US asset and wealth management deals insights: Q3 2019
Asset and wealth management deal activity slowed during the quarter but is still on track for an annual record
Deal volume and value in AWM eased during the third quarter after an unprecedented first half of 2019. Still, deal activity is on track to set an annual record during 2019. Three forces have been spurring consolidation: fee pressure, slowing growth in assets under management, and the persistent shift from active to passive investing.
Wealth management remained the most active sub-sector, with dealmaking fueled primarily by continued consolidation among registered investment advisors (RIAs). Reported deal value fell to the lowest level since the first quarter of 2018 because of the absence of a reported megadeal.
“While deal volume fell, the pressure to streamline, adapt, and change isn’t declining. Transforming operations is one potential strategy. The other is M&A, which could be the only viable way to survive in this rapidly consolidating industry.”
Trends and highlights
Disclosed deal value during Q3 slumped 74% compared with the second quarter. Still, the total deal value of $13.7 billion during the first nine months of 2019 is nearly three times the total during the same period of 2018.
Deal volume fell to 48 transactions during the third quarter compared with 63 during Q2: a 24% decline. Yet the total of 161 transactions during the first nine months of the year is still far higher than the 115 announced during the same period of 2018.
The total asset and wealth management deal volume is on track to surpass the reported deal volume for all of 2018: The number of transactions during the first nine months of 2019 is only 16 deals shy of the record 177 deals announced during all of 2018.
Highlights of deal activity
Significant Transactions
Notable deals during the third quarter of 2019 include:
Assured Guaranty agreed to buy the entire share capital of BlueMountain Capital Management for $160 million.
RIA-aggregator Mercer Global Advisors actively pursued two acquisitions announced during Q3 2018 (one via affiliate Genstar Capital, an equity investor). Additionally, Genstar and equity investor Lovell Minnick Partners sold a minority stake in Mercer Global Advisors to Oak Hill Capital Partners as part of a recapitalization. Terms of the deal were not disclosed.
Capital One Financial Corp. expanded into the WealthTech space with its acquisition of robo-advisor United Income Inc. Terms of the deal were not disclosed.
AWM sub-sector analysis
After a busy spring, deal volume declined in every AWM sub-sector aide from “Admin & Other” during the third quarter. As expected, wealth management remained the most active sub-sector, with 22 announced deals. Traditional and alternative asset managers were neck-and-neck in announced deal volume, with traditional asset managers disclosing 13 transactions compared with 11 deals among alternative asset managers.
Despite the decline, the year-over-year volume of deals involving private equity, venture capital, and business development companies continues to be strong. There were 35 announced deals through the third quarter, and the full year outlook is strong. Private equity firms are fueling the increase through their strategic acquisitions of minority stakes.
AWM deals outlook
The minority investment by Oak Hill Capital Partners in large RIA aggregator Mercer Advisors during the third quarter underscores how consolidation of wealth managers and RIAs is at the forefront of M&A activity among asset and wealth management. (Mercer Advisors controls AUM exceeding $15 billion.) In coming quarters we expect continued investment by PE firms in wealth managers. RIA roll-up activity will probably also remain robust.
Large discount brokerages including Charles Schwab and TD Ameritrade recently eliminated commissions on stock and ETF trades. The price war has spread across the industry and will increase pressure on smaller firms; some may choose to merge in order to survive. We expect to see a new round of consolidation and deals among discount brokerages of all sizes. They will probably seek to offset the cost of price cuts by increasing scale and reducing operating costs. Banks may find some of the firms attractive acquisition targets.
From a strategic viewpoint, we expect that more investors and acquirers outside the asset management space will pursue deals in AWM. Insurers will probably be especially active. Assured Guaranty's acquisition of CLO and hedge fund manager BlueMountain Capital Management highlights how insurance firms seek to gain a strategic edge by diversifying earnings and leveraging their balance sheets. The M&A market is ripe for consolidation and we anticipate that non-traditional investors and foreign buyers will make opportunistic plays in coming quarters.
Overall, we expect a strong close to the year in AWM dealmaking in step with the record-high transaction volumes during the past 18 months. Firms continue to face pressure to streamline, adapt, and transform. Some managers may look in house for ways to improve margins and remain competitive. Other firms may may choose to “buy” rather than “build” as they broaden their offerings and improve customer service. For many firms, M&A may be the only viable way to survive in this rapidly changing industry.
About the data
We define M&A activity as mergers and acquisitions in which targets are US-based companies acquired by US or foreign buyers. We define divestitures as the sale of a portion of a company (not a whole entity) by a US-based seller. We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on announcement date for transactions, as provided by Thomson Reuters and S&P Global Market Intelligence, as of September 30, 2019, and supplemented by additional independent research.
Information related to previous periods is updated periodically based on new data collected by Thomson Reuters and S&P Global Market Intelligence for deals closed during previous periods but not reflected in previous data sets. Deal information was sourced from Thomson Reuters and S&P Global Market Intelligence and includes deals for which targets fall into one of the AWM industry sub-sectors: traditional asset management, alternative asset management, wealth management, or administration and other (such as fund administrators). Certain adjustments have been made to the information to account for transactions which our data sources classify as financial services but which we assign to technology and other sectors, or vice versa.
