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Consolidation: An ongoing trend?

Posted by on 19 September 2017
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It is broadly accepted that add-ons and buy-and-build strategies are well-trodden routes to value creation, with many GPs generating strong returns from portfolio companies through building scale and driving revenue as well as cost synergies.

This industrial logic is now being increasingly adopted by LPs as well, with an increasing stream of M&A transactions, particularly in the separate account / fund-of-funds and investment consultancy segments of the market.

What is driving this consolidation?

At face value, the quest for scale appears to be paramount.  However, the underlying factors are much broader than pure size and cost synergies:

  • Given the ongoing shift in investors’ mindsets from historical asset class silos towards multi-asset strategies, traditional investment management houses are looking to bring in new alternative assets capabilities under their roof.  Acquisitions are often the quickest way to execute this.
  • Within alternatives, there is an increasing prevalence for investors to look across private markets as a single blended space rather than as separate property, real assets, private equity, private debt and infrastructure silos.  By definition, any firms which genuinely have sufficient breadth and depth to service clients across all of these alternatives building blocks are likely to be large rather than small.
  • Investors are increasingly rationalising and consolidating their relationships into fewer, larger and broader pots.  With greater fundraising gravity –  more money is going to larger players – there is a defensive as well as offensive impetus to consolidate in order to be a winner.
  • There is an increasing incidence of investors who look at opportunities thematically rather than by asset class (for example being able to satisfy an investor’s need for greater healthcare sector exposure regardless of whether that is through public or private markets) which requires the synthesis of capabilities across asset classes.
  • Last but not least, consolidation is an unintended by-product of the increasing regulatory and compliance burden globally.  The fixed costs of doing business are rising constantly, which larger firms are better able to defray.  Additionally it is the larger, better-resourced firms that are best positioned to adapt to and work around fundamental regulatory changes, be it the shift from DB to DC, or the implementation of Solvency II.

"A barbell-shaped industry is emerging"

Where are these trends leading us?  A barbell-shaped industry is emerging: at one end are highly focused boutique firms who are recognised leaders in their narrow geographic or strategic niches; at the other end are the large global multi-asset class players with broad reach and capabilities.  In the squeezed middle, generic separate account / fund-of-funds managers and investment consultants face an increasingly challenged future – not focused enough to be dominant in a specific niche, but too small to be competitive in the bigger pond.

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The implications of industry consolidation are manifold:

  • For investors, the increasing presence of large global ‘one-stop shops’ is generally positive.  However, the corollary is reduced choice as the hollowing out of the industry continues.  Many well-respected names have already been absorbed, and many others will inevitably follow in the coming years.
  • For acquirers, integration planning and execution are key, with important questions to address around how to align investment philosophies, processes and interests.
  • For GPs, this trend is both a blessing and a curse.  LP consolidation means fewer but larger investors – this will sharpen the divide between those GPs who gain early fundraising momentum and those who get stuck on the sidelines.

"For investment professionals, consolidation can have an ugly side."

  • For investment professionals, consolidation can have an ugly side. While many integrations proceed smoothly, in other cases the cost synergies involve rationalisation of personnel as well as potential cultural clashes and bruised egos.

What can standalone mid-sized separate account / fund-of-funds firms do to delay their day of reckoning?  How can private equity practitioners future-proof themselves in a changing and consolidating industry?  What are the broader unintended consequences of consolidation?  These are fundamental questions that we all face, whether you’re a big fish, a small fish, or anywhere else along the PE food chain.

Join our no-holds-barred discussion at the “Too hot to touch” highlight closing session of SuperReturn Asia 2017.

Consolidation: an ongoing trend? What are the drivers behind GP and LP consolidation and what does this mean for the future of the industry?

Wen Tan, Co-Head of Private Equity Asia Pacific, Aberdeen Standard Investments

Peter Pfister, Managing Director, Pavilion Alternatives

Yan Yang, Managing Director, BlackRock

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