Vertical integration is coming back into fashion for fund managers, according to global consultancy firm, PwC, as market, social and technological forces reshape the industry.
In the latest annual update to its global survey of the sector, PwC says asset managers will increasingly look to build more direct links to end clients to preserve a competitive edge.
“The need for control of distribution and the client relationship is also likely to spur vertical integration as [asset and wealth management] organisations bring together expertise from private banking, wealth management and other client access points with the core value drivers of investment performance,” the report says.
But as well as creating end-to-end empires, the asset management sector is also poised for another round of consolidation with almost 75 per cent of respondents weighing up potential mergers in the near future, for various reasons.
The study suggests about one in six (or 16 per cent) of asset management firms are expected to either close of merge by 2027 – an attrition rate of double the historical average.
“Gaining access to new segments, building market share and mitigating risks will drive deal appetite over the next year and beyond… though some transactions may be held up by valuation uncertainty and funding constraints in the short term,” the PwC paper says.
The rush for scale comes in spite of an expected rebound in global asset management revenues from an off-trend dip to US$545 billion last year (from almost US$600 billion in 2021) to a forecast high of US$622 billion by 2027.
According to PwC, size is increasingly important for fund managers as larger firms are able to squeeze competitors on fees, better control costs and afford the technological upgrades necessary to thrive over the coming years.
“A combination of competition and investor pressure continues to drive down fees. Passive funds have seen the sharpest drops in total expense ratios (TERs)—the total cost of running or managing a fund—but active funds will see faster falls in the years ahead,” the report says. “Our survey shows that asset managers expect the drops to continue over the next 12 to 24 months—and they could go on even longer. By 2027, we expect that the TER of active investment funds will decrease by 12% from 2022, to 59 basis points (bps), whereas the historically lower TER of passive investment funds will drop by 9% from 2022, to 13 bps.”
And at-scale managers will likely grab a bigger share of the revenue pool with PwC tipping the top 10 firms to control about half of the managed fund fees by 2027 compared to their collective 42.5 per cent share in 2020.
The report also notes direct indexing, private markets, exchange-traded funds, ‘tokenisation’ of assets and robo-advice will also continue to drive significant change in the asset management industry over the next five years.
Olwyn Alexander, PwC Ireland global asset and wealth management leader, said in a release: “Existential challenges are sweeping the asset and wealth management industry against a backdrop of social, economic and geopolitical disruption. The choice is simple – adapt to the new context or fail.”