Every investment management company CEO feels the only way forward is to do M&A and get larger. I had done 6 M&As with previous firms, and can safely say 1+1 is not 2 in M&As. Here’s a thread of my experience in the industry.
(1) Investment management is a people business. Integrating system & process is the easy part. Telling fund managers what to do & how to do is tough. This is often required when M&As are done due to duplication of cost
(2) Most fund managers are set up like doctors in private practice where they run their own shop within a firm, but share the common resources. However in fund mgmt, even client relationship & processes can be unique - resulting in cost going iut of control
(3) CEOs at public listed investment management firms are incentivised incorrectly by placing AUM (assets under management) target as KPI. This causes an acquisitive mindset without thinking of how to merge the firms into one
(4) Another KPI trap is telling market one will save xxx millions by merging when in reality very few have the gumption to make cuts to deadwood, that have become permanent fixtures and developed larger than life personas within the firm
(5) Today the top 15 asset managers globally have more than US$1 trillion of AUM and this will get larger and the gap will widen. 15 years ago CEOs would be doing cartwheels if they had US$500bn AUM. Today that threshold has doubled, at the very least
(6) The Trillion Dollar Club as we call it is due to fund management fees dropping so to keep pace with same revenue you’d need to grow hour assets bigger & quicker, often done via M&A
(7) Fees have dropped due to rise in passive funds, especially in Developed Markets investing. Today an active public market fund manager can charge anything between 30-150bps management fee whereas it can be 5-20bps for passive funds.
(8) The problem has been how active funds have been defined rather loosely in order to charge the premium pricing when in actual fact most at closet index trackers. It’s estimated 80% of funds marketed as active out there are passive in nature if we put some strict criterias
(9) Firms are also bloated by over expanding. I’m a firm believer that we should focus on our core activity and outsource the non-core. But during the good days there was an obsession that we needed to do everything. When we got large, it was difficult to shed
(10) The rare ones who have done decent job integrating are those that have allowed investing creativity to be free, but centralising all common resources. Finding that balance is super difficult, at risk of having people departures, that lead to client departure
(11) Most long term institutional investors are attached to the fund managers individually. As part of the agreement, if the fund manager departs, most clients withdraw money too. So there’s an element of power fund managers wield over the firm. Which firms dont want to upset.
(12) Best solution is to focus on what you’re good at. It’s nonsense to think you’re good at everything and can become a supermarket of funds. Even Blackrock realise that their advantage is in passive and have started reducing their active presence
(13) Investment management is a very expensive business, hiring good people cost a lot of money. However, with good technology and sound philosophy it’s a scalable business which does not require much incremental cost when AUM rises
(14) This is probably the mistake with most large firms that stcak their team with 30-40 man teams when in actual fact the same work could be done with 1/4 of people. Large clients are finally realising this and (slowly) moving away from insisting on large teams
(15) With good information flow coming in from various sources, tge value add of teams will come in from identifying good assets, at right time & value, not writing generic research reports which many do now. For this, a good small team is sufficient
(16) This concern has led to many boutiques being founded by seasoned fund managers. But fund raising is not easy. Many good performing fund managers who are not client savvy and visible find it hard to move from large firm where sales was done for you, to being your own sales
(17) Nonetheless an interesting shift in the industry where the large ones will get larger, not necessarily better there will be more boutiques. But there will be a tier of very good stable mid tier sized managers who grow organically with the right culture
(18) Finally, my most successful experience has been ‘team lift outs’ where we acquire a team to come in and manage a specific fund. Rather than buying a firm. I’m certain this is the way to grow. Find good people (team) and bring them in, give them independence & be patient
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