Morgan Stanley analysts Betsy Graseck and Michael Cyprys discuss
what’s driving unprecedented consolidation for asset and wealth
management firms.
Read more insights from Morgan Stanley.
----- Transcript -----
Betsy Graseck: Welcome to Thoughts on the
Market. I'm Betsy Graseck, Morgan Stanley's U.S. Large Cap Banks
Analyst and Global Head of Banks and Diversified Finance
Research.
Michael Cyprys: And I'm Mike Cyprys, Head of
U.S. Brokers, Asset Managers and Exchanges Research.
Betsy Graseck: The asset management and wealth
management industries are on the cusp of major consolidation.
We're going to unpack today what's driving the race for scale and
what it means for investors and the industries at large.
It’s Monday, October 13th at 4pm in New York.
Mike, before we dive into the setup for M&A, I did want to
get out here on the table. What's your outlook for the asset
management industry?
Michael Cyprys: Sure. So, asset management today
is, call it, $135 trillion industry, in terms of assets under
management that are managed for a fee. We expect it to grow at
about an 8 percent clip annually over the next five years. And
that's driven by faster growth in private markets, solutions and
passive strategies, while we expect to see slower growth in the
core active arena.
Two key drivers of growth there. First private markets. We expect
to see rising investor allocations from both institutional
investors, but also more importantly from retail investors that
remain early days in accessing the asset class. So, as we look
out in the coming years, we do expect this democratization of
private markets to play out, and we see that being helped by
product innovation, investor education and technology advances
that are all helping unlock access.
Second growth driver is solutions. And I think you're looking at
me a little dazed on what's solutions. And by that we really mean
products and strategies that are addressing demographic
challenges around aging populations. So, think about that as
solutions that provide for retirement income, as well as those
that offer tax efficient solutions. So, think about that as model
portfolios, as well as sub-advisory mandates. We also expect to
see growth in outsourced Chief Investment Officer, OCIO mandates
and broadly retirement focused products.
So that's the asset management industry in terms of our outlook.
Betsy, what's your outlook for the growth in the wealth
management industry?
Betsy Graseck: Well, somewhat similar, but a
little bit slower – off of a larger base. What does that mean?
So, we are looking for global growth in wealth management of 5.5
percent CAGR, and that is off of a base of [$]301 trillion, which
is intriguing, right? Because that's larger than the [$]135
trillion you mentioned for asset management.
So, in wealth, we were expecting [$]301 trillion in 2024 grows to
[$]393 trillion in 2029. And within the wealth industry, what we
see as the driver for incremental opportunities here is both in
the ultra high net worth segment as well as the affluent
segments, as client needs evolve and technology delivers
improving efficiencies.
And I think one of the interesting things here – as we think
about the look forward from industry perspective – is the fact
that both asset management and wealth management industries have
been very fragmented for a very long time, especially relative to
other financial industries. I think one reason is that they need
less capital to operate successfully.
But Mike, back to the asset management industry, specifically –
deal activity seems to be inching up. What are you attributing
this increase in M&A to?
Michael Cyprys: Yeah, so we do see M&A
picking up, and we expect that to continue over the next couple
of years. A number of reasons for that. First growth is becoming
a bit more scarce, with clients working with fewer partners. And
over the next five years, we expect the number of available slots
to continue to decline upwards of a third, which concentrates
growth opportunities.
Betsy Graseck: Wait, wait, wait. Upwards of a
third. And number of slots. When you say number of slots, you're
talking about it from the asset manager client perspective…
Michael Cyprys: Correct. From the asset owner
standpoint or intermediary standpoint.
Betsy Graseck: They're looking to consolidate
their providers?
Michael Cyprys: Correct.
Betsy Graseck: Okay.
Michael Cyprys: They're looking to work with
fewer asset managers.
Betsy Graseck: Mm-hmm.
Michael Cyprys: At the same time, the winners
are taking more share, right? So, our work shows that the largest
firms are disproportionately capturing a larger share of net new
money as they leveraged their scale to reinvest in capabilities
as well as in relationships.
And also, I'd point to the fact that we have seen a pickup in
deal activity already. And we think that's going to lead more
firms to consider strategic activity themselves, as they think
and rethink what constitutes scale. And we think that that bar is
rising…
Betsy Graseck: Mm.
Michael Cyprys: And firms are thinking about how
to compete effectively as the landscape evolves. And look, this
is all in the context of already a lot of challenges and changes
happening as you think about evolving client needs. The rising
cost of doing business, whether it's investing for growth or even
harnessing AI, and that's all pressuring profitability. We think
this is particularly a challenge for those mid-size money
managers that are multi-asset, multi-liquid and global. Those
with, call it, [$]0.5 trillion to [$]2 trillion in size, making
them more likely to pursue consolidation, opportunities to
bolster their capabilities and scale while also generating cost
efficiencies.
Betsy Graseck: So now looking forward, what type
of deals do you expect and how does it differ from past years?
Michael Cyprys: Sure. So, a few things are
different than past years. First is that the deal activity is
encompassing many forms of partnership. And we think that this
experimentation around partnership will only accelerate. That
allows, for example, for private market managers to access retail
distribution without owning the end infrastructure and the last
mile to the customer. It also allows traditional managers to
provide their retail customers with access to high quality
private market strategies from well-known and branded firms.
Second is we see a broadening out of the types of acquisitions
themselves when we talk about M&A, right? So, three types of
deals. First are deals within the same vertical or intersector.
So, think about this as an asset manager buying another asset
manager to acquire capabilities, to gain cost synergies or
bolster distribution.
Second type of deals that we're seeing are ones that expand
beyond one's own vertical. So intersector deals. So, asset
management combining with wealth or insurance, for example, where
firms would seek to own a larger, greater portion of the overall
value chain. And so, these firms are getting closer to that end
client. For example, an asset manager getting closer to that end
customer. And the third type being financial sponsor deals where
a sponsor is investing either as an in an asset or a wealth
manager.
Now you didn't ask me around the historical outcomes of M&A.
But I would say that the historical outcomes have been mixed in
the asset management space. But here we think that the
opportunity ahead is so bright that we think firms will find ways
to navigate and pursue strategic activity. But it does require
addressing some of the culture and integration challenges that
have plagued some of the deals in the past.
Betsy Graseck: Okay.
Michael Cyprys: So, Betsy, what do you see as
the key drivers of consolidation in wealth management?
Betsy Graseck: There's several. From the wealth
manager side, number one is an aging population of advisor and
advisor-owners, and the need to address succession and how to
best serve their clients when passing on their book of business.
So, we've got succession issues as the number one driver. But
additionally, the need for scale is clearly getting higher and
higher – given the costs of IT infrastructure rising, the needs
to be able to leverage AI effectively and to manage your cyber
risk effectively. These are just some of the drivers of desire to
merge from the wealth manager perspective.
Second. We have an increasing buying pool. If you just look at
the large cap banks, for example. Significant amount of excess
capital. Could we see some of that excess capital be put to work
in the wealth management industry? To me, that would make sense.
Why? Because wealth management is one of the best, if not the
best financial institution service for shareholders. It is a high
ROE business. It also is a business that commands a high multiple
in the stock market.
So, we would not be surprised to see activity there over the
course of the next several years. So, Mike, thanks for joining me
on the show today.
Michael Cyprys: Thanks, Betsy. Always a
pleasure.
Betsy Graseck: And to our listeners, thanks for
listening. If you enjoy Thoughts on the Market, please leave us a
review wherever you listen and share the podcast with a friend or
colleague today.
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