European Asset Managers: M&A, IPOs and ETFs

Robert van den Oever: Welcome to Morningstar. Today I’m talking to Morningstar Manager Research Analyst Jeana Doubell and we’re going to run through some of the big moves that have been made by Europe’s biggest asset managers as these firms jockey for space in navigating the biggest trends on long term of the industry.

So Jeana, let’s start with an overview of the global asset management industry. What is the main trend driving strategic business decisions for these asset management firms?

Jean Doubell: Well, we’ve seen a lot of consolidation in the market, especially among the biggest players in Europe. This could just be due to taking advantage of general inefficiencies in the markets or due to downward pressure on taxes. It is also an ongoing trend. So, for example, one of the most recent big acquisitions that was announced in the market was the asset management firm BNP Paribas, which will acquire the asset management firm AXA. These are two big French investment names. And the AUM of the combined entity will actually reach 1.5 trillion in assets under management if we include their money market funds. Now that’s pretty big and will likely put the combined entity as one of the biggest asset managers in Europe. Ideally, we’d like, from an investor perspective, to see that market share growth, that revenue growth also pass through to savings for our investors, looking at the economies of scale, passing them on to the investor and probably , minus taxes. for the final investor.

van den Oever: Good. An exciting new development, a new combination, and coming just a year after two other major players, namely UBS Group and Credit Suisse, announced an acquisition, right?

Doubell: Yes, it is true. But I would say that in this case, the reason for the purchase was slightly different. You see, typically for acquisitions of this size, the regulatory approval process can be very long and drawn out. But in the case of UBS and Credit Suisse, we have seen Swiss regulators actively encourage this acquisition deal.

van den Oever: Okay, I see. And now, what made it different? Was there a different theme rather than the tax cut that drove the acquisition?

Doubell: Indeed. So if we take a step back, Switzerland was really one of the hubs of banking in Europe, with a strong and solid reputation for banking globally, really. And Credit Suisse was a big part of that. The company has existed for over 150 years. So it has quite a substantial history. Although its success peaked around 2007, just before the Great Financial Crisis. But since then, a series of scandals and management missteps have led to significant exits, which really culminated in 2022. We’ve seen huge exits leading into 2023.

And around the same time, we also saw the bankruptcy of two US regional banks. And while there were smaller players, Silicon Valley Bank and Signature Bank, their demise really sent shockwaves through the banking system globally. And so the French and Dutch and generally just European regulators were really on edge, including the Swiss authorities. And so they actively intervened and encouraged UBS’s acquisition of Credit Suisse to stop a banking sector or any possibility of a banking sector disappearing. So in this case it was really due to trying to maintain the reputation and the robustness and the transparency of the banking sector in general.

van den Oever: Yes, indeed. Reputation and transparency have been central points since the Great Financial Crisis. But how much are investors really influenced by all this?

Doubell: Quite considerable. We find that management missteps or a company charging high fees deters investors quite considerably. An example of this can be seen in GAM Investments, which in 2018 had a significant scandal surrounding its Absolute Return Fund range and which has led to significant exits in the years since. Even a management reshuffle or a significant tax cut was not enough for the firm to significantly regain its market position. So we then saw a takeover bid from Liontrust Asset Management, based in London, who offered to buy the firm. Instead, in a series of high-profile boardroom fights, that bid was stymied and we saw an activist group, NewGAMe, come in and become the main shareholder of GAM Investments. So it will be largely up to them to rebuild GAM’s reputation in the market and ensure their financial stability in the future.

van den Oever: Good. Interesting development there. Are acquisitions or potential acquisitions between players of this magnitude historically as common?

Doubell: Well, if we go back about 15 years, we saw the merger of Société Générale and Crédit Agricole Asset Management in 2010. And that basically led to Amundi, which is probably the biggest asset manager in Europe. They have consolidated this position through several acquisitions and moves. We saw Amundi’s IPO in 2015. In 2017, they also acquired one of their biggest competitors at the time. More recently, in 2022, they acquired passive specialist Lyxor Investment Management. It’s also quite interesting because it brings me to another trend that I’ve seen that has driven a lot of movement in the industry, actually, is to do passive investing. At the same time, as the pursuit of passive investments can cannibalize some of the returns on more active capabilities and products, we have also seen asset managers push alternative investments. Because for products like private equity and private debt, firms may charge slightly higher margins on those products because of the extra due diligence and long-term time horizon required for those products.

van den Oever: Good. And moving from there to examples, what key players come to mind when you consider pushing into both passive and alternative investments?

Doubell: Well, BlackRock is definitely a market leading ETF provider and that started or came to life with the acquisition of iShares, the ETF platform in 2009 from Barclays. Since then, it has truly become a household name, offering a wide range of products to investors across Europe. This makes sense given the 3.5 trillion in assets under management, so a sizeable firm indeed. More recently they have also been doing alternative investments and we have seen that through the announced intention of July 2024 they will acquire the alternative investment data provider Preqin based in London. This will be a considerable advantage for them, given that in alternative investments, one of the biggest challenges remains access to high-quality data. So for BlackRock to acquire Preqin and have more direct access to good, clean data will certainly improve their ability to be able to pursue alternative investments.

van den Oever: Okay, very interesting. So, in summary, we see market consolidation and the drive towards both passive and alternative investments playing a key role in driving business strategy among some of Europe’s biggest asset management names. Jeana, thank you very much for all your information on what is happening in the European asset management industry. For Morningstar, I’m Robert van den Oever.