Analysis of how the covid pandemic has impacted the asset management sector by Hugh Elwes, Managing Director at Stephens Europe
The asset and wealth management industry – similar to most other parts of the economy – was severely impacted by the Covid-19 pandemic. News of the escalating severity of the global outbreak sent shockwaves through investment markets a year ago, as evidenced by the S&P 500 losing more than a third of its value during the latter part of the first quarter of 2020.
However, while the sharp market decline and investor outflows undoubtedly had a major impact on asset manager revenues at the time, unlike the continued tribulations for numerous elements of the economy, many asset management groups witnessed a ‘V-shaped’ recovery after the initial slump.
Risk assets, such as equities, roared back – particularly driven by the strong performance of the US-based tech giants. Asset managers also witnessed significant inflows from a broad spectrum of investors since the March 2020 market lows, enabling many groups to escape the large budget cuts evident in other industries.
Transitioning to a remote workforce
Even though revenues have recovered, Covid-19 has still had a profound impact on the asset management space, as business models rapidly reacted to the virus outbreak. Despite significant investment in back-office systems in recent years, widespread remote working had clearly not been anticipated. As one asset manager commented at the time: “our business evolved more in six weeks than it did in the prior ten years.”
However, while the transition to a remote workforce was relatively seamless for asset managers broadly, the institutional distribution channel needed longer to adapt – with the traditional due diligence process proving more difficult in the new virtual world. Asset managers focused on assets relying more heavily on in-person due diligence, such as private equity and real estate, also saw a slowdown in transactions. Nevertheless, despite initial difficulties, asset management groups quickly adapted, and the pace of activity continues to accelerate.
With technology enabling significant productivity improvements for asset managers, there are suggestions remote working may become the norm for the industry – with one major UK investment house announcing its plans to allow remote working full time after the Covid-19 pandemic. This would have major implications for real estate markets and associated areas.
However, we still believe offices will remain crucial hubs for asset management activity – enabling important face-to-face meetings and due diligence, staff training, and general culture building. Indeed, it is hard to imagine multi-billion-dollar deals being enacted strictly over Zoom.
Nevertheless, the remote working phenomenon is poised to continue for the foreseeable future, with Europe now witnessing the ‘third wave’ of Covid-19 infections. In the UK, Europe’s largest asset management market, investment houses are resigned to home or remote working for at least another couple of months. This means businesses will need to find new ways of building cultures and teams, while protecting the most important assets – people.
Beginning to explore opportunities
Rewinding to the beginning of the Covid-19 crisis, leaders of asset management groups focused internally, in a bid to ensure their businesses would continue to operate. While markets have recovered since the shock of early 2020, volatility is likely to be a feature of markets moving forward, as the full effects of the pandemic-related recession increasingly appear.
We believe the risks for equity-focused asset managers, in particular, are still elevated – with the continued threat of Covid variants, a bumpy economic recovery, further social unrest and additional post-Brexit ramifications.
This will undoubtedly force many asset managers into action. For example, smaller groups with weaker business models will seek to merge or get taken over by platforms with stronger international distribution capabilities. Additionally, all businesses will be looking to further reduce fixed costs by increasing outsourcing efforts.
Fee pressure will continue to escalate, driven by customers seeking better value for money and heightened transparency. The industry also remains inefficient and antiquated from a technology standpoint, so there is significant scope to streamline further.
M&A poised to accelerate
The pace of M&A has picked up in the wealth and asset management sectors in recent months, especially in the wealth space. After a pause for reflection last year, the market has become incredibly competitive again for quality assets with a proven ability to operate in post-Covid conditions.
For example, newer business models, such as AJ Bell and Transact, are highly rated and have been popular with investors. Pre-emptive bids to circumvent full sale processes have returned – as witnessed by TA Associates’ recent acquisition for the Fairstone Group, which was completed in just six weeks. In asset management, banks are continuing to sell or merge their asset management arms. For instance Wells Fargo asset management was sold to private equity in February and State Street is rumoured to be looking at options for its asset management arm SSGA.
Banks and lenders remain supportive and are keen to put money to work, as long-term growth trends for the wealth and asset management sectors strengthened over the past year – with savings rates rising sharply for those in employment. Even though we have yet to fully return to normal in business terms, healthy green shoots are clearly emerging.