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.
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.
“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.”
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