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Increasingly, managers are looking for niche sales opportunities and this means it is likely that merger and acquisition (M&A) activity in 2012 will be most active when it comes to managers of alternative strategies.

"Despite an optimistic start, overall, deal values were subdued in 2011, reflecting market volatility and uncertainty, particularly in the second half of the year," said Barbara Wall, director at Cerulli Associates. "The aggregate transaction value amounted to US$17.3 billion last year, some 5% lower than the value in 2010."

The decline in the value of M&A transactions in 2011 reflects a general trend of M&A activity in niche areas, such as alternatives (with lower deal values) where managers sought to supplement existing capabilities. There were two major themes affecting the global asset management M&A landscape last year. First, regulatory and economic uncertainty brought about high failure rates and long lead times. Second, divestitures of unique or small asset classes resulted in increasing deal activity among smaller managers.

Although traditional manager deals returned in 2011, alternatives transactions are likely to increase again in the near future. Not only divestitures from large banks, but also the perceived growth opportunities for alternatives from increased allocations to this asset class-particularly by institutional investors-will be the underlying drivers of acquisition interest in alternatives (despite redemptions by high-net-worth investors disappointed by lack-luster returns). Another major driver in this area is enhanced distribution opportunities in Europe and Asia through undertakings for collective investments in transferable securities (UCITS) III offerings.

Exchange-traded funds (ETF) providers, whose products continue to increase in popularity, could also become acquisition targets this year. Although independent ETF providers have attracted the attention of sponsors and strategic acquirers alike, only a few transactions have been completed to date, as most independent firms choose to pursue growth independently. Nevertheless, large firms may need to buy their way into this market-which is highly concentrated among top players that benefit from first mover advantage, product placement, and scale-while independent ETF providers may be tempted to explore options with sponsors willing to pay for growth.

"Overall, I expect that M&A deal sizes in the asset management industry will be more at the medium and small end of the scale this year (that is, in the less than US$1 billion AUM range)," said Wall.

These findings and more are from The Cerulli Edge - Global Edition, March 2012 issue. CLICK HERE to request a press copy of this research.

Headquartered in Boston with offices in London and Singapore, Cerulli Associates provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.

BG