Consolidate or capitulate: M&A in asset and wealth management

A high pressure business environment is leading to renewed consolidations among portfolio managers, with alternative assets particularly prized by acquirers.

At the end of 2024, a €5.1bn ($5.3bn) deal for BNP Paribas to acquire Axa’s asset management business was confirmed. The acquisition, expected to be completed by mid-2025, will create one of Europe’s largest asset and wealth management (AWM) firms, with more than €1.5tn in assets under management (AuM). Far from a one-off, this deal is the latest in a trend for an industry which is both growing and consolidating.

In the face of unfavourable economic headwinds, high interest rates, resurging inflationary pressures and an unstable geopolitical environment among other things, the growth of the AWM industry seems to be continuing full steam ahead. According to PwC’s latest report, global AuM for the industry is expected to grow at a compound annual growth rate (CAGR) of 5.9 per cent and reach a total of $171tn by 2028, up from $128.9tn in 2023.

As the industry grows, pressure to consolidate is expected to increase, and there seems to be no reason to downgrade PwC’s 2023 prediction that one in six AWM groups would disappear or be swallowed by larger rivals in the coming years.

Economies of scale

On the traditional investment front, several factors are causing asset managers to feel the pinch.

Firstly, the growing importance of technology — and particularly AI — is pushing many to embark on wide-ranging and costly digital transformation strategies, whose fruits will only appear in the medium to long term. Coupled with high compliance costs, particularly in Europe, alongside fierce competition with large managers who can weather these costs and make do with very low fees charged to investors, traditional small and medium-sized asset managers have been in rough waters for the last few years.

Moreover, asset managers of all sizes are competing to attract the ever growing ‘mass-affluent’ investor class, as well as millennial and Gen Z investors who are expected to inherit $68tn. This new generation of investors highly favours bespoke user-friendly digital platforms, alongside more simple investment products like exchange traded funds, putting even greater downward pressure on fees. Of course, larger asset managers with greater revenues and economies of scale can more comfortably absorb these lower margins.

In Europe, AWM firms are facing intense pressure from much larger US rivals, and the aforementioned acquisition of Axa’s asset management arm by BNP Paribas is only the beginning. Amundi had recently been in talks to acquire Allianz’s asset management arm and the Natixis deal was recently approved by Generali's investment committee. However, the former has been paused for the moment and the latter is mired in complexity and difficulties in identifying business synergies; highlighting the difficulty of such deals especially in Europe. Nonetheless, European banks will be watching such potential sell-offs closely as they mull the future of their own asset management arms.

New revenue-generators

Faced with such pressures, AWM firms need to venture outside their comfort zones in search of new avenues of profit. This is where the alternatives segment of the global AWM industry comes in.

The pool of alternative AuM is expected to grow at a faster rate than that of traditional investments, at 6.7 per cent CAGR. The giant asset managers are on a spree of acquiring boutique alternative investment firms. Case in point, BlackRock’s recent acquisitions of both GIP, an infrastructure investment firm, and HPS, a private debt manager.

Even the typically traditionally minded pension funds have started wading into alternative investments. In the US, state pension funds alone have already allocated up to 40 per cent of their assets to alternatives. That $68tn due to make its way into the hands of millennial and Gen Z investors also has an impact here. This generation of investors has a marked interest in even more exotic alternative asset classes like crypto assets.

Additionally, these investors are interested in ‘ethical’ investments with environmental, social and governance (ESG) and green themes; a big space for asset managers seeking opportunities in social infrastructure, clean energy start-ups, renewable energy infrastructure and so on.

A consolidating AWM industry will see these alternative and traditional assets brought under one roof to cater to changing needs of investors and to open new revenue streams. The larger AWM firms definitely have the upper hand. As Albertha Charles, global head of asset and wealth management at PwC, puts it: “A number of traditional asset managers have made high-profile acquisitions in the private space… we’re seeing a blurring of boundaries between traditional and alternatives.”

Asset management revolution

The AWM industry is undergoing rapid changes; a “revolution” as PwC puts it. Between fierce competition, new investment avenues in alternatives, an unstable geopolitical and economic landscape and catering to a new generation of investors, asset managers will need to adapt or wither on the vine.

Many of the changes outlined — including consolidation and greater investments in alternatives — have been pioneered in the US, and we are now seeing continental European and UK asset managers racing to catch up. If they do not, they will be beaten to the chase by US firms already establishing beachheads on European shores.

One high profile instance saw German house DWS lose out to US titan Goldman Sachs in an attempted acquisition of the Dutch NN Group’s asset management business. The Americans will also be looking forward to a particularly buoyant period pending the return of Donald Trump to the White House, where they await a deregulatory agenda and a pro-crypto SEC chairman.

Be it from the American powerhouses, European legacies or even Asian upstarts, we should expect M&A in the AWM industry to keep pace, if not speed up.

Mike Delano, asset and wealth management leader, PwC Luxembourg