An M&A Boom for Financials

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

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

An M&A Boom for Financials

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