Asset and wealth management: US Deals 2024 midyear outlook

Consolidation, product diversification and succession planning are among the factors driving AWM deal activity

The steady stream of deal activity in the asset and wealth management (AWM) sector over the latter half of 2023 continued into the first quarter of 2024. The activity is an encouraging sign that the uncertain macroeconomic environment — plagued by high interest rates, persistent inflation and geopolitical uncertainty — hasn’t completely stifled dealmaking.

In the first quarter of 2024, there were 79 announced AWM deals — the highest quarterly total since the robust first quarter of 2023 when 90 deals were announced in the sector. More than 20 additional AWM deals were announced in April. (See chart below).

Business model reinvention has been one of the primary drivers of AWM deal activity, as firms look to survive and grow amid margin compression and difficulty attracting new capital. To reinvent themselves, AWM firms are launching into new asset classes and/or developing additional distribution relationships to capture new assets under management (AUM). We anticipate similar deals will occur in the latter half of 2024 as firms continue to develop strategies to buy, build or partner their way into the alternatives market.

Several themes continue to drive AWM deal interest and activity:

  • Product diversification, particularly a continued expansion into alternative products, like private credit and real assets, specifically infrastructure assets, to meet investor demand
  • Banking partnerships, in which banks originate loans and maintain customer relationships, while asset managers take on the management and control of the vehicles into which such loans are sold
  • Industry consolidation for scale and efficiencies
  • Aging founders and succession planning
  • Developing or acquiring teams with experience managing permanent capital vehicles versus traditional, drawdown-style, closed-end funds

Note: The primary M&A data source used in the midyear outlook is S&P Capital IQ.

How market conditions are impacting M&A strategy

Acquisitions continue to serve as a strategic tool for asset managers to drive growth and enhance profitability. Amid a backdrop of higher interest rates, a challenging fundraising environment and increased regulatory burdens, larger firms are seizing opportunities to acquire smaller, struggling peers. This trend is driven by a need for larger firms to achieve scale and efficiency, as well as to diversify product offerings, with the addition of a private credit platform or an expansion into real assets, particularly infrastructure.

Asset managers remain focused on maintaining margins, despite the potential risk of fee compression to attract new AUM. A critical aspect of this expansion is ensuring that the company’s infrastructure, including accounting, IT, HR systems and other back-office software, scale with the growth.

The challenge of attracting new funds is significant, compelling some companies to diversify their investment strategies, potentially leading to more industry consolidation. Investors’ concerns about the illiquidity of closed-end funds are prompting a shift toward greater liquidity demands, which will inevitably change asset managers’ market strategies. Moreover, there is a concerted effort to secure anchor commitments from major entities, such as sovereign wealth funds, to bolster fundraising efforts and stabilize capital inflows.

Macroeconomic environment will be a top focus of AWM dealmakers in the coming months

What’s now?

Macroeconomic developments — particularly the Federal Reserve’s interest rate decisions — will continue to be closely watched by AWM dealmakers. While the gap is narrowing, a discrepancy remains between some buyers and sellers on business valuations. Rising interest rates in 2022 and early 2023 had a significant impact on business valuations, particularly for private equity (PE) managers that did not have complementary private credit offerings. Higher interest rates lead to leveraged buyout deals becoming more expensive, thereby putting pressure on fund-level investment returns. With investor demand diminishing, PE-focused managers had more difficulty raising capital for future funds. As a result, their forward-looking fee-related earnings and valuations took a hit.  Lower interest rates could make a wider range of deals possible by leading to a reduction in the discrepancy between buyer and seller valuations, potentially allowing deals to be structured with less complexity. 

What’s next?

AWM dealmakers should be prepared to act quickly in the face of macroeconomic changes by:

  • Identifying potential growth opportunities and assessing market niches that align with their business objectives
  • Considering new geographic markets (e.g., US alternatives asset managers expanding to the EU), diversifying product offerings, or targeting specific client segments (e.g., alternatives managers pursuing high-net-worth investors through a retail channel)
  • Evaluating potential partnerships or acquisitions that can accelerate their firms’ growth strategies

The AWM industry is also experiencing rapid technological advancements, such as increased adoption of artificial intelligence (AI) and Generative AI (GenAI), machine learning and blockchain. While many AWM firms are still exploring use cases for these technologies and are looking for opportunities to use GenAI in the investment sourcing process, these technologies are already being applied in the middle and back office (chatbots, sales support, marketing campaigns, institutional business RFP responses, etc.) to improve operational efficiency and profitability, enhance risk management, and drive higher sales productivity and improved financial advisor / client experiences.  

“The AWM sector continues to show resiliency amid a challenging economic environment.”

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

The bottom line

Higher inflation and interest rates over the past couple of years have prompted AWM leaders to focus on consolidation, as managers seek to improve their businesses’ financial standing and growth opportunities by developing economies of scale and expanding their alternative product offerings. Despite the continued challenges from unpredictable macroeconomic conditions in the near term, we anticipate these circumstances will continue to drive M&A activity as AWM leaders seek to improve business margins and expand growth avenues in a difficult fundraising environment.

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