They call it the “valley of death,” and its inhabitants are asset management companies that either are subscale or have undifferentiated products.

Large and differentiated asset management companies continued to emerge as winners in 2021. Large-scale players outgrew the market, while differentiated players further expanded their margins. Their differentiation came through a variety of means: access to alpha; environmental, social, and corporate governance (ESG); or specific investment themes. Meanwhile, companies that are neither large nor differentiated—those trapped in the valley of death—fell behind despite the tailwind boost of a bull market driving top-line growth across the entire asset management industry.

This dynamic drove a clear narrative for asset management M&A in 2021. Strategic acquirers, such as banks and insurers, sought to build scale and differentiation. Meanwhile, private equity (PE) investors were snapping up the opportunity to invest in outsourced architecture, focusing on rolling up infrastructure platforms and building out “multi-boutique” differentiated firms.

Banks get back in the game

The year 2021 will be remembered for a paradigm shift in asset management. For the first time in two decades, many large banks looked to reenter asset management after most had deprioritized the business in the 1990s and 2000s.

Why now, after such a long hiatus? The rationale for reentering may be linked to asset management’s capital-light infrastructure and the potential for high returns on equity. Following recent regulatory pushes to increase capital requirements for most core banking activities, this has become a highly attractive segment for bank portfolios.

Large banks are using M&A to quickly scale up their asset management offering. In a $7 billion deal, Morgan Stanley acquired Eaton Vance's $500 billion portfolio of assets under management, strengthening its leadership in the US market. Meanwhile, JPMorgan Chase, UBS, Deutsche Bank, and others are actively in the market for asset management deals, having been on the losing end of several large acquisition attempts.

Banks also are increasingly looking to differentiate their offerings in terms of geographies and products, and M&A is a key avenue. For instance, Goldman Sachs’ acquisition of NN Investment Partners expands its footprint into ESG, the European market, and the insurance asset management business.

While the American and European banks are further along in this trend, the Asian asset management market remains a collection of smaller, localized battlefields. Global asset managers have yet to establish a meaningful position outside regional hubs such as Singapore and Hong Kong, so the market remains highly fragmented. That said, consolidation continues, though on a smaller scale than in the US and Europe.

For instance, Allianz Group announced in July that it would acquire PT RHB Asset Management Indonesia, an asset manager with $480 million under management. In India, Sundaram Asset Management announced its acquisition of the asset management business of Principal India, and HSBC is in talks to purchase the India-based L&T Mutual Fund. In China, the China International Capital Corporation is on the lookout for acquisition targets in Asia as global banks make inroads into the Chinese market.

Private equity is paying attention, too

Private equity investors also are showing interest in this field, though they are taking a different tack. While corporate acquirers focus on building scale and accessing new markets, many PE investors are investing in scalable infrastructure, such as platforms, administration, software, or data.

These models are attractive as banks and insurance asset managers are selling and outsourcing their infrastructure capabilities. The scalable platform businesses also lend themselves well to PE roll-up strategies. For example, leading fund Hellman & Friedman showed the attractiveness of this investment strategy with its acquisition, management, and eventual $8.7 billion IPO of Allfunds in spring 2021.

Takeaways for M&A practitioners in asset management

All things considered, asset management is becoming an increasingly attractive M&A market. The sector achieves strong top-line growth, high profitability despite some margin erosion, and overall positive macro trends, such as high savings rates, low interest rates, and anticipated high inflation—all of which contribute to inflows to the industry. In such a market, leaders will continue to position themselves for success by building scale or differentiating their offerings.

M&A will be especially competitive as strategic acquirers look to build and expand over the next few years. If valuations continue to rise and as M&A becomes an even more attractive option in the asset management sector, it also will become more strategically important. Those that sit out are likely to be left behind.