Valuation of Asset Management Firms

Bernd Scherer

Asset management firms attract investor’s interest in times of recovering markets as they are seen as ideal recovery plays (due to their aggressive stock market beta). Rising markets will increase assets under management both indirectly (larger inflows as a function of larger wealth and lower risk aversion) and directly (performance related increase in assets under management). Another often quoted reason for the interest in asset management firms is the expectation by many market observers that the asset management industry is ripe for consolidation. Cost synergies are obvious, but diseconomies of scale are not. How do these thoughts enter the rational valuation of asset management firms?


As a first approximation, the asset management industry is hugely profitable, simply because of a rightward shift of the demand function for asset management services.11See Cochrane (2013) for a discussion on the size of finance as an economic sector. However, academic research in the 21st century has accumulated puzzling (seemingly contradictory) evidence that does not yet seem to be reconciled.

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