The UK active management sector is under sustained attack. There is ongoing pressure on fees – smart beta and passive management continue to encroach on its traditional client base – while regulatory hurdles and shifts in technology have made it more challenging and expensive to run a business. And this is all before the implications of Brexit are considered. This should make the sector ripe for consolidation, but deals so far this year have been piecemeal.

Most agree that M&A activity should happen and the necessary drivers are in place. “There is a need for active management to consolidate in light of the growth of passive,” says Gary Potter, co-head of F&C multi-manager solutions at BMO Global Asset Management. “Equally, the banks will be looking for ways to enhance their bottom line growth, in a way that they can’t do in basic banking. They can raise debt cheaply and could well go and buy asset management businesses.”

Mounting pressure on fees is forcing asset managers to find new and more efficient ways of operating. Flows into passive vehicles reveal the scale of the challenges faced by the asset management sector – recent figures from Morningstar showed that investment into passive funds has been four times larger than into active ones since 2007. There is widespread recognition that in a lower growth world, fees have become a more important consideration.

This should, in itself, drive M&A activity but Deloitte showed in its 2016 Financial Services M&A Predictions research that asset managers can achieve scale relatively quickly. If greater assets under management (AuM) does not necessarily bring greater economies of scale a primary reason for activity is removed.

The most recent asset management deals have tended to be more strategic, characterised by investment houses buying expertise in individual areas. For example, Schroders acquired Brookfield Investment Management’s securitised products investment management team, GAM acquired European equities specialist Taube Hodson Stonex and Aberdeen acquired Advance Emerging Capital.

Brexit boost

Undoubtedly, the Brexit referendum result has created real problems for the UK sector. It threatens passporting, a problem for fund management groups with significant international businesses. Fund flows had dried up anyway, particularly in certain areas such as UK equities; UK-domiciled funds saw £38bn in outflows over the year to 31 May, according to figures from Thomson Reuters Lipper.

Tom MacDonald, head of banking transaction services at Deloitte, says there have been almost no M&A transactions cancelled, though some have been postponed. “Brexit has had little effect on M&A volumes overall. That said, activity had been a little supressed in the run-up to Brexit, so volumes are relatively stable at these lower levels.”

The most notable deal to go to the wall has been the Pioneer (the management arm of UniCredit) and Santander Asset Management deal. Talks had started in November 2014 to merge the two asset management businesses but fell apart in July 2016. While the collapse in negotiations was mostly due to regulatory hurdles, Brexit sealed its fate.

For the whole sector, much will depend on the final outcome of the Brexit negotiations. “If you are a UK fund manager selling to UK investors, there isn’t a great deal of change,” says MacDonald. “But if you are a multinational, your business could be more challenged. If we stay in the EEA, if we go for a Norway-style deal, there will be no change to market access. It will be painful, but manageable. But if we are fully out, it will be difficult.”

MacDonald believes that the depreciation of sterling may draw foreign buyers. “A lot of UK-owned enterprises now look very cheap for those buying in dollars or euros. Then again, they would need to feel there will be a bounce in the currency.” Within the fund management sector, this could create interest around some of the listed groups.

There is a scenario in which even a hard Brexit (leaving the EEA) could drive further corporate activity. UK asset managers will need a foothold within the EU for distribution. While many international companies already have a business in Dublin or Luxembourg, it could see some groups making acquisitions.

Certainly, some fund groups still appear to be comfortable talking about acquisitions post-Brexit. Most recently, Phil Wagstaff, global head of distribution at Henderson, said that the group was still looking at making acquisitions within the next five years.