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Jul 29, 2019

Proportionate regulation needed to address European asset management consolidation

Report reveals harm done to boutique operations

A more proportionate approach to regulation is needed in response to increasing consolidation in the European asset management sector, according to the New City Initiative (NCI), the UK-based boutique asset management think tank.

The paper – ‘M&A in asset management: Is it strangling boutiques?’ – explores the drivers behind ongoing M&A activity and questions whether decisive action needs to be taken at a governmental or regulatory level.

There is no doubt asset management M&A has been riding high over the last few years, with data from Mercer Capital revealing that both deal volume and deal count in 2018 were at their highest levels since 2009.

Consolidation at large asset managers has been driven by a combination of factors, including the reallocation of funds by investors into cheaper passive products and a dramatic increase in managers’ costs, notes the report.

It also cites regulations in the EU as having been particularly intense for asset managers, with rules such as the Alternative Investment Fund Managers Directive, Mifid II and the European Market Infrastructure Regulation all affecting the margins of fund managers.

The report further observes that there are ‘second order’ barriers, such as within the UK wealth management sector, where there has been huge consolidation as firms deal with regulatory complexity and look to achieve economies of scale. This leads to much larger pools of capital, which must be allocated to managers that can accept sizable investments, namely those with higher capacity.

The biggest managers are typically those that can onboard the larger flows, but smaller funds – or those that are disciplined about capacity and the liquidity they offer – cannot accept these outsized allocations. This is creating a widening gulf between big and small managers, notes the report.

And if investors are unable to access as many small and medium-sized asset managers, they may struggle to obtain portfolio diversification through wider exposures to niche strategies, which can also have a negative impact on returns, the report continues, arguing that boutique asset managers have a proven track record of outperformance against both their largest rivals and index trackers.  

Jamie Carter, chairman of NCI, says in a statement: ‘It is clear there is widespread concern among our members that continued consolidation in the asset management industry will force investors to allocate to only the largest, most dominant asset managers – ultimately depriving them of choice and potentially even returns.

‘If the UK is to have a competitive asset management industry [in the future], NCI strongly recommends that a more proportionate approach to regulation would be a good starting point to enable boutique managers to flourish alongside their larger peers.’