Asset and wealth management deals insights: 2021 outlook

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).