Perpetual/Pendal transaction symptomatic of saturated fund manager market

Perpetual’s acquisition of Pendal is occurring against the backdrop of the market for managed funds having reached saturation, driving up competition, according to a new report from Ibis.

In an analysis of the Perpetual/Pendal transaction, Ibis asked the question of “how will two undersized fund managers that have recorded declines in assets under management in 2021-22 combine to form a stronger business?”

It said that, in the past, asset manager mergers and acquisitions activity that banked on scale alone had lost revenue.

“Even after Perpetual and Pendal acquired US fund managers Barrow Hanley and Thompson, Siegel & Walmsley (TSW) respectively, clients withdrew approximately 15% and 8% of funds. Some other risks associated with the deal include:

• Loss of key staff;
• Increased debt as Perpetual is financing Pendal’s cash component with a new debt facility;
• Declining valuation if the business mix shifts to lower margin offshore asset management;
• Additional risks in cultural merging as the recently acquired firm TSW will experience its second ownership switch in 12 months; and
• While Pendal and Perpetual may mitigate the risks of Australian clients attrition by handling their funds autonomously, global clients might move their investments.

“Although executives from both companies have full confidence in the deal, the effects of the takeover could go north or south depending on external economic factors and how the acquisition is handled,” the Ibis report said.

“The Australian finance and investment services sector is in the mature phase of its economic life cycle. The market for funds is reaching saturation, driving up competition. To tackle this problem, the sector’s more established firms are resorting to mergers and acquisitions to cut the competition, achieve economies of scale and increase profit margins,” it said.

“Rising M&A activity is expected to further increase market share concentration in the sector. Increased consolidation among financial services businesses is also anticipated to discourage new players from entering the sector as fewer independent firms will be available to market new players’ funds.”