Insiders name the 4 asset managers that could be the next takeover targets after Franklin Templeton's $4.5 billion deal to buy rival Legg Mason

• Franklin Resources and Legg Mason's $4.5 billion merger is the latest, and biggest, consolidation in the increasingly competitive active asset management space.
• Deals like Invesco's Oppenheimer acquisition, Amundi's Pioneer purchase, the Janus Henderson merger, and others have squeezed out the active asset management industry's middle class.
• Industry insiders, bankers, and consultants lay out which companies might be the next targets for the industry's biggest players, as they jockey for position.
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Compared to last year's muted asset manager M&A activity, 2020 is off to a roaring start.

The $4.5 billion Franklin Resources-Legg Mason deal combines two sizable active asset managers, makes one activist hedge fund a lot of money, and speeds up the top-heavy asset management consolidation.

The two managers' consolidation hints at the pressures these managers are facing amid a wider industry shift to passive from active investing. Given their size, the tie-up also surprised some analysts. As of the end of 2019, Franklin had $698 billion, while Legg Mason had $804 billion.

"We believed both firms were likely to be acquirers of smaller asset managers as opposed to either one being an acquisition target," Greggory Warren, an analyst at Morningstar, said in a report.

The deal announced last Tuesday was also a win for Nelson Peltz, the chief executive and founder of the activist hedge fund Trian Fund Management. Peltz disclosed a new investment in Legg Mason nine months ago, and took a seat on the asset manager's board with a Trian cofounder.

Trian stands to make a $70 million profit on Legg Mason in the nine months since disclosing a fresh stake last year and the sale, according to data compiled by Bloomberg.

Together, Legg Mason and Franklin Templeton's parent company would oversee some $1.5 trillion in client assets.

While insiders and industry experts find it unlikely that another deal this size could happen this year, there are several well-known managers that could be next in line as takeover targets.

"In the asset management space, we look for more strategic transactions in growth segments (private markets, ESG, solutions, ETFs) that help managers improve their organic growth," Credit Suisse analysts wrote in a report Thursday.

Pressures on the active asset management industry have only mounted during the 11-year-long bull market, which has made low-cost index funds and ETFs even more attractive to investors.

Some targets, like Wells Fargo Asset Management's unit or Waddell & Reed's Ivy Funds, may be spun-off. Others, like Russell Investments and Putnam Asset Management, have been on the sale block, sources say - but the right suitors and prices have not come along yet.

The need for scale may force prospective buyers' hands.

"We find many asset managers are struggling with differentiation, the pricing squeeze, performance hoppers and client retention," Carolyn Armitage, a managing director at Echelon Partners, told Business Insider.

"Many have chosen to add wealth management services to their offering to help redirect the client's focus to the overall relationship with the firm and the goal-based financial planning services offered," she said. "Others are opting to create enhanced scale by consolidating or merging/selling into larger organizations."

Here's why insiders say those four firms are ripe for the picking: