The UK’s Liontrust, Impax and Jupiter were among the hardest hit.

But the steep falls in value are not enough to tempt private equity managers, according to Stuart Duncan, a research analyst at Peel Hunt.

He said it was hard to see the attraction of the sector compared with the more popular wealth management and financial advice industry.

‘If you look at why private equity is interested in wealth management, it is about the ability to consolidate and roll up these businesses and change the revenue model to go from pure advisory and build investment management capabilities. It’s harder to see that in asset management,’ Duncan said.

‘You could roll them up, but it has not always been proven that consolidation works particularly well in the sector. You find product overlaps; you don’t get the revenue synergies that you’d expect. With private equity, there are also financial considerations and given the regulatory capital constraints they have, it’s not easy to see how you can extract financial synergies as well.’

Slippy assets

PitchBook data recently showed that private equity activity in the European asset management sector in the first three quarters of the year recorded an increase of more than 33% in deal value over the whole of 2021. However, many of the deals were actually in the financial advice or platform sector.

The largest deal over the year, for example, was Cinven’s acquisition of True Potential for more than €2bn.

One important consideration for anyone looking to buy an asset manager will be how sticky their assets are, according to Elwes. ‘If they have long-term pension mandates, performance is OK as those tend to be quite sticky. But short-term retail assets tend to be less sticky,’ he said.

Although the listed asset management sector is not attracting much attention from private equity buyers, the rest of the UK stock market is seen as a good hunting ground.

A Numis poll of 200 senior private equity professionals found that 73% of their pipeline is focused on UK-listed companies, with 92% referencing the opportunity for public-to-private deals.

‘Once the market has repriced in the near term, there is a likelihood that with lots of dry powder in their funds and their expected improvement in debt markets, private equity will begin again to make bid approaches to UK PLCs,’ said Stuart Ord, head of M&A at Numis. ‘And they expect institutional shareholders to be receptive to their advances, given many remain under pressure from redemptions.’