The outsourced chief investment officer (OCIO) industry is poised to enter the next phase of the consolidation lifecycle, entailing high levels of acquisition activity. The concentration of assets among the largest providers is expected to increase as industry-wide and idiosyncratic factors drive further consolidation, according to The Cerulli Report—U.S. Outsourced Chief Investment Officer Function 2024.

U.S. assets managed by OCIO providers reached $2.9 trillion by year-end 2023 and, according to Cerulli’s latest projections, will reach $4.2 trillion by year-end 2028, reflecting an average annual growth rate of 7.9%. Large-scale OCIO providers, those above the 90th percentile in assets under management (AUM), account for 61% of global OCIO assets, up from 49% in 2017, due in part to consolidation of competitors.

Acquisition activity is being fueled by large-scale OCIO providers and, more recently, wealth managers. Large OCIO providers have used their resources to gain scale through the acquisitions of competitor providers or other firms that enhance their investment platform. Acquiring small or mid-sized competitors has helped large OCIO providers gain footholds in client channels where they had not previously gained marketshare.

Wealth managers, specifically registered investment advisors (RIAs), are also seizing opportunities to improve their institutional offerings through acquisition, making it an important strategy for accessing sophisticated investment capabilities. “To gain scale among institutional investors, an OCIO provider needs sophisticated investment capabilities, expertise working with large client portfolios, and a well-established investment team. Acquiring a well-established institutional OCIO provider may help RIAs expand into the channel and gain access to better alternative asset capabilities for their private wealth clients,” says Chris Swansey, associate director.

At the same time, the rising costs of technology, compensation, and regulatory/compliance requirements have put pressure on many OCIO providers. Additionally, acquisition activity has led to increased turnover among senior investment personnel. So, while large-scale providers have shown an increased appetite for acquiring smaller providers, smaller providers have also shown an interest in selling all or a portion of their businesses.

Overall, OCIO providers gaining scale through acquisitions have accelerated the rapid reshaping of the industry. “Acquisitions from outside entities such as RIAs and private equity firms could lend resources to these providers that enable them to build new market advantages,” adds Swansey. From a macro perspective, however, the resulting changes could create a bifurcated industry with a few large-scale providers managing a heavy concentration of assets and many small providers fulfilling a specific niche without much opportunity for middle-market providers. “As large providers gain scale and smaller providers entrench themselves within niche markets, middle-market providers will need to differentiate their value,” concludes Swansey.