Focus on industry M&A – Why banks are holding back the ‘tsunami’ of asset management M&A
As Europe’s banks came under intense capital, regulatory and political pressure after the 2008 crisis, many practitioners expected them to unleash a wave of M&A, principally involving their fund management unit.
The fund divisions did not ‘fit well’ with the transactional model of investment banking. And as appetite for investment dried up since the following crises, the retail bank networks that had acted as dominant distribution points largely lost their usefulness of having that function.
Asset management seemed a somewhat moribund activity for banks in Europe last year, as the €5.2trn Continental fund management community suffered €70.6bn outflows, and total asset contraction of €314.7bn, according to Lipper.
(It should be pointed it did not do better, or worse, in Europe compared to many other regions.)
Despite these poor numbers, banks have generally held onto their asset management operations.
Indeed, the biggest bank in the biggest economy (Deutsche Bank) explicitly said it would not sell its retail fund manager, DWS Investments, as part of a now-ended structural review of its company.
In a three-year plan released earlier this month, the bank said a newly integrated ‘Asset & Wealth Management’ division was “an essential part of the universal banking model.”
Deutsche said, “following an extensive review, DWS Americas, DB Advisors, Deutsche Insurance Asset Management and RREEF will be integral parts of AWM.”
Add to this third-party alternatives businesses such as ETFs and you had “an efficient platform for future growth”.
Far from selling itself out of asset management, Deutsche has reaffirmed its commitment to it, and the AWM unit aims to double IBIT for its operating business from around €800m in 2011 to about €1.7bn in 2015 “while increasing assets under management and invested assets to about € 1trn.
Deutsche has also been active on the ‘A’ side of M&A, by buying and integrating Deutsche Postbank’s operations.
If onlookers expected new management board co-chairman to announce full-scale divestment of asset management, they were disappointed. Instead the duo seemed to have put fund and asset management, in their various forms, near or at the heart of the bank’s future growth.
Admittedly, Deutsche tried but failed to sell its RREEF alternatives unit to Guggenheim Partners after not agreeing terms of the deal, and it has sold its BHF-BANK operation to the Kleinwort Benson Group subsidiary of RHJ International.
One clue to one reason banks have not sold more of their asset management units may lie in the BHF-BANK deal. It will raise €384m cash for Deutsche – if regulators agree the action – but the deal would make up just 5% of the reduction in risk weighted assets Deutsche wants to make by March, according to Natixis.
One fund practitioner said generally: “If you are not achieving substantial objectives by selling fund managers, you may as well keep them. After all, they are one of the few parts of a banking group that shows potential for growth.”
Another reason banks may not be selling more heavily is because, as one practitioner noted, “it is damn difficult to do a deal”. Witness Deutsche’s discussions with Guggenheim about RREEF failing to agree terms, and the talks ending by mutual consent.
“The atmosphere around a sale is often that sellers don’t, or at least do not need, the unit being sold, so the buyer will bargain hard.” It is clear Deutsche was not willing to sell RREEF ‘at any price’.
One final reason for a lack of selling action in Europe may be the ‘cultural’ issues. A difference in approaches can make cross-border deals difficult, though this is not isolated to Europe, as large groups buying boutiques can often flounder.
The head of one fund servicing unit at a major global bank says the integration of staff after most M&A deals have been difficult, “and you have to be very careful not to tinker when you get assets in.”
One area of asset management that has seen some activity of late, largely for reasons of economies of scale and broadening investor bases, has been funds of hedge funds, without question a community under some pressure. Man Group has bought FRM, Gottex bought Penjing AM, Kenmar made for Olympia and UBP for Nexar.
One rival manager not involved in any of these deals, and not planning to ‘do’ M&A, said: “Most of the recent takeovers of fund of funds by bigger investment houses have not been a marriage of love, but rather of necessity.”
But in a recent report on FOHF M&A, Fitch Ratings said, whatever the reason for such deals, there are not many scale players with over €2bn left, as targets. For those with under €2bn, Fitch says, “obstacles exist such as poor financial condition, legacy issues, key person risk, in addition to the usual risks related to asset retention and cultural differences”.