News BlackRock had struck another deal today underlined the significant pick-up in fund management consolidation over the last few years.

However, despite the emergence of behemoth firms like BlackRock, the concentration of assets is limited and more merger and acquisition (M&A) activity could be on the cards.

According to analysts at Bernstein Research,  BlackRock – the world’s largest manager – controls less than 5% of assets under management worldwide, while the top 20 asset managers run just 20% of total AuM globally.

In contrast, the top four asset services firms have 60% of the market share among them, which the Bernstein analysts dub as ‘edifying’ given these two industries are linked in the value chain and gain profits from the same stock of clients.

Many critics argue the asset management industry is overdue for consolidation, especially as firms are seeking to capture global growth opportunities and will need to invest in manufacturing as well as distribution capabilities.

M&A activity in the asset management industry has certainly accelerated recently to meet these growing needs.

This morning BlackRock announced its acquisition of independently-managed real estate advisory firm MGPA. The asset manager is also set to buy Credit Suisse’s $17.6 billion ETF business, following a deal announced at the start of the year.

These are representative of a number of big deals which have taken place over the last few years. From a UK perspective, one of the most eye-catching was in March when Wealth Manager revealed Schroders entered into bid talks with Cazenove, leading to a £424 million offer with deal in the final stages of completion.

Analysts at Bernstein point out the last six years has seen a surge in global M&A activity in the investment management arena, especially in terms of total value of deals.

Between 2006 and 2012, there has been 800-1200 deals announced, in which the target’s primary business is asset management, while total volume has averaged at $40 billion a year.

In contrast, prior to 2006 there were an average number of 250 deals per year, with $16 billion in annual dollar volume.

Why asset management M&A activity is set to rise

There is a raft of reasons why deal activity is set to remain at elevated levels. One of the supporting factors is the need for firms to diversify their business models to ensure financial stability.

The Bernstein analysts said in a note to clients: ‘The financial crisis demonstrated the benefit of operating an asset management business that is well diversified by asset class, product breadth and distribution focus.

‘Today, clients appear to have more preference for established, diversified, large and brand name firms—a trend clearly traceable in the alternative investment industry.’

The importance of having local presence is another point supporting firms seeking growth, especially in developing markets, although this can be slow and costly.

In terms of specific industries, the European exchange traded fund (ETF) market in particular remains too fragmented, Bernstein said.

The declining appetite for swap-based products and the number of sub-scale issuers will serve to put pressure on further consolidation, even among large names such as Credit Suisse.

However, Bernstein analysts are not expecting dealmaking to hit fresh heights in the immediate future.

‘While we think it reasonable that M&A activity could remain elevated, we are not persuaded that the lift in deal making over the last few years is a sign that rampant industry consolidation is underway.’