PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.
The asset and wealth management sector has seen a flurry of deal activity over the past six months. The period was marked most notably by several billion-dollar-plus transactions, including the acquisition of Wells Fargo’s asset management business by a private equity consortium led by GTCR and Reverence Capital ($2.1 billion), Macquarie’s acquisition of Waddell & Reed (WDR) ($1.6 billion) and Ares Management Corporation’s acquisition of Landmark Partners from BrightSphere Financial Group ($1.1 billion), as well as Warburg Pincus’ acquisition of a minority stake in Edelman Financial Engines and the acquisition of Ascensus by Stone Point Capital and GIC.
While the aforementioned deals accounted for much of the announced deal volume, smaller scale consolidation continued to drive healthy deal volumes. We saw 145 announced transactions during the period, of which 98 were in wealth management and reflect aggregation of smaller wealth managers by larger RIA platforms.
While the search for increased scale continues to fuel consolidation, there are several other underlying drivers we believe could impact dealmaking in the months ahead.
Continued momentum in wealth management deals
With the recent listing of Coinbase and a wave of additional IPO listings expected in the next few months (Robinhood, eToro, Alight Solutions, Apex Clearing), one can expect the price discovery enabled by public markets and greater research analyst coverage to drive higher investor confidence and potential interest from larger players looking at this space.
There is a long tail of digital brokerages (including those that target investors in other markets), crypto brokerages and picks-and-shovels businesses that serve them waiting in the wings for potential fundraising or consolidation deals. Many of the soon-to-be-public players can also be expected to start using their richly valued stocks as acquisition currency to bulk up further.
Continuing retirement recordkeeping consolidation
The retirement recordkeeping market has seen significant consolidation which has a similar impact on overall economics by enabling virtual scale. As the impact of the cost efficiencies being targeted in these deals begins to show up in new contracts with plan sponsors, we expect this to put additional pressure on the long tail of insurers and asset managers with more than 1 million plan participants, and will be competing against larger players with a 5-10x scale advantage, forcing many of them to exit or double down and driving additional deals.
Focus on responsible investing
Responsible investing continues to be top-of-mind for asset managers, especially as investors are becoming increasingly interested in environmental, social and governance (ESG) issues as well as with a renewed focus on sustainable investing by the Biden administration.
We believe the ESG retail investment market is currently underserved, particularly in niche subsectors, which presents an opportunity to money managers to penetrate currently untapped markets. Outside of traditional money managers, we are also seeing an increasing number of cross-sector companies, such as insurers, looking to gain exposure to sustainable investments by teaming up with asset managers and providing seed capital to fund sustainable investment strategies or investing directly in sustainable investment vehicles.
The SPAC wave has crested
Over the past year, special purpose acquisition company (SPAC) activity has been at an all-time high. However, recent regulatory scrutiny and accounting issues have slowed the pace of new SPAC fundraising as well as de-spacing deals. While there are a number of SPAC merger-IPO deals expected to come to market in the near-term given the backlog of more than 400 SPACs currently looking for targets, many SPAC sponsors will find it more difficult to close deals. In particular, we have observed increased difficulty securing PIPE financing as institutional investors take a more conservative view on valuation and dilution concerns following some high-profile recent listings slipping below the $10 threshold. This could spell continued trouble for SPAC sponsors — those sponsored by more prominent alternatives firms may still sail through but others without experienced sponsors or strong brand names behind them will struggle.
Diversification and cryptocurrencies
With the rise in popularity of cryptocurrencies among retail investors, we believe it is only a matter of time until institutional investors — particularly, hedge funds and other alternative asset managers — turn to crypto investing. According to a survey conducted as part of PwC’s 2021 Global Crypto Hedge Fund Report, only 21% of surveyed hedge funds currently invest in digital assets, and the average assets under management (AUM) invested in such assets is just 3%. As alternative firms seek to deploy capital at a faster pace, we expect some to increase their focus on digital assets. While most traditional alternative firms lack the robust infrastructure to do so, buying or seeking out a joint venture relationship with an existing crypto manager may come to the forefront.
“Billion dollar plus transactions, acquisitions, a flurry of activity and we are only 6 months into this year.”
Asset and Wealth Management Deals Leader, PwC US
Principal, Financial Services, Strategy&, PwC US