Asset and wealth management: US Deals 2024 outlook

Asset and wealth management M&A dips but remains strong in the face of high interest rates

Despite interest rates continuing to hamper broader US deal and IPO activity, deal volume in the asset and wealth management (AWM) sector remains robust. AWM deal volume over the last 12 months (ended November 15, 2023) dipped about 3% compared to the historically strong market of 2022 (307 deals in the last 12 months versus 316 in 2022) but remained on par with the deal volume seen in 2021 (307 deals). The last six months alone saw several notable transactions of over $500 million announced:

  • Cetera Financial Group’s acquisition of Avantax, Inc., a publicly listed, tax-focused financial planning and wealth management business, for $1.2 billion (enterprise value)
  • Bridgepoint Group plc’s acquisition of Energy Capital Partners, LLC, a private equity firm focused on investing in the energy sector and sustainability related businesses, for $1.1 billion (enterprise value)
  • Rithm Capital Corp.’s acquisition of Sculptor Capital Management, Inc., which specializes in private credit offerings, for $700 million
  • LPL Financial Holdings Inc.’s partnership with Prudential Financial Inc.

In particular, the acquisition of Sculptor Capital Management, Inc. exemplifies the growing interest in private credit. Over the course of the last 12 months, 10 deals were announced of private credit-focused managers, surpassing the eight mergers in 2022 and five deals in 2021, according to S&P Global Market Intelligence. As discussed further below, the appetite for private credit among investors remains strong amid the current higher-interest rate environment.

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Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.​

Key deal drivers

Evolving horizons for private credit amid headwinds

Higher interest rates coupled with more stringent capital and liquidity requirements among banks have led to opportunities for private credit to step in as an alternative form of financing to get deals done in the current environment. High levels of dry powder among private equity funds and a large portion of commercial real estate mortgages coming due in the next few years have further heightened demand for alternative sources of credit. 

Not only have alternative asset managers’ diversification activities in 2023 been focused on expanding into private credit, but traditional managers are also looking for alpha in private credit products. In addition, inflows to retail products, such as business development companies (BDCs), have seen an uptick in recent months, while private credit products have shifted away from focusing primarily on direct lending, with an increase noted in mezzanine/opportunistic products, asset-based and net asset value (NAV) lending.  

As retail customers move funds from bank deposits to higher yielding money market mutual funds (MMMFs) and fixed income investments, and as regulators tighten capital and liquidity rules further following the bank failures in the first half of 2023, the banking system will continue to find it hard to support the growing credit needs of the real economy. As a result, private credit is expected to enjoy a secular tailwind, with assets under management (AUM) expected to grow from $1.4 trillion in Jan 2023 to $2.3 trillion in 2027, i.e., a compound annual growth rate (CAGR) of 16%.

 Throughout 2023 and expected to continue into 2024, there has been an uptick in partnerships with traditional banks focused on balance sheet optimization strategies. Private credit continues to be the largest contributor to fundraising and deployment by asset class, with a meaningful portion of total credit inflows coming from insurance partnerships. As the credit cycle turns with higher interest rates pressuring the economics of highly leveraged firms, we also expect more competition for private credit firms with experience in workouts or specialized domain knowledge in sectors where signs of stress are more likely to show up earlier — oil and gas, homebuilding, consumer products, media and entertainment, etc.

Firms evaluating strategic partnerships for growth and sustainability

In the ever-evolving landscape of the AWM industry, the current economic backdrop marked by higher interest rates, elevated valuations and market turbulence has led companies to reassess their growth strategies. Faced with these challenges, we are seeing businesses increasingly explore strategic partnerships — not only for revenue enhancement (e.g. product shelf) but also as a means of optimizing cost structures (e.g., fund administration platform), or to gain new capabilities and flexibility (e.g. switching clearing brokerage provider). This shift toward comprehensive collaborations enables companies to capitalize on shared revenue opportunities, while strategically streamlining back-end operations for efficiency gains and cost reductions. 

One recent example is the partnership between Prudential Financial Inc. and LPL Financial Holdings, Inc., whereby Prudential will move more than $50 billion in retail brokerage and advisory assets from its advisors to LPL Financial. Several other mid-sized bank and insurance owned broker-dealers, which depend on third-party firms for clearing and technology, are evaluating potential providers for similar transitions as they look for support on compliance and supervision, as well as revenue generation, in addition to the traditional clearing and custody support that clearing broker-dealers have provided.

In navigating this transformative period, given the high financial stakes and long periods that strategic partnerships entail (seven-year deal terms are common), professionals within the AWM industry should recognize that evaluating strategic partnerships demands a nuanced analysis, akin to the scrutiny applied to traditional M&A targets. Understanding the interplay between strategic partnerships and inorganic growth through M&A is crucial for driving sustainable growth and successfully adapting to the intricate dynamics of today's market conditions.  

Evaluating a strategic partnership involves analyzing shared objectives, operational risks, upfront transition costs, recurring cost-saving and revenue synergies. Key considerations include cultural compatibility, long-term strategic alignment and the alignment to long-term strategic goals. Both demand a meticulous assessment of financial, operational and cultural factors for comparing against M&A opportunities, successful integration and sustained value creation.

Democratization of private markets set to continue

Private markets have traditionally been off-limits to retail investors due to high investment minimums and illiquid structures. However, a growing movement to democratize private markets is set to continue, making them more accessible to a broader range of investors.

Several factors are driving this trend, including retail investors' desire for greater diversification and the potential for higher returns from private assets. Given the challenging fundraising environment, sponsors are also looking to tap into new pools of capital and are developing more products and strategies to attract retail investors to private markets. Aggregators that pool capital from high-net-worth (HNW) individuals are also growing in popularity, as are intermediaries such as iCapital, which digitize the regulatory requirements and disclosures, workflows and reporting requirements.

One of the main challenges to democratizing private markets is the illiquidity of the assets. To address this issue, sponsors continue to develop semi-liquid funds that offer investors greater flexibility and shorter lock-up periods. For example, KKR and Pemberton Capital Advisors have reportedly announced open-ended direct lending funds, highlighting the desire to provide investors greater flexibility in managing deployed capital as well as the push to diversify into private credit products.

The democratization of private markets is still in its early stages, but significant progress has been made. Continued success is likely dependent on the development of an efficient secondaries market that allows retail investors to freely and cost effectively trade as well as retail investors gaining broader access to fund managers and not just a narrow set of investment products.

“AWM firms aren’t sitting idly, waiting for interest rates to fall. They’ve accepted the reality of ‘higher for longer’ and are looking to strategic partnerships, scaling into new asset classes — in addition to select M&A deals — to accomplish their growth goals.”

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