M&A volume in Australia’s fund management space is bouncing back from a tough 2023, with a need for scale and new capabilities driving dealmaking.

While 2024 volume has been bolstered by a single transaction – KKR’s proposed AUD 2.18bn (USD 1.45bn) acquisition of Perpetual’s [ASX:PPT] corporate trust and wealth management businesses – fundamentally, traditional fund managers are under pressure to acquire scale and synergies in the face of growing industry super funds and the continuing rise of passive investment products.

“I like to say that while ‘investment activities’ remain a boutique specialist game, the ‘business’ of fund management is very much a scale game,” says Nelson Lam, a Sydney-based partner and executive director of Berkshire Global Advisors, which specializes in the financial services industry.

In total, Australia has recorded 28 deals worth USD 3.1bn in the year to date (YTD), compared with only USD 450m across 24 deals in the same period last year, according to Mergermarket data. Full-year figures for the past 10 years show clear falls in 2019 and 2023, but this year is set for a storming comeback.

Other drivers of consolidation and deal activity among fund managers include succession planning, product diversification mostly into alternatives, and evolving distribution needs to access new markets such as B2C, high-net-worth investors, and family offices, said Lam, whose firm has advised on the sale of Premium Asia Funds to Antipodes and the merger of Loftus Peak with Orca Funds Management among this year’s deals.

Different strokes for different folks

On the target side, fund managers with capabilities in alternative assets, such as real estate (RE) and private credit, appear particularly attractive – there have been a slew of deals involving the private credit space this year.

In April, Centuria Capital Group [ASX:CNI] acquired an additional 30% stake in Centuria Bass Credit, increasing its holding in the Australian investment and alternative asset management firm to 80% for a consideration of AUD 57m (USD 37.8m) plus adjustments for net tangible assets. In May, HMC Capital [ASX:HMC] agreed to acquire Payton Capital, a Melbourne-based commercial RE private credit fund manager, for an upfront consideration of AUD 127.5m (USD 85m) in cash and scrip. In June, Regal Partners [ASX:RPL] entered into an agreement to acquire 100% of Merricks Capital for around AUD 235m (USD 157m).

There is strong interest in private credit fund managers, but the challenge is that, on the supply side, not many managers are of scale or have a track record, says Lam, who will host the Berkshire M&A symposium during the Sydney Alternative Investment Week later this month.

Lam also says that existing ‘multi-boutique’ platforms and large fund managers with healthy balance sheets have the advantage of scale and capital leverage to pursue acquisitions. Fund managers with distribution reach across the institutional and wholesale/advised retail network should benefit from deals with managers seeking distribution support, while players with track records of being good strategic partners for alternative managers will be attractive suitors, too, he adds.

Domestic bliss

Australia has 647 fund managers operating across the industry, with AUD 4.32trn (USD 2.88trn) of funds under management (FUM), according to a State of the Fund Management Industry Report prepared by KPMG and released by the Financial Services Council (FSC) in October 2023. FUM are up 13% from AUD 3.81trn (USD 2.54trn) in June 2020.

The industry is attractive from a sophistication, growth and operational base, but this attractiveness in a global context is also countered by lower margins from competitive fee pressures, as well as steeper distribution costs because of a highly ‘gate keeper-oriented’ sales and distribution landscape, according to Lam. This likely explains why most of the deals are done between domestic players, as evidenced by Mergermarket data.

However, the adjacent area of fund management services providers has seen more active offshore players, such as Japan’s Mitsubishi UFJ Financial Group, which bought Link Administration for AUD 2.1bn (USD 1.4bn) of enterprise value earlier this year; Dutch group TMF Group’s July purchase of Vasco Trustees, one of Australia’s largest fund services providers; as well as Apex Group, a global financial services provider headquartered in Bermuda, landing fund administrator Mainstream Group for nearly AUD 400m (USD 267m) in 2021.

Apex sees significant opportunities in Australia’s superannuation member administration market, as super funds prioritize access to data and increasing member engagement, says Nick Happell, the group’s regional managing director for Asia-Pacific.

With regulatory change over the past 10 years, fund managers are looking for services providers that are well versed with adapting and can invest in technology to offer solutions to the industry at scale, Happell explains, adding there is still room in Australia for Apex to make acquisitions, albeit opportunistically.