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April 8, 2019

Monday Morning Memo: Is there a wider consolidation ahead in the European fund industry?

by Detlef Glow.

Rumor has it that Deutsche Bank may want to offload its asset management unit DWS in case of a possible takeover of its local rival Commerzbank. The thinking is that Deutsche Bank may need the cash from selling its asset management arm to finance the Commerzbank deal. The rumors have led large European asset managers including Allianz Global Investors, Amundi and UBS to announce their interest in DWS.

Since we witnessed a lot activity with regard to mergers and acquisitions (M&A) in the European asset management industry over the past few years, the interest in DWS may not come as a surprise, especially since there were more or less previous consistent rumors that Deutsche Bank was considering a sale of its majority stake in DWS. Nevertheless, the rumors leave the question open as to whether another merger of giants in Europe will be the start of the next consolidation wave.

From my point of view, the European fund industry is already in a consolidation phase, even as there were exceptions such as the Standard Life-Aberdeen merger, mainly with regard to smaller market participants.. These mergers and acquisitions happened in all parts of the asset management value chain and appeared also in the financial technology space. I strongly believe the M&A activity will further increase over the course of 2019 since asset management and the respective services are businesses in which economies of scale can play a vital role with regard to profit margins.

That said, the size of an asset manager can change quite fast, as investors will monitor what happens to their funds after the merger of two asset managers and pull out their money if the performance does not fit their expectations. With regard to this, asset managers need to be quite careful when they plan to take over a rival because they face the risk that key staff will leave the new company and investors may follow.

This looks a bit different for the service providers of the asset management industry, as these companies work behind the curtains and, therefore, are not so visible to the fund investors. Since size is an important factor for the service providers, I could imagine that we will see more price pressure in this part of the asset management industry, which will at the end lead to a consolidation in this part of the industry.

I also strongly believe that we will witness a further consolidation in the number of funds over the next few years since the operating costs of a fund are increasing permanently. The asset managers, at some point in time, will no longer subsidize funds that are not profitable in their product ranges to protect their profit margins.

These developments may not start soon, but I am pretty sure that a number of asset managers and service providers have their plans ready to go and will execute them when they get an opportunity or when markets get tough. As far as I am concerned, I don’t think a consolidation would be negative for investors, as this will not really take away investment opportunities. I expect the opposite, and I could imagine that the transparency within the European asset management industry will increase since the market structure will get simpler.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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