Asset Managers use Mergers & Acquisitions to enhance their digital capabilities mostly for their distribution set-up but also to strengthen their investment capabilities. M&A is the fastest way to build additional skills which sometimes seems far from their original background. ISPs (Independent Software Providers) including FinTechs benefit from the backing of large groups which give them access to a broader client base, an institutional stamp of credibility, and the financial resources to invest & grow.
This article offers an overview of the latest most significant deals which illustrate that asset managers now see data as a strategic asset.
State Street & Charles River: securities services providers’ intensifying shift into data
State Street Corp. (STT) has paid $2.6 billion in cash to prove it is serious about its transformation from custodian to tech-savvy data manager. The bank agreed last July to buy financial-data firm Charles River Development (CRD). Charles River has 745 employees and revenue of more than $300 million last year. Charles River will be a stand-alone division within State Street.
Charles River runs an end-to-end investment management platform (from portfolio management and risk analytics to trading and post-trade settlement) used by more than 300 investment firms, wealth managers and other financial-services companies - many of which overlap with State Street's client list – representing $25trn of assets. Bloomberg LP and BlackRock’s Aladdin are among Charles River's biggest competitors in the US (as well as Amundi Services in Europe).
One of the things that led State Street to Charles River is State Street Global Advisors (SSgA), the bank’s asset manager. “A couple of years ago SSgA was looking to rationalize their front office, which is something that most firms are in some form of doing and landed on Charles River and that's what led us to Charles River. SSgA will be one of the places where we'll integrate and where we'll control the front, middle and back office to create a streamline interface, which will not only create efficiencies, free up data, but give us access to the front office for the first time for some of our liquidity products and trading products” has stated State Street CEO.
The two firms combined offerings provides a strong coverage of the largest asset managers & asset owners: State Street works for 86 of the world's largest 100 money managers, Charles River on its part is used by more than 300 investment firms o/w 49 of the Top 100 asset managers (see STT/CRD positioning in the table below). State Street wants to scale Charles River's weaker penetration in the high-growth wealth management space, expand its services to Europe & Asia and leverage Charles River's wealth management solution to expand State Street's custody and accounting services.
State Street has been steadily adding to its own data and analytics offerings. The bank estimates there is an $8 billion revenue pool for those front-office tools. State Street expects the acquisition to be accretive to earnings in 2020. According to STT the transaction generates an internal rate of return of approximately 14% with cost synergies only and greater than 20% with full cost and revenue synergies. Particularly the bank expects $10 million to $15 million in expense savings related to the implementation of Charles River's front-office solutions within SSgA. However, some commentators believe that the transaction is risky because of its high amount, inherent in the acquisition of a technology company, and the investment deemed too late.
State Street and other custody banks such as BNY are betting technology and the digitization of financial markets allowing them to automate processes (RPA) but also giving them the tools to harness the reams of data they collect to revenues.
BlackRock & Envestnet : expanding advisor access to the asset manager’s technology
BlackRock Inc. takes a 4.9% equity stake (for $122.8mn) in Envestnet, one of the largest advisor technology providers for RIAs (Registered Independent Advisers): 11.8% market share, #2 All-in-One software in the US after Morningstar Office [1]. Three years ago, Envestnet acquired Yodlee, one of the leading financial aggregator provider.
Envestnet serves 93,000 advisers from 3,500 different firms representing over $400bn assets, including some of the largest banks, registered investment advisers and broker-dealers. Envestnet also partners with 1,000+ asset managers through its turnkey asset management platform (manager research, portfolio consulting & portfolio management). The company revenues have tripled over 5 years and were close to $700mn in 2017.
The deal will accelerate plans to tightly integrate Envestnet platforms with BlackRock Digital Wealth business, a conglomerate of the firm’s advisor tech business operations. Formed last year, Digital Wealth includes BlackRock’s robo offering FutureAdvisor, its risk analysis tool Aladdin and the retirement planning tool iRetire.
Synergies will also be pursued with BlackRock Advisor Center the digital suite of advisers resources for portfolio modeling, risk management and business support.
Analysts from William Blair see three ways for BlackRock to boost Envestnet development:
- the integration of BlackRock portfolio construction and risk tools should give the platforms an advantage over the competition
- the tie-up is likely to enhance advisors’ movement to fee-based accounts, which helps Envestnet’s growth as a primarily fee-based platform
- BlackRock is giving more resources for Envestnet M&A activity. MoneyGuidePro the leading financial planning software in the US (36% market share) is quoted by press as a potential target.
Partnerships with ISPs give large asset managers access to an advisor network and the ability to offer their products in a fully integrated package, a big selling point for RIAs. Invesco pursues the same objective with Intelliflo purchase (see article in this DigiBook release).
“The wholesale model doesn’t work anymore for asset managers to get their products in front of RIAs. The mutual fund marketplace worked for a long time with asset managers essentially paying basis points for shelf space. The distribution model is not what it used to be” says the CEO of T3.
BlackRock has a high degree of ambition: “We want to make BlackRock technology ubiquitous to advisers” says BlackRock global head of BlackRock Digital Wealth.
Its latest move early December to integrate iRetire income calculator with eMoneyAdvisor – the 2nd most used financial planning tool owned by Fidelity – is another step in that direction, as it could put BlackRock's retirement income platform in front of 50,000 additional advisers.
Franklin Templeton & RandomForest: integrating data science capabilities to enhance investment processes
Franklin Templeton Investments (FT) bought last March San Francisco-based FinTech start-up Random Forest Capital in a move that aims to boost the firm’s fixed income capabilities. San Francisco-based Random Forest Capital, founded in 2016, uses Machine Learning and statistical algorithms to analyze data gleaned from primarily non-bank, tech-focused, web-based platforms that originate secured and unsecured debt.
Following the acquisition, the Random Forest team will join FT Fixed Income Group investment team, complementing FT existing fundamental fixed income research with their expertise in private lending. The data scientists team is expected to support FT to source new investment opportunities in consumer, residential & commercial credit.
By embedding data scientists in each investment team, from conducting research to optimizing portfolios and executing trades, Franklin Templeton short term goal is to gain an information edge with which remedy the mediocre performance of its flagships funds which has led to large outflows. In a longer perspective, the asset manager belief is that “data is the new oil which gives tremendous economic power to countries and companies that produce it”. Time will tell if this was a wise foresight.
Author: Eddy Arnaud - December 2018
[1] Source: 2018 Software survey from T3 and Advisor Perspectives
