PwC today released its quarterly Deals Insights report, offering a detailed analysis of merger and acquisition (M&A) activity within the asset and wealth management industries during the final three months of 2018; the report also looks forward to anticipated trends in 2019.
“Financial services deals are continuing across all sectors at values we haven’t seen for years,” said Greg Peterson, partner and U.S. financial services deals leader, while previewing the report for PLANADVISER. “M&A opportunities are ripe among regional banks, FinTech, asset and wealth management, payments businesses, and all types of insurance firms.”
According to PwC’s analysis, the value of deals across financial services sectors during 2018 “shot above” prior year levels. The surge shows no signs of weakening in 2019, Peterson said, thanks to digital disruption, market volatility, and the clear gains from consolidation. Even in the case that the economy slows or even enters a recession in the next year, Peterson suggested M&A activity will most likely continue at a strong pace, given the driving business fundamentals that are at play.
“We expect corporate, venture, and private equity to play a bigger role in acquisitions and minority investments both inside and outside the U.S.,” he noted.
Within the asset and wealth management domain, PwC finds this sector recorded its strongest M&A quarter of the year during the last three months of 2018. Fourth quarter deal volume rose to 54, with total announced deal value at $9.4 billion. The surge in activity helped make 2018 the strongest year since 2015, the report shows, with 140 announced deals and total disclosed deal value reaching $14.9 billion, compared with $8.6 billion in 2017.
For context, Fidelity’s recently published Wealth Management M&A Transaction Report shows there were 23 deals inked during 2018 specifically within the registered investment adviser (RIA) space worth $1 billion or more. According to Fidelity’s report, the 2018 RIA transaction number was down compared with the 2017 figure—though assets in motion were up significantly. In total, Fidelity says there were 95 transactions totaling $563.4 billion in 2018. Assets transacted more than doubled, up from 2017’s $265.5 billion, across RIA and independent broker/dealer (IBD) channels.
PwC’s report also highlights M&A activity in the insurance brokerage sector. The fourth quarter saw 151 announced deals in the insurance sector, with a total disclosed deal value of $2.2 billion. This increased total disclosed deal value for 2018 to $40.3 billion, or more than double the $19.5 disclosed deal value in 2017. Nine deals exceeded $1 billion in 2018, compared with seven such deals during the prior year, according to PwC.
Looking specifically at asset managers, PwC finds deal activity in the traditional asset management space rose during 2018. Several forces impacted these transactions, said Gregory McGahan, partner and U.S. alliances and joint ventures practice leader. These include fee pressures from low-cost passive managers, the challenge most active managers face in beating benchmarks, and significant pressure on margins and AUM share.
The PwC report highlights the largest asset manager transaction in 2018—Invesco’s acquisition of OppenheimerFunds from MassMutual in a $5.7 billion stock deal. Important to note, PwC says, MassMutual did not exit the space. Instead, it is now the largest shareholder in a firm managing more than $1 trillion.
An Industry Still Ripe for Disruption
Reflecting on their latest research findings, the PwC partners said the asset management and wealth management industries have long been considered ripe for evolution and consolidation. This is clearly one reason why M&A in the sector was strong in 2018, with record deal value and a sizable number of transactions exceeding $1 billion.
“We believe there is much more activity to come and more deals to be consummated given both the fundamentals and challenges across the sector,” McGahan said. “In a volatile and uncertain environment, asset managers with the ability to use stock for transactions would be best suited to execute large transformative deals.”
The PwC partners noted that asset manager consolidation could begin to cut back on the ever-expanding number of mutual funds and exchange-traded funds (ETF) made available to individual and institutional investors. The report says industry experts estimate the current U.S. mutual fund and ETF count to be in excess of 10,000. McGahan and Peterson raised the question of whether there is room for so many managers and overlapping products, implying consolidation may be inevitable even before one considers the serious fee and margin pressures facing providers.
The report points out that both active and passive managers face serious fee pressure. According to PwC research, actively managed mutual fund fees are expected to drop by approximately 19%, from an average of 54 bps in 2017 to 44 bps in 2025. As in the past, passively managed funds will face the biggest decline, PwC predicts, with management fees projected to decline 20.7% by 2025.
“Price will probably be the key differentiator amid intense competition for market dominance,” the report concludes. “Fee pressure is expected to persist until asset managers improve their performance. Investors are increasingly looking to derive greater value from fees, and there is more consideration these days by traditional asset managers to switch to outcome-based fee structures.”
Opportunities for Advisers?
According to the PwC partners, there are two other important takeaways from the new report for retirement plan advisers. First is a “blurring of the lines” between firms considered to be asset managers versus insurers. The pair noted how the insurance company sector is pursuing more acquisitions of complementary businesses that formerly would be considered to be part of the wealth management or asset management sectors.
“There are insurance firms and alternative managers that are looking for opportunities to generate excess value for clients while also expanding their reach,” McGahan said. “We have seen firms going out and buying blocks of advisers to add to the equation. Of course, their challenge is going to be retaining these advisers over time.”
The second takeaway is the growing importance of minority stakes being taken in asset management and wealth management businesses—for example when a private equity firm or larger, established provider makes a minority investment in a smaller, independent wealth management firm.
“We are seeing a lot of these large funds come in and make minority investments in small shops,” Peterson noted. “For the firms receiving such investments, they gain a new source of capital and a real succession planning opportunity while also remaining independent. We see mutual benefits to both sides of the equation with this strategy, which is why a lot of big names are getting involved in this space. We don’t think we will see a reduction in this type of deal anytime soon.”
Another M&A expert who spoke recently about these trends with PLANADVISER is Dick Darian, CEO of Wise Rhino, a firm created specifically to help facilitate wealth management industry M&A activity.
For advisers considering getting involved in all the M&A activity, Darian recommended forcing oneself to put the rationale of any potential transaction into writing. The written plan must answer two key questions: Why is the firm unable to solve an issue on its own? And why does the firm believe others might be able to it do this? It is best to do this work well in advance of any planned M&A activity.
“I started my business because advisers do not know how to answer these questions,” Darian said. “One way to explain this is that the typical advisory firm owner focuses so much more on the practice than on the business. Very few firms formalize their thinking about the practice as a business that could be valued, bought or sold. In my experience, I don’t think many advisers can honestly assess their strengths and weaknesses and compare this with what is available out there in terms of buying or selling capabilities. It’s very complex and very emotional work to do. Many people are not prepared even to understand where they stand today, let alone where they should go.”
If an adviser wants to start to define what a practice might be worth, the revenue and expense numbers obviously matter as a jumping off point. How big is the business, and is it growing, staying the same or shrinking? Important to note, the vast majority of acquirers active in the wealth management space today are not just looking to buy a book of business and send the adviser packing. They want the adviser to come in and continue building the business through existing relationships.
Another important point is that any final valuation is not just about the multiple, Darian said. The multiple in any deal will vary based on size of the firm and based on the character of the business itself.