The frenetic M&A activity in the asset and wealth management sector has slowed this year, along with deal activity across the board. David Prosser looks at the transaction drivers that continue to play a part in the sector’s business strategies.
After record years for M&A transactions in the asset and wealth management (AWM) sector in 2021 and 2022, data from Refintiv reveals more modest deal values and volumes during the first four months of 2023. Indeed, at £13bn, global AWM M&A between January and April was at its lowest level in this period of the year since 2017. In the UK, dealmaking was at its slowest level since 2020. In part, the easing reflects the fact that the past two years – and 2021 in particular – saw such significant M&A activity.
But dealmakers in AWM, like everyone else, are contending with a different economic backdrop. Rising interest rates and market volatility provide a less conducive environment for M&A, indicated in analysis just published by PwC. “In the near-term, we expect AWM firms to be focused on organic growth and digesting recently completed deals,” it reports.
Nevertheless, there is good reason to expect more M&A in the medium to longer term, when the economic outlook improves. Demographic change – ageing societies in the West and increasing wealth in developing markets – is a structural theme with clear benefits for investors in AWM businesses.
Huge demand for environmental, social and governance themes is also prompting firms to acquire new capabilities. And the fintech influence in AWM – with innovation underpinning new services and business models – is yet another potential M&A driver.
Adding fintech
Technological innovation has much to offer the AWM sector. Potential benefits include reduced cost and greater efficiency in the back office, but also an opportunity to expand the market; providing investment advice to savers is expensive – most firms therefore concentrate on wealthier individuals, but advice underpinned by tech could be more inclusive.
Going a step further, robo-advisers are digital platforms that provide automated, algorithmic investment services with minimal human supervision. But the industry is moving slowly, particularly with client-facing innovation. “The investment management sector is conservative,” argues one adviser to asset managers. “It is still not convinced that such models are going to capture significant market share.”
Nevertheless, the need to acquire new technology and intellectual property has been a driver of M&A activity in the AWM sector. Research from PwC suggests seven of the top 15 AWM firms globally have made significant M&A deals of this type in the past three years.
In 2021 JPMorgan paid nearly £700m for UK-based robo-advice platform Nutmeg. Launched in 2012, the firm attracted 140,000 clients prior to the deal, offering low-cost investment management services with an algorithm that automatically allocates savers’ cash to funds according to information they supply about their objectives and attitude to risk. More recently, though, the plunging value of technology stocks has given acquirers pause for thought. Last autumn, Swiss bank UBS scrapped its plans to pay $1.4bn for the US robo-adviser Wealthfront amid such concerns.
In the asset management sub-sector, the era of the mega merger at least appears to have largely passed. It is three years, for example, since the $4.5bn deal that saw Franklin Templeton buy its US rival Legg Mason, and two years since T Rowe Price paid $4.2bn for alternative credit manager Oak Hill Advisors; in the UK, Standard Life’s £3.8bn purchase of Aberdeen Asset Management, the most recent large deal in the sector, was as long ago as 2017.
However, deal activity has hardly ground to a halt. Asset managers still regard M&A as central to their strategies for growth, says Stephen Jones, who leads PwC’s financial services transaction services team in the UK. “It’s a means through which to build out your matrix so you have full coverage around the world,” he says. “Managers are looking for acquisition opportunities in the regions where they lack the presence they want and in the product areas they regard as priorities in those areas.”
Growing presence
One common focus, says Jones, has been to acquire new capabilities in alternative asset classes. The growing appetite of investors for exposure to these assets – often in search of yield during a period of low interest rates – has left managers who are focused on traditional equity funds scrambling to catch up.
“Private credit, real estate and infrastructure are very good examples,” Jones explains, although he points out that rising interest rates may have an impact on the trend.
It’s a point that’s echoed by Bruce Flatt, the chief executive of Brookfield Asset Management, the Canadian firm that is now the world’s second largest alternative asset manager. “Every industry eventually goes through consolidation – the alternatives industry is in the midst of this today,” he said in a letter to investors in the business in February this year, predicting further deals.
Managers will therefore be quick to take advantage of opportunities. In May, for example, the UK’s Liontrust agreed to pay £96m for Swiss fund manager GAM, which put itself up for sale following a series of problems that led to customer outflows. The deal provided a rescue for GAM, but also enabled Liontrust, best-known for its equity funds, to expand into fixed-income and alternative asset classes.
Opportunities for wealth
In the wealth management sector, meanwhile, slightly different forces underpin M&A, with activity still elevated – albeit with deals that tend to be smaller. The UK, after all, remains a remarkably fragmented market; the Financial Conduct Authority, the City regulator, suggests that more than 5,000 firms are authorised to provide wealth management services and financial advice in the UK.
“One thing we’re still seeing is the drive by private equity [PE] firms to pursue buy-and-build strategies,” says Neil Connor, a financial services deals partner and head of asset management at KPMG UK. “If you can bring these smaller businesses together on a single back-end platform with greater automation and efficiency, you can steadily add more clients and assets under management with improved operational leverage.”
Cash calling
PE firms also like the cash-generative, recurring-revenue wealth management business model, Connor points out. Examples include the fast-growing Wren Sterling, which is backed by the New York-based, financial services-focused PE firm Lightyear and has made a series of acquisitions over recent years. Similarly, Ascot Lloyd, now backed by Nordic Capital, has been involved in more than 80 transactions since 2017.
Private equity interest
Stewart Cape joined Progeny, the wealth management firm, as its head of corporate development last autumn, having got to know the business in his role leading the financial services M&A practice of KPMG in the North of England. There, Cape had advised Progeny on its 2021 sale of a majority stake to the New York-based private equity investor Further Global Capital Management.
The deal with Further provides Progeny with the firepower it needs to grow rapidly, Cape explains: “We intend to continue our clear and established acquisition strategy, acquiring select firms that add defined and significant value for clients and shareholders.”
One recent example is the acquisition of the Fry Group, which offers tax, estate and financial planning services. The deal marks Progeny’s expansion into international markets, offering it exposure to territories including Singapore, Hong Kong and the United Arab Emirates.
In March it acquired Cambridge-based Gibbs Denley, Progeny’s seventh acquisition since the takeover. Cape is relishing “the prospect of building the first global multidisciplinary advice business, supporting UK clients, families and businesses with all their advice requirements, wherever they may choose to live”.
Then there is Evelyn Partners, now one of the UK’s biggest wealth management firms and owned by Permira and Warburg Pincus. The firm was previously known as Tilney Smith & Williamson, which was formed in 2020 following the merger of Tilney and Smith & Williamson, which had both been acquisitive companies in the preceding years.
“I expect to see further consolidation in our marketplace,” says Jason Hollands, managing director of corporate affairs at Evelyn Partners. “Almost 90% of advisers in the UK have fewer than five members of staff, but that isn’t viable in today’s market,” he says. “The cost of complying with increasing regulation and the need to invest in digital technology make it almost impossible for these small businesses to stay independent.”
Corporates are also on the consolidation trail, as international suitors compete with domestic rivals to clinch deals. US wealth manager Raymond James bought publicly listed Charles Stanley last year, just a few months before Royal Bank of Canada acquired Brewin Dolphin. This year has already seen the merger of the private client businesses of Rathbones and Investec.
“It remains an attractive market, given tailwinds such as the growing maturity of defined contribution pension schemes, where a whole generation of savers will need help managing their money into retirement,” adds KPMG’s Connor. “There is more consolidation to come, and eventually we will probably see consolidators looking at combining once they reach a certain size.”
In which case, the lull in dealmaking seen so far this year may prove temporary. Indeed, PwC’s research suggests that activity could pick up again as soon as in the second half of 2023. Valuations in some areas of the market have dropped sharply, it says, which should encourage buyers – and disappointing returns from financial markets are squeezing margins, adding to the pressure to secure more scale.
South African expansion
“Everything we do is about how we can meet clients’ needs now and in the future,” says Chris Merry, CEO of multi-family office Stonehage Fleming, which announced the acquisition of South Africa’s Rootstock Investment Management late last year. “Sometimes you need more depth and resources to meet those needs – organic growth is important to us, but acquisitions have a role to play as well.”
The Rootstock deal is a case in point. Stonehage Fleming already has a presence in South Africa, but through Rootstock it gains access to the important local market of Stellenbosch, as well as additional expertise in South African equities that other parts of the business will be able to leverage. Stonehage Fleming, which serves high- and ultra-high-net-worth clients, also hopes to offer some of its corporate services and trust services through Rootstock.
Merry expects to make further acquisitions in the months and years ahead, but stresses the dangers to AWM businesses of getting M&A wrong: “We see a lot of potential opportunities, but it’s important to be selective. It only makes sense to do deals with firms that have the same type of clients as us and can add value for our existing clients; they also have to be a good cultural fit – to share our values.”
