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Increasing pressures on fees and margins coupled with growing competition from ETFs and underperformance relative to benchmarks boosted M&A activity among asset and wealth managers last year.

The number of deals recorded in the asset and wealth management (AWM) space rose 5% to 140 but their cumulative value soared 72% to $14.9 billion, according to a new report from PwC. Four mega deals accounted for 85% of the total deal value in 2018 and three of them were announced in the fourth quarter.

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The four include Invesco’s $5.7 billion acquisition of Oppenheimerfunds, Hellman & Friedman’s $3 billion acquisition of Financial Engines and Victory Capital Holdings’ acquisition of USAA Asset Management for $1 billion.

As a result of its Financial Engines acquisition, Hellman & Friedman, which has a majority interest Edelman Financial Services, created the nation’s largest independent financial planning and investment management firm.

Invesco’s all-cash acquisition of Oppenheimerfunds leaves MassMutual, an insurance company, the largest shareholder in Invesco.

Looking ahead PWC expects “to see more deals as valuations normalize and owner managers adapt to a ‘new normal’ regarding margins and perceived enterprise value.” PWC also expects AWM margins will remain near 25% or higher, down from near 35% in the past, but still attractive.

“Private equity firms love the cash-generating ability of this sector,” according to the report. PWC expects private equity firms will continue to be interested especially in alternative asset managers as minority owners. Those deals in 2018 helped offset a broader decline in M&A activity in the subsector last year and “the momentum behind such deals will be strong in 2019 and beyond,” according to the report.

PWC anticipates that insurance companies too will continue to pursue acquisitions of asset and wealth managers as a complementary line of business. On the sell side, it sees asset managers, under pressure to grow AUM, looking beyond the U.S. to expand distribution and open to the possibility of an acquisition or joint ventures with foreign firms.

PWC is also forecasting continued declines in fees among actively and passively managed mutual funds, near 20%.

“Price will probably be the key differentiator amid intense competition for market dominance” [and] fee pressure will continue until asset managers improve their performance.”

As of mid-year 2018, only 15% of actively managed U.S. mutual funds outperformed their benchmarks over the previous 10 and 15 years, according to the PWC report, citing S&P Global’s SPIVA scorecard. “Without improving their performance, they risk facing greater outflows than before.”

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