mergers and acquisitions calculator

Canada’s largest asset-management firms will be on the lookout for acquisitions in 2019 as they seek to build scale, add unique capabilities or diversify their investor base, thus continuing an ongoing trend of consolidation in this space.

“The large consolidators are getting larger,” says Darcy Hulston, president and CEO of Calgary-based independent asset-management firm Canoe Financial LP. “There are not many mid-tier asset-management shops left.”

(Canoe acquired Montreal-based Fiera Capital Corp.’s retail mutual fund business late last year.)

Squeezed by rising operations costs, heavier compliance burdens, shifting client expectations and tougher competition, independent asset-management firms increasingly are open to fielding attractive offers of sale or mergers.

“What we’re seeing is business succession plans [at founder-managed independent firms] being accelerated,” says Philip Heywood, transaction services and financial services due diligence leader with PricewaterhouseCoopers LLP (PwC) in Vancouver. “More assets are coming to market, so we’re expecting to see more transactions occurring as a result.”

The consolidation trend in the asset-management industry might be driven, in part, by “people [running companies] wanting to cash in and being offered a price that they couldn’t refuse,” says Dan Hallett, vice president and principal with Oakville, Ont.-based HighView Financial Group. “That ties in to succession planning issues or, in some cases, lack of succession planning.”

There have been several high-profile acquisitions over the past 18 months. In July 2018, Toronto-Dominion Bank acquired Regina-based institutional money manager Greystone Capital Management Inc., which had $36 billion in assets under management (AUM). In March 2018, Bank of Nova Scotia acquired Montreal-based institutional and private-client asset manager Jarislowsky Fraser Ltd., which had $40 billion in AUM. In August 2017, Toronto-based CI Financial Corp. acquired mid-sized independent Sentry Investments Corp., also of Toronto, which had $19 billion in AUM.

The trend toward consolidation is, in part, a function of demographics – the baby-boomer generation is moving into its decumulation phase and therefore moving assets out of investment funds – and of firms seeking growth in a highly competitive marketplace, says Paul Bourque, president and CEO of the Investment Funds Institute of Canada (IFIC) in Toronto: “It’s a challenge in a mature industry to achieve the growth that you may have gotten in the 1990s or 2000s.”

Consolidation also is being driven by increasing need to secure access to distribution, Bourque adds: “[Distribution] firms are heightening and strengthening their product review policies. They’re limiting the number of [asset] managers they want on their shelves. That’s partly just to develop a value proposition and also to manage the cost of compliance.”

Asset-management firms also are seeking consolidation to deal with shrinking margins “driven by a real pressure on fees,” says Chris Pitts, national leader, asset and wealth-management practice, with PwC in Toronto.

“[The pressure] is coming from the regulators, which have focused investors on the fact that fees are important to returns, and from the easier accessibility of ETFs and other types of passive products, which have substantially lower fees,” Pitts says.

Indeed, the ETF industry has been growing quickly, almost tripling to 33 providers from 12 over the past three years, according to the Canadian ETF Association (CETFA) in Toronto. (See Gradual shifts in the fund industry.)

In some cases, acquisitions of asset-management firms aren’t primarily motivated by scale, but instead by an attempt to broaden capabilities in certain asset segments, such as the private-client and institutional spaces, says Kendra Thompson, managing director, wealth management, North America, with Accenture LLP’s financial services group in Toronto.

“The more complex, sophisticated, higher-risk or higher account-threshold type of advice – whether it’s institutional or the ‘productization’ of institutional strategies – we see several asset managers exploring that space,” Thompson says. “Certainly, we expect large insurers that have investment-management capabilities for their own capital – as well as the Canadian banks – to explore [the institutional space].”

That wider range of capabilities helps firms create more “outcome-based” products, such as target-date funds, Pitts says: “[Consolidation] means larger players have a broader array of production capabilities to create different products to help clients.”

Diversifying asset-management capabilities through acquisition also allows firms to reach coveted investor segments, such as those invested in pension funds.

“What I would be looking for is the stability of the AUM – that’s what’s going to make [consolidation] more attractive,” says Susan Christoffersen, professor of finance with the Rotman School of Management at the University of Toronto. “[Pension investments are] a stable source that you’re going to extract management fees from.”

In most cases, Hallett adds, “you want [to acquire] a higher-quality business, which is typically associated with stickier AUM.”

Of course, Canadian asset managers remain interested in acquiring foreign asset managers to add scale, broaden asset- management capability or gain access to a foreign market. For example, in March 2018, Fiera acquired Hong Kong-based asset manager Clearwater Capital Partners LLC, which had US$1.4 billion in AUM.

“[Large asset managers] continue to be interested outside of the borders of Canada,” Pitts says. “I see that as a continuing trend.”

The current volatility in North American and global equities markets that began in late 2018 is not likely to dampen the trend toward consolidation in Canada, but could be a factor in deal- making in the near term.

“[Firms] might want to wait until AUM rebounds – until public market prices rebound – because that will really give [vendors of companies] maximum proceeds on the sale,” Hallett says. “But there are always circumstances under which some companies feel more of a need to sell.”

Adds Heywood: “[Volatility] might make certain products more attractive in the short term, and may move those types of assets up the priority list for a buyer.”

Consolidation in the investment-management industry is likely to lead to similar products being merged because of an acquisition, Hallett says. However, with the large number of products available to Canadian investors – according to IFIC, there are about 3,400 individual Canadian mutual funds in the marketplace – a reduction in that number is not necessarily bad for advisors and their clients.

“There will be the odd example of a good product, or a good subadvisor, that is sacrificed because of a merger, where maybe the product decision is made more for corporate reasons than on pure investment merit,” Hallett says. “But, on balance, I don’t think [consolidation] is significantly negative or positive, frankly. I would say the positive is that [consolidation] gets rid of a lot of products we don’t need.”

Pitts suggests that the current cycle of consolidation inevitably will result in a wave of new asset-management startups, as occurred after previous cycles of consolidation.

“I would absolutely expect that,” Pitts says. “This is a very entrepreneurial industry. We’ve seen, even in the past five years, as deals have happened for certain assets, the founders of those [acquired firms] often have gone on to set up a new business in somewhat competing space within a matter of months of having done the deal.”

Says Hulston: “The consolidators get big, they maybe get a bit soft and, all of a sudden, scrappy new innovators with ambition, hard work and good value creation come in and nip away at market share.”

However, Thompson suggests, the competitive pressures on the industry, including the overall commodification of products, make succeeding extremely challenging for new entrants unless they have secured access to distribution and can offer clients services that include advice.

“It’s very unlikely,” Thompson adds, “and probably, I would say, ill-advised for [an executive] spinning out of an [acquired] asset manager to start a boutique asset manager that doesn’t have captive distribution or doesn’t have an advice experience associated with it.”

Pitts agrees that the landscape has changed for new entrants: “Somebody starting up has perhaps a harder job to get going, to get to critical mass quickly [than in the past]. They really have to bring something unique [to the marketplace] or they have to partner with somebody to get that distribution and get to scale quickly.”

“You need to be excellent at absolutely everything to have a shot at building your business,” Hulston adds. “Your compliance curriculum has to be excellent, you can’t have a bad headline, your client service has to be excellent – and that’s the way it should be.”