Nearly half of asset managers are skeptical about the future of boutique companies. But they are wrong.
Amanda Tepper, founder and CEO of strategy consultant Chestnut Advisory Group, said boutiques are important to the health of the industry, despite the fact that larger companies have attracted the most assets in recent years. In fact, when it comes to mergers and acquisitions, transactions involving stores are more likely to succeed than those entered into by managers to gain momentum.
“This is exactly why we believe ‘store advantage’ acquisitions can create tremendous value for all constituents, with one big caveat: the deal must be executed well,” wrote Tepper and Todd Glickson, Senior Advisor, in the new Chestnut Advisory Group report on M&A in the asset management industry.
Dispatchers are finding that stores more often than not offer differentiated risk-adjusted returns, deep investment expertise, personalized products and strong support for their team, according to the report, which will be released shortly. The report incorporates the research of 450 professionals, including institutional investors, financial advisers, consultants and asset managers.
“What do the stores have that investors want? New and differentiated ways of thinking, and therefore new and different products that are out of the ordinary. Investors love the idea of potentially finding the next Bridgewater, ”said Tepper II. “That’s why we say there will always be a healthy appetite for shopping. It’s part of a healthy ecosystem in the industry.
Chestnut found that 17% of institutional investors want to increase their investments in boutique managers over the next 5-10 years. Thirty-six percent of consultants and 21 percent of financial advisors plan to allocate more to stores over the same period.
Winning store contracts involve businesses acquiring unique products that they didn’t have and that their customers need. Managers should also buy stores that match their brand and culture, according to Chestnut. Tepper pointed out that what the company calls “boutique benefit offerings” could mean buying a true niche asset management company, an investment capacity or a team that the company does not. not own, technology or even software reports.
Forty percent of asset managers surveyed by Chestnut expect demand for in-store investments to decline over the next five to ten years. In contrast, only 9 percent of consultants thought the same.
“This shows how asset managers misunderstand what investors want today,” she said.
Tepper goes against the grain of the shops, believing that they should be fully integrated rather than left independent. “Even if it’s more painful, the boutiques have to be part of this business. It’s more likely that this will lead to the maximum benefit, ”Tepper said.
“[But that] means that most of these transactions probably shouldn’t take place at all, ”she added. Tepper explained that if the founders want to sell 100% of the business, but want the acquirer to keep the name, identity and culture, then they don’t want to change at all, even though they will be owned by someone. one else. “It’s unlikely to work,” she said.
The report quotes a senior consultant’s research official as saying the company found that “only 1 of 65 asset manager M&A deals have benefited clients.” The rest “inevitably led to unfavorable changes in the acquired manager, as the roles of people changed and people left. And that’s the norm. ”
The Chestnut Report also argues that successful scale-based M&A deals are rare. These transactions must combine low-cost funds with unique products that stand out from the competition – a difficult combination to achieve.
For both stores, but particularly for scale-driven M&A, Tepper said, “We wanted to demystify the idea that ‘we’re not in the top 3 companies and we’re losing assets, I think I will buy my way out of this problem. ‘ No, you probably won’t, it will be a lot harder than you think.
The main driver of a company’s desire to grow is the prospect of lower costs and the effect on margins.
“Our experience is that the thesis of acquiring a ‘large-scale’ investment firm turns out to be a mirage in most cases. One asset manager research participant told us, “70% of asset manager mergers and acquisitions are a waste of time,” Tepper and Glickson wrote. “We agree with the sentiment.”
Tepper explained that managers overestimate the cost savings and fail to imagine that the impact on bottom lines is in fact “fleeting”.
She attributes this to the fact that reducing costs ultimately affects investments and other professionals who create the products and deal with customers. Therefore, these cost reduction efforts take longer and do not produce the desired results.
The biggest obstacle to these scale games, however, is the lack of pricing power that the combined companies actually gain from the deal. Tepper said that at the best of times, the merged company is able to maintain its fee levels on its best products. But many companies resulting from mega mergers have driven prices down as they bid to gain market share.