Dealmaking in the wealth management industry chalked up another record in 2021, the ninth straight year with a high-water mark, and private equity capital drove the activity, according to a report by the investment bank Echelon Partners.
There were 307 deals in 2021, a jump of almost 50% from the 205 deals recorded in 2020. There were 145 acquisitions of firms with more than $1 billion in assets. And $576 billion in assets were acquired. The average seller had more than $2 billion in AUM. All are records.
Barnaby Audsley, vice president of Echelon, based in Manhattan Beach, California, said the biggest headwind to dealmaking right now is the outlook for the economy here and around the world.
“There are some macro risks,” he said, “inflation, the rate at which the Fed will have to raise rates. If they are raised too fast and cause a recession, that may cause a pause in M&A, but overall, long-term, the forces that are driving consolidation and investment in the wealth management ecosystem are not transitory. They’re more secular.”
The report called private equity capital “the most active force” in wealth management M&A. Private equity was directly or indirectly involved with more than two-thirds of all deal activity — 209 transactions, or 68% of the total, in 2021. The 209 deals represented a 55% jump from 2020.
There were 38 direct private equity deals in 2021, up from 23 in 2020.
The report said nearly every prominent strategic acquirer in the industry has at least one private equity partner.
At a panel discussion hosted by Dynasty Financial Partners, three RIAs talked about why RIAs are so attractive to private equity, as well as potential pitfalls.
“Private equity haș recognized that with the generational shift in wealth, with the advancement of the software and technology, especially the types of technology that are available to us in the independent channel,” said Jason Fertitta, CEO of Americana Partners, “that Wall Street is not going to dominate the space forever, and the independent firms can actually compete with Wall Street now.”
Fertitta said there’s a good argument to be made that firms like his are safer than Wall Street giants.
“There’s no proprietary trading, no fat-finger trade that puts the firm in jeopardy,” he said. “These big custodians just don’t do that, and we have access to all the same software we had on Wall Street.”
But Phil Fiore, CEO of Procyon Partners, sounded a cautionary note for private equity.
“It’s great that private equity is involved with our business. It’s a validation, but the thesis is wrong,” he said. “They’re paying extremely high valuations with the idea that if they aggregate a bunch of these and form some common disciplines within them, like HR, reporting, etc., they can get to the right outcome from an EBITDA standpoint. But independent businesses don’t do that. They left to be independent. If they (private equity) think they’re going to take these great businesses and form corporate disciplines around them in order to synergize (profit) and (loss), it’s not going to work out well for them as owners.”
The fragmentation of the industry, as well as the solid client relationships many of these firms have, is also drawing in private equity, said Brian Baum, managing director of Interchange Capital Partners.
“They want a stable customer base, a recurring revenue stream, and people who have been doing this forever that are going to continue to do this and not have to be replaced,” he said. “We’ve all had decades-long client relationships. That’s what’s interesting to PE firms, but it can go against them. We can leave the PE firms, and the clients will come with us. That’s where the allegiance is.”
Baum warned private equity firms that they have to build a company and culture that understands that.
“If it happens to UBS, Merrill Lynch or Morgan Stanley today, eventually, if these firms are successful, it’s going to happen to them,” he said. “Already people are leaving LPL, Kestra, the hybrids, to come to us and go fully independent. Advisors know we have skin in the game and understand the business.”
Audsley illustrated the fragmentation, pointing to the 13,000 RIAs in the United States.
“There’s a lot of opportunity for private equity and its platform investments to conduct an M&A strategy,” he said.
He also noted the demographics of the RIA space, with many owners near retirement age. “It’s an industry in motion,” he said.
RIA dealmaking activity declined though, with the category announcing only 22.7% of acquisitions in 2021, or 70 total transactions. In 2020, RIAs announced 78 transactions, or almost 38% of the year’s total, making it the most active type of acquirer.
Last year saw more purchases of minority stakes in companies, Echelon said, a sign that the wealth management M&A marketplace has matured. Such deals climbed 58% in 2021.
“The typical minority investment is reserved for the larger, more mature companies in PE world … the capital solutions that are being brought to the operators of businesses are becoming wider. As the industry matures, there are more options,” Audsley said.
There was record activity in wealthtech M&A last year. The report showed 108 deals and fundraising rounds, up 123% over 2020, also a record.
Here we see the effects of the pandemic, Audsley said. “Covid has resulted in work-from-home. That’s resulted in wealth managers and businesses looking at software and tech vendors,” he said. “Smaller businesses haven’t invested enough into tech in the past.” And, he said, there is “more investment in companies that provide access to investments that were previously just made available to institutional investors.”
As for what 2022 holds for wealth management M&A, Echelon pointed to five factors that it expects to keep the trend of the last decade in place.
It said debt markets will likely remain accommodative, even as interest rates rise. Financing costs should remain relatively attractive.
Private equity, it said, has a record amount of dry powder, expected to soar past $714 billion in 2022.
Buyers are likely to increase consolidation efforts overseas, it said, which would mean more sub-acquisitions.
Echelon forecast an increase in cross-selling opportunities between wealth management and retirement plan services, which it said would result in heightened interest from the largest buyers in each marketplace.
And finally, Echelon said there is likely to be increased investment in wealth technology with corporate cash balances at large financial institutions at record levels.
