Reprinted courtesy of the National Post
by Tom Bradley

Companies and industries go through life cycles. Oil and gas has one of the most predictable ones. To increase profits, large firms go into cost-cutting mode and sell off small, less-economic fields. This allows small firms and startups, which have a lower cost structure, to accumulate assets and build scale. Some of the small firms grow to become intermediates, although they don’t stay there long. They either continue growing into large firms or get swallowed up by one.

Airlines also have a definitive cycle. Think about WestJet. It started out with a bargain-basement offering and matured into a full service, multi-aircraft airline. As the company evolved, it left room for the next WestJet to come along and scoop up price conscious travellers. Today, we’re starting to see ultra-low-cost carriers (ULCC) in Canada, including WestJet’s own downmarket brand, Swoop.

In other industries, the cycles seem to be getting shorter. Firms in technology, biotech and consumer products don’t seem to last long before they’re scooped up by industry leaders.

Banks bulk up

In asset management, we’ve being going through the consolidation phase of the life cycle. There’s been a steady flow of transactions in Canada as the banks (mostly) and some industry consolidators have been buying independent, privately held firms. In 2017, CI Financial bought Sentry Investments while Sun Life added Excel Funds. This year, Scotiabank bought Jarislowsky Fraser in March and more recently announced it was purchasing MD Management. Fiera Capital filled out its lineup with CGOV, a highly regarded boutique.

I suspect we’re at the tail end of the bulking-up phase because the pace of acquisitions has slowed. The banks’ asset management divisions have reached a size where domestic deals no longer move the dial. They’re increasingly looking outside Canada for growth.

The other side of the mountain

I don’t know how the landscape will change going forward, but I’ve been around long enough to know there’s another side to the cycle. In the 1980s and 1990s, we saw the rise of the independents as firms such as Phillips, Hager & North; Jarislowsky Fraser; TAL; Beutel Goodman; Trimark; Mackenzie; Connor Clark & Lunn; Sceptre; McLean Budden; Altamira; Gryphon; and Knight Bain became a force. The emergence of mutual funds and defined contribution pension plans fuelled their growth, as did the decline of the trust and insurance companies that had previously dominated the institutional part of the market. Of note, the banks were a non-factor back then.

These firms all followed a similar storyline. A few talented analysts and portfolio managers decided to leave large firms and go out on their own. They started up with a narrow offering, usually Canadian equities. As they generated good returns and garnered assets, they expanded their product lines and distribution channels, which allowed them to grow further.

At some point, however, the senior shareholders in most of the firms wanted to cash out and thus the banks’ bulking up phase began. In each case, strategic reasons were given for the final transaction (more resources, better distribution, product enhancement), but succession was always the root cause. In some cases, weak performance also came into play.

It’s interesting that of the 12 firms listed above, only CC&L and Gryphon continue as independent firms today.

Rinse and repeat

Despite the high degree of absorption over the past 15 years, there are still many independents that have distinguished themselves through performance and/or asset growth (they usually go together). Also on the list are Mawer, Letko Brosseau, Burgundy, Canso, EdgePoint, Greystone, Leith Wheeler, QV Investors, Sprucegrove, Sionna Investment Managers, RPIA, Black Creek and Polar Capital. There are also many smaller firms that are rapidly moving up the rankings.

With the emergence of indexing and dominance of the banks, the asset management life cycle may not be as predictable as oil and gas or technology. But there will be a cycle. There are always talented, ambitious money managers who want to escape the bureaucracy and burden of managing billions of dollars to stake their claim and leave an imprint on the industry.