Asset and wealth management: US Deals 2023 outlook

AWM dealmaking cools in late 2022; positive signs for improved 2023 deal flow

  • AWM dealmaking in 2022 was largely on par with 2021, with deal volume exceeding 300 transactions in the last 12 months. However, deal volume was most significant in the first half of the year and began to cool in the later half of the year, particularly in the fourth quarter. The slowdown isn’t a surprise as the explosion of deal activity in 2021 and early 2022 was never expected to continue given the emergence of several macro factors that drove uncertainty: inflation, rising interest rates, the war in the Ukraine, expectations around slowing economic growth, among others.
  • Today’s macroeconomic issues are yet to be resolved — interest rates and inflation continue to rise, the war in Ukraine rages on and the capital markets needed to fund deals are drying up. What’s more, economic signs are pointing toward a global downturn.  
  • As the economy enters a potential recessionary environment heading into early 2023, we expect asset and wealth management firms to focus on digesting and integrating the acquisitions they’ve completed over the past 18 months.
  • In the short-term, AWM executives will likely focus on driving overall cost-cutting measures and realizing synergies they priced into recently completed deals rather than explore new transformative M&A opportunities. Even so, we see several positive factors that could drive AWM dealmaking later in 2023. 

Explore national deals trends

A pause before a potential uptick in M&A

Rising interest rates and the reduction of available capital have sapped appetites for dealmaking, and the hurdle to complete a deal is higher than in recent history. In the near-term, we expect AWM firms to be focused on organic growth and digesting recently completed deals.

However, as the pace of rate hikes slow and debt markets reopen, deal flow could pick up in the second half of 2023 and beyond. We see several contributing factors.

Public markets: While IPOs for alternatives asset managers were largely put on the backburner this year due to market conditions, the reasons why asset managers are generally attracted to public capital — including founder succession plans and greater liquidity — remain unchanged. We expect there to be a backlog of potential IPO opportunities that were delayed in 2022 to get done in the back half of 2023, particularly among founder-owned businesses such as private equity and other alternatives firms. In the wake of a public offering in January by a leading private equity firm, for example, other private equity groups have reportedly been planning IPOs but have not yet consummated their listings.

Wealth management: Wealth management has historically driven most AWM M&A — and we expect 2023 to be no different. The scalability of wealth management roll-up platforms has attracted increased attention from private equity, and we see PEs driving additional activity in the sector. We expect to see platforms searching for growth in new markets, including in geographies outside the US, with this trend being driven by the strengthening of the US dollar. What’s more, to become less susceptible to market movements, we believe firms will seek diversification outside of traditional wealth management models, which generate revenue based on AUM and net interest margins. 

Traditional asset management: We expect M&A activity among traditional asset managers to slow over the near-term given macroeconomic uncertainty, volatility in valuations (EV/EBITDA multiples for listed traditional asset managers are down to 9x from a high of 15x as recently as February 2022) and divergence in expectations between bidders and sellers. However, negative flows and significant drops in equity and fixed income indices throughout the year are resulting in higher margin pressures across the board, which should spur greater consolidation in 2023. Many large players will look at scale, and new capabilities (e.g., ESG/solutions, distribution, technology capabilities) as they look at potential M&A options.

Public AWM valuation trends: In the public markets, valuation multiples for traditional asset managers, on average, remained relatively flat coming out of the pandemic through the third quarter of 2022, despite consistent monthly net outflows for US equity mutual funds since January 2020. The uptick in markets from September 30 to November 15 have driven multiples for the traditional asset managers to levels not seen since 2017. Alternative asset managers enjoyed significant multiple expansion post-COVID through the third quarter of 2021, but have since seen a precipitous decline in multiples given the softer deal market, which could present M&A opportunities.

Divestitures to reshape AWM business mix

Business portfolio review is another lever financial institutions can pull to foster growth and build shareholder value as the economy softens. Management’s objective in a review is to allocate capital to the most promising businesses and consider whether it’s appropriate to divest less attractive units.

In this age of continuous disruption, divestitures can be a critical tool in transforming and reconfiguring a firm. PwC’s upcoming divestiture study shows that executing a divestiture in a timely manner can help increase the chances for value creation.

A key barrier to moving quickly to divest, however, is inertia. Many factors can create inertia, including entanglements, emotions and cognitive biases. A firm’s directors can play an important role in overcoming inertia. The degree of board governance is significant in increasing the likelihood that a company will consider divestment, the study shows. Having a positive attitude towards divestitures and developing a reinvestment plan also can help companies overcome inertia. 

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“We see several positive factors that could drive more AWM deal activity in the latter half of 2023. In the meantime, AWM executives will likely focus on cost-cutting measures and realizing synergies from recent deals rather than explore new transformative M&A opportunities.”

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

Key deal drivers

Navigating uncertainty - crypto deals market

The past year was a tumultuous one for the crypto asset space.  While conviction in the asset class has not been strong historically, we started to see some bigger names in traditional asset management do deals or launch products in the space, suggesting digital assets were becoming more widely embraced. Recent examples include a prominent investment manager acquiring a stake in a UK digital assets exchange, as well as a brokerage launching ETFs that give investors exposure to companies likely to benefit from greater crypto adoption. At the same time, we saw increased private equity interest in crypto and due diligence performed on digital asset companies.

But the apparent change in investor sentiment dissipated in November as the failure of one of the largest crypto exchanges tested investors’ nerves and drove massive crypto sell-offs. We expect the exchange’s collapse — especially given it reportedly involved the improper use of customer assets — will scare off potential investors and temper any M&A momentum that was built earlier in the year, at least until there is greater clarity on the future of crypto regulation. Recent events have certainly added pressure for regulators to intensify their oversight and enforcement. While Congress has made some bipartisan steps toward creating a clearer framework, it’s unlikely to pass digital asset legislation in the lame duck period and it remains to be seen whether the next Congress will act. Once the smoke clears, however, reduced valuations could spur consolidation in the sector, though in the absence of increased regulation, we expect the due diligence process — including a review of internal controls — will be heavily scrutinized.

The allure of private credit capabilities

Interest in private markets continues to grow. The shift of lending away from traditional banks and toward non-bank lending is not a new phenomenon. Non-bank lending expanded rapidly after the global recession of 2008-09 and now exceeds bank lending in advanced economies. Behemoths within alternatives have long been big players in private credit. However, there may be a new wave on the horizon as certain banks pull back from lending and seek to transform into capital-light institutions, thereby de-risking their balance sheets and avoiding hefty regulatory capital charges, particularly as the more recent benign credit cycle continues to turn. A recent example is the proposed divestment of a global investment bank’s securitized products business to an investor group which includes prominent investment managers.

We expect alts managers who currently play in the private credit space to continue to be serial acquirers of such businesses and assets as they meet the high yield demands of LPs of alternatives funds. And, as we’ve mentioned in prior editions of this publication, we expect alts managers such as pure-play private equity firms to evaluate opportunities to acquire a private credit platform, which is a trend we have already seen emerge in recent transactions.  

Diversification has come to the forefront for private equity managers, especially as private equity fundraising faces volatile markets heading into 2023. These firms will need to do a deal in order to compete with peers who have added new capabilities and avenues to grow. In addition, diversification is becoming an increasingly crucial factor in valuations of alternatives firms, as private minority investors and the public markets have been placing more importance on it. In addition to private credit, look for further expansion into sister asset classes within alternatives, including real estate and infrastructure as investors search for protection against inflation.

Continuing retirement recordkeeping consolidation

Retirement recordkeeping, which has historically been a significant business segment for asset managers as well as wealth managers, continues to experience a wave of consolidation. In 2022, we saw large deals, including the acquisition by one of the sector’s top players of a global insurer’s recordkeeping business. Some mid-size players (beyond the top-10 at-scale players) also announced divestitures.

Several other players are reportedly exploring long-term outsourcing contracts — with technology players looking to modernize their technology infrastructure and deliver savings in cost-to-serve in an increasingly competitive market. These long-term outsourcing deals (often 8-10 years) deliver many of the economic benefits that M&A would drive.

The provider marketplace is still significantly fragmented, and we expect the benefits of scale to drive continued consolidation in the market, especially among players beyond the top-10 providers.

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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