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Asset and wealth management deals insights: 2021 outlook

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Asset and wealth management deals stay hot in the second half of 2020

The last twelve months have marked a banner period for Asset and Wealth Management deal making. Deal volume hit a high-water mark relative to the past few years. Similarly, the value of announced deals hit $53.4bn, a new record. Morgan Stanley was behind two of the largest deals this year: the $13.1 billion acquisition of E*TRADE Financial Corp. and a proposed $6.8 billion acquisition of investment manager Eaton Vance. But smaller-scale consolidation across the industry was also robust. In all, we saw 220 announced deals during the period, up slightly from the 212 announced deals in 2019.  

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Challenges and opportunities for deals in 2021

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.  Explore national deals trends.

Asset and wealth management deals outlook

We expect the strong pace of deal activity to continue into 2021. However, the impetus for transactions has already begun to shift. Many deals in 2020 were led by more traditional drivers of cost cutting and economies of scale, as firms looked for ways to cope with fee compression. Looking forward, we see more desire by some to expand capabilities, products and distribution. This, along with middle-market companies that may struggle to differentiate themselves in a crowded market, could be a prelude to future AWM dealmaking. 

“After a year of record-breaking deals volume, we expect continued high intensity deal activity in the year to come.”

Greg McGahan, US Financial Services Deals Leader and AWM Deals Leader

Key deal drivers

Future AWM deals may be driven by more than just cost-cutting, economies of scale and 'survival'

The investment thesis for asset management transactions has often depended on the ability to reduce costs upon integration. But in a number of recent asset management deals, despite successful integrations, acquirers haven’t necessarily seen the rewards in their stock prices. Despite achieving cost synergies, some firms have seen their price/earnings multiples decline even as their earnings have increased.

As the Street may be downplaying the value of cost reduction, we’re already seeing a shift from deals driven by cost-cutting to deals driven by potential revenue synergies. These moves to broaden product offerings and expand distribution are designed to drive top-line growth, rather than expanding profit margins by reducing expenses. Morgan Stanley’s $6.8 billion acquisition of Eaton Vance, announced in October, and Blackrock’s $1.0 billion acquisition of Aperio are both prime examples of this shift, and may be a prelude to even more AWM dealmaking in 2021.

Continued convergence between AWM and other sectors

We expect well-capitalized large banks will continue to look at AWM targets in order to add stable fee-based revenue. Some may also look to redeploy capital toward the sector, given restrictions they could face if they attempted to acquire other depository institutions. Finally, some banks may pursue AWM acquisitions as a path to growing their top line, given relatively flat revenue growth in their core businesses.

We also expect alternative asset managers (“alts”) to continue to look for targets among insurers. This is driven by demand-side and supply-side factors:

  • The prolonged period of low interest rates has been especially difficult for insurers with long-dated liabilities (fixed annuities, fixed indexed annuities, variable annuities, LTC, etc., aggregate to $1Tn in assets in the US alone). This has placed significant pressure on insurers to seek out higher yielding investments in private markets. This is an area of strength for sophisticated alts managers have built up, with origination engines and specialized teams to spot opportunities.
  • Equity markets are currently valuing alts managers at P/E multiples of 15-20x, while life insurers quote at P/E multiples of just 5-10x. Since the long-dated assets that come with insurance deals add to the “permanent capital” of alts managers, the marginal impact on their valuations is even more positive.

Lastly, technology-enabled players that support AWM — those outside of traditional money managers but part of the AWM ecosystem — could continue to be attractive acquisition targets. Recent PE-backed recapitalizations of Gen II Fund Servicing and Clearwater Analytics have proven there is high demand and valuation multiples are rich, and this should spur increased activity.

Continued wealth management consolidation across RIA and IBD channels

We also expect continued consolidation in the registered investment advisor (RIA) sector, as valuation multiples have risen higher in the wake of a number of recent deals. Over the past 12 months (through November 15, 2020), the wealth management sub-sector has seen 119 announced deals, up 21% over the comparable prior period. Additionally, roll-up players (e.g. Focus Financial, Hightower) have been joined by a new set of private equity-backed players which have raised significant funds within the last 12 months and are pursuing the same roll-up strategy (Creative Planning, CAPTRUST, AllWorth Financial). New non-U.S. players, such as Canada-based CI Financial, are jumping into the fray too.

Also, look for continued consolidation in the independent broker-dealer (IBD) space, as new equity market highs spur the long tail of smaller players to exit in favor of larger players such as LPL Financial, Raymond James, or PE backed consolidations such as Advisor Group and Cetera.

Workplace investing will also see continued interest from larger wealth managers following recent deals such as Morgan Stanley’s acquisitions of Solium and E*TRADE (whose crown jewel was the Stock Plan business). These transactions can help drive organic growth, and they may make for an attractive fit with corporate banking businesses at large banks.

The long tail of retirement recordkeepers beyond the top players is ripe for consolidation

Recent deal activity within the recordkeeping space — for instance, Empower’s acquisitions of the recordkeeping businesses of Mass Mutual and Fifth Third Bank — illustrates a confluence of drivers that could spur even more deals ahead, including:

  • Increasing pricing pressure as leading players continue to price aggressively to win new business away from competition. The industry’s move in the direction of a “per participant” pricing model could be challenging for some providers.
  • Technology / workflow capabilities which help drive productivity. Many larger firms’ can now afford technology budgets that are 3-10x what the next tier of competitors can afford. Meanwhile, some offshore technology vendors have been able to commit to a 30% cost reduction per participant, or more, through long-term outsourcing contracts
  • Opportunity in adjacent sectors, such as HSAs, Rollover IRAs, Benefits Admin and Retirement Plan Advisory
  • Continued interest from PE firms given the stable fee-based cash flows from recordkeeping offerings. These firms also find these deals more attractive by laying off longevity risk to PE-owned reinsurance players which have been active in the market (e.g. Athene, Venerable, Aspida, Financial, Fortitude Re).

Contact us

Gregory McGahan

Gregory McGahan

Asset and Wealth Management Deals Leader, PwC US

Arjun Saxena

Arjun Saxena

Principal, Financial Services, Strategy&, PwC US

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