According to the firm, consolidation of the asset management industry is an inevitability.
“The industry has seen both margin pressure and slowing organic growth in recent years and we see no catalyst for either of these trends to ease in the near future,” the stockbroker said. “We therefore agree that consolidation will likely move higher up the corporate agenda, as management teams come under increasing pressure to start delivering earnings growth again.”
However, the line between predator and prey, acquirer and target is not so clearcut, citing Henderson as a prime example.
While Numis believes the asset manager “could be one of the most likely acquirers,” the stockbroker doesn’t discount the possibility of Henderson as a target given the relatively diversified nature of the group.
“With a current operating margin at circa 36% with a management target of circa 40% medium term, we think there could be scope to achieve cost synergies in a scale acquisition, when compared to the high 40-50% achieved by the best in the industry and commonly targeted in acquisition,” Numis stated.
Numis also identified Intermediate Capital as a firm straddling the line between predator and prey.
Intermediate Capital could continue down a path of engaging in successful bolt-on acquisitions as it has done previously (Longbow and Graphite) but it could also prove a tempting acquisition for other asset managers looking for higher yield returns, Numis said.
“We note that in the increasing global search for income, managers that have proven records of delivering higher yield returns, especially within the fixed income space, are proving more and more in demand.”
Because of Jupiter’s current predilection for an organic growth strategy, Numis views bolt on acquisitions as unlikely and larger acquisitions as extremely unlikely, though they would be theoretically plausible given Jupiter's £100m in surplus capital.
Rather, Jupiter appears to be a highly strategically attractive potential target because of its “significant exposure to the UK retail market,” ”number of strong fund franchises,” “good distribution network in the UK and increasingly Europe” and “strong brand name.”
Numis similarly “can see a lot of merit in Liontrust being a target, given an unwarranted discount rating, decent franchise and potential for cost synergies.”
The stockbroker referenced Liontrust’s impressive UK/EU platform (a testament to its ability to punch above its weight) and management teams “with good long term performance track records” as selling points to larger overseas and domestic boutique companies alike.
The one asset manager Numis was not entirely sold on as potential prey was surprisingly Aberdeen. Despite the number of press rumours implying Aberdeen is "up for sale," Numis maintained that the sheer complexity of the acquisition would dissuade most buyers.
While it acknowledged that there is usually fire where there is the smoke of rumour, “Finding a buyer that could digest a deal of this size (circa £3.5bn market cap) and complexity, that also needs/wants an EM biased franchise (at what would be a psychologically difficult time to justify the purchase of EM assets to its own shareholders) is probably a hurdle,” Numis explained.
Numis also thinks it unlikely the CEO of Aberdeen will be willing to sell out "at a time when the business is not in its finest hour," unless a potential buyer was willing to pay a significant premium.
However, Numis conceded that Aberdeen's EM and Asia equities teams could prove strategically attractive to a larger asset manager.