Asset and wealth management deals insights: Q2 2019
Deal value and volume overview
Deal activity was robust among asset and wealth management firms during the second quarter, with 49 deals reported during the period.
- The total of announced transactions was more than double the figure during the second quarter of 2018.
- Deal volume rose compared with the first quarter as well. However, total deal value fell because of the absence of a mega-deal similar to a $11.7 billion transaction announced during the first quarter.
- Wealth management remained the strongest sub-sector with 29 reported deals—the highest quarterly total during the past five years.
"Although financial services tapped the brakes in deal activity, we still see many attractive opportunities, especially as industry definitions blur. The current round of payment processor deals, for example, affects banking and technology, too. Leaders are finding ways to consolidate their areas of strength—and shed assets that no longer make strategic sense.”
Asset and wealth management outlook
We expect these trends to shape the deals landscape in the coming months:
- Margin compression. Asset managers are seeking alternative ways to cut costs and free up capital as they confront persistent pressure on profit margins. Firms are considering outsourcing back- and middle-office functions to third-party administrators. As a result, the appeal of fund administrators will probably grow in coming months. Firms are likely to continue to use consolidation to gain scale and streamline back-office functions.
- Direct lending grows in size, potential risks. The direct lending market surged 80% during the first half of 2019 compared with the same period last year, and it may expand to $1 trillion in AUM by 2020. In just the past three years, direct lending managers have raised nearly $500 billion in AUM. This strategy has succeeded in most cases as a credit boom and the strong economy pushed down loss rates to a record low. Still, large asset managers are starting to beef up their origination capabilities in preparation for a possible downturn in credit. Smaller firms may be unable to make similar investments and will probably be compelled to offer their businesses for sale while valuations remain comparatively high.
- Allure of payments processing. This quarter, Thompson Street Capital Partners spun off its payment processing platform, The Payment Group, to shareholders. We could see more such activity as the lines blur between finance and technology. Some assets may be more attractive as standalone entities.
- Outsider interest. Private equity and insurance firms seeking to diversify or gain a new platform will probably continue to snap up AWM firms.
