M&A Activity Continues to Play Central Role in 2022

Although the substantial market volatility seen in early 2022 has the potential to slow M&A activity, the fundamental drivers remain intact and will continue to drive future activity, according to Piper Sandler.

By DJ Shaw

Merger and acquisition deals in the retirement plan services industry have shown no sign of letting up this quarter, with the most recent industry deal coming from the acquisition of Pensionmark Financial Group by World Insurance Associates LLC.

The fast pace of financial services M&A deals in 2022 comes after there were 392 announced transactions in 2021, setting another industry M&A record. This was a 53% increase from 2020 and a 45% increase from the previous record of 270 transactions set in 2019, according to research from Piper Sandler & Co. Anticipated tax hikes, historically low interest rates, strong equity markets, and postponed 2020 sales created an ideal environment to reach new M&A highs in 2021. The Piper Sandler research argues these forces largely remain in place this year.

In its report, “Abnormal or New? 2021 Asset Manager Transaction Review and 2022 Forecast,” Piper Sandler says that the strategic needs of players across all sectors of the asset and wealth management industry remain high due to an ongoing reshaping of the industry driven by shifting age demographics, evolving client preferences and new technologies.

Even as each year sets another record for wealth management M&A activity, the sector is still only in the beginning of its consolidation, the report says. The industry remains highly fragmented, with more than 5,000 registered investment adviser firms individually managing fewer than $1 billion in client assets.

Wealth managers of all sizes are now reevaluating their long-term strategic direction and strongly considering M&A as either a buyer or seller. After nearly two dozen private equity investments in wealth management platforms in 2021, the report notes that potential sellers should expect to find a wealth of options.

The report says that alternative asset management has become a fertile ground for M&A. It projects that deal activity will continue to accelerate, as an increasing number of firms seek to build out their alternative asset management capabilities.

Traditional managers seeing stagnation in their legacy business will aim to build out their platforms to accommodate where investor interest is strongest, the report adds. Alternative asset management specialists will seek to expand their capabilities and target distribution channels that have historically been reserved for long-only strategies, while financial backers will continue to deploy capital in large sums to build on favorable sector trends and the strategic and liquidity needs of sellers.

In another expectation set out by the report, Piper Sandler says that specialized high-performing managers are driving M&A in the traditional space. Fewer opportunities to extract significant cost synergies from targets remain after years of traditional asset manager consolidation.

While there are still several mega targets that could consolidate, only a handful of firms are positioned to pursue such opportunities, the report says. For the vast majority of traditional managers, unique investment capabilities or distribution reach could be prerequisites to attract interest from potential partners.

Despite rising interest rates and market volatility, the report says it expects buyer interest will not dampen. While substantial market volatility to start 2022 has potential to slow M&A activity, the fundamental drivers remain intact and will continue to drive future activity. As the industry has moved past the worst of the pandemic-related market turmoil, firms still have significant capital to deploy into an industry in which the report says secular trends are forcing all firms to reposition themselves for future success.

In its final prediction for 2022, the report says that heightened competition among buyers will help to maintain robust pricing. With an increasing number of potential acquirers seeking targets in the wealth management and alternative asset management sectors, intensified competition will keep strong valuations steady and drive higher multiples for the most attractive opportunities.

In such an environment, buyers will also need to become more flexible in their transaction structures. In the traditional asset manager space, Piper Sandler says it expects pricing will remain lower, but it is unlikely to be compressed further.