The Power of Politics in Shaping Global Markets
Morgan Stanley's experts, Betsy Graseck and Michael Cyprys, delve into the intricate relationship between politics and global markets.
Betsy Graseck: Welcome to our insightful discussion on the market's pulse. I'm Betsy, a renowned analyst at Morgan Stanley, specializing in U.S. Large Cap Banks and Global Banks and Diversified Finance Research.
Michael Cyprys: And I'm Michael, leading the research on U.S. Brokers, Asset Managers, and Exchanges.
Betsy Graseck: Today, we're tackling a significant shift in the financial landscape: the consolidation of asset and wealth management industries. We'll explore the factors fueling this race for scale and its implications for investors and the industry.
It's 4 pm in New York on October 13th.
Michael, before we dive into the M&A setup, let's discuss your insights on the asset management industry's future.
Michael Cyprys: Absolutely. Asset management is a colossal industry, managing a staggering $135 trillion in assets for a fee. We anticipate an impressive 8% annual growth over the next five years, primarily driven by private markets, solutions, and passive strategies, while the core active arena may experience slower growth.
But here's the twist: The growth catalysts are twofold. First, private markets are attracting increased investor allocations, especially from retail investors who are relatively new to this asset class. This democratization of private markets is facilitated by product innovation, investor education, and technological advancements, making access more inclusive.
The second growth driver is solutions, which might sound vague, but it's crucial. These are products and strategies addressing demographic challenges, particularly aging populations. Think of retirement income solutions, tax-efficient strategies, model portfolios, and sub-advisory mandates. We also foresee growth in outsourced Chief Investment Officer (OCIO) mandates and retirement-focused products.
Now, let's shift to wealth management. Betsy, what's your take on its growth trajectory?
Betsy Graseck: It's similar yet slightly slower, considering the larger base. We project a global wealth management growth of 5.5% CAGR, starting from a massive $301 trillion base, which is fascinating as it exceeds the $135 trillion in asset management.
By 2029, we anticipate wealth management to reach $393 trillion. The primary drivers of incremental opportunities are the ultra-high net worth and affluent segments, where evolving client needs and technological advancements create new efficiencies.
Interestingly, both asset and wealth management industries have been highly fragmented for years, more so than other financial sectors. This fragmentation can be attributed to the relatively lower capital requirements for successful operations.
Michael, returning to asset management, deal activity seems to be on the rise. What's driving this M&A surge?
Michael Cyprys: Indeed, M&A activity is picking up, and we expect this trend to persist. Several factors contribute to this. Firstly, growth opportunities are becoming scarcer as clients consolidate their partnerships. Over the next five years, we predict a significant decline in available slots, upwards of a third, intensifying the competition for growth.
Betsy Graseck: Hold on, upwards of a third? And these 'slots' you mentioned...
Michael Cyprys: Yes, from the asset owner or intermediary perspective, they're seeking to consolidate their providers and work with fewer asset managers.
Betsy Graseck: Ah, I see.
Michael Cyprys: Simultaneously, the largest firms are capturing a larger share of net new money, leveraging their scale to reinvest in capabilities and relationships.
Additionally, we've witnessed a recent uptick in deal activity, prompting more firms to consider strategic moves. The definition of 'scale' is evolving, and the bar is rising.
Betsy Graseck: Hmm, intriguing.
Michael Cyprys: Firms are strategizing to compete effectively in this dynamic landscape, amidst evolving client needs, rising business costs, and the pressure to harness AI. This is particularly challenging for mid-size money managers operating across multiple assets and global markets, with assets ranging from $0.5 trillion to $2 trillion. These firms are more inclined to pursue consolidation, enhancing capabilities and scale while generating cost efficiencies.
Betsy Graseck: Looking ahead, what types of deals do you foresee, and how do they differ from previous years?
Michael Cyprys: Several aspects set this period apart. Firstly, deal activity is embracing various partnership forms, and we anticipate this experimentation to accelerate. For instance, private market managers can access retail distribution without owning the entire infrastructure, while traditional managers can offer their retail clients access to high-quality private market strategies from reputable firms.
Secondly, the types of acquisitions in M&A are broadening. We identify three deal types: intra-vertical or intersector deals, where asset managers acquire peers to gain capabilities, cost synergies, or distribution; intersector deals, where asset management combines with wealth or insurance, aiming to own a larger portion of the value chain and get closer to end clients; and financial sponsor deals, where sponsors invest in asset or wealth managers.
Historically, M&A outcomes in asset management have been mixed, but we believe the future is promising. Firms will navigate cultural and integration challenges to pursue strategic activities successfully.
Betsy Graseck: Got it. What are the primary drivers of consolidation in wealth management?
Betsy Graseck: Several factors are at play. Firstly, an aging population of advisors and advisor-owners necessitates succession planning and client service continuity. Secondly, the need for scale is increasingly vital due to rising IT infrastructure costs, the imperative to leverage AI effectively, and the management of cyber risks. These factors drive the desire for mergers among wealth managers.
Another significant aspect is the expanding buying pool, including large cap banks with substantial excess capital. It's plausible that some of this capital could be invested in the wealth management industry, given its high ROE and stock market multiples.
We anticipate activity in this sector over the next few years. Michael, thank you for sharing your insights today.
Michael Cyprys: Thank you, Betsy. It's been a pleasure.
Betsy Graseck: And to our listeners, thank you for tuning in. If you enjoyed this episode, please leave a review and share it with your network.
