Wealth managers want to pass the baton. Private equity firms are ready

Unique consolidation in the wealth management industry has private equity firms and acquirers considering the possibility of building their business portfolios with stable cash flows.

Founders and other senior executives are eyeing retirement at the same time that private equity investors have been attracted by recurring revenue from asset-based wealth managers, high levels of client retention and the potential for accelerating growth. growth through acquisitions. Some wealth managers are using private equity to make acquisitions, which further fuels consolidation.

“You’re looking at an industry that has recurring revenue and is growing through acquisitions, and a lot of companies are growing quite rapidly – that’s why private equity is excited about this,” said Scott Hanson, co. -founder of the wealth management company. Allworth Financial, which is backed by financial services-focused private equity investor Lightyear Capital.

In the first half of this year, private equity firms and their portfolio companies backed 48 asset management deals globally for a total of $6.7 billion, including direct investments and supplements, according to data from PitchBook. The number and value of deals are among the highest in 12 years, and the industry is on track to surpass last year’s record of 82 management deals involving private equity investors.

Private equity investing in the wealth management industry is not new; However, alongside its attractive business model, the fragmented state of the industry – which offers potential for consolidation and offers private equity investors the opportunity to conduct roll-up transactions for value creation – is a another factor in the increase in private equity activity.

Great wealth managers are capitalizing on all of these factors to pursue accretive acquisitions and accelerate growth beyond what can be achieved by naturally attracting clients over time.

Allworth Financial is one of the wealth managers who have taken advantage of the trend to expand. The serial acquirer has purchased 21 wealth managers over the past five years, bringing its total assets to more than $15 billion, from $2.8 billion at the start of 2018, according to Hanson.

M&A activity in the wealth management industry has increased significantly over the past two years, with some soon-to-retire advisors struggling to find successors and seeking to monetize their life’s work through of a sale to a strategic buyer or a financial sponsor, he said.

“A wealth management firm is typically a small business run by a founder and a handful of employees,” Hanson explained. “They want to make sure their clients are taken care of after they retire and at the same time they want to realize the economics of the businesses they’ve built. So we’re seeing a lot of these businesses selling to large acquirers. »

A recent report by Cerulli Associates estimates that more than a third of advisors managing about 40% of total industry assets are expected to retire within 10 years, but one in four lack a succession plan .
The growing presence of private equity firms in wealth management also contributed to record M&A activity last year, as such investments helped strategic buyers build larger war chests to win deals. agreements.

According to investment bank Echelon Partners, 307 mergers and acquisitions were announced in the sector last year, and PE was directly or indirectly involved in 60% of the total acquisitions. In 2020, the number of transactions was 205.

In the first quarter of this year, acquirers backed by private equity firms accounted for nearly 55% of wealth management acquisitions, according to the Echelon report. The most active acquirers in the first quarter were private equity-backed wealth managers, including Creative Planning, backed by General Atlantic; Beacon Pointe, supported by KKR; and Mercer Advisors, backed by Oak Hill Capital and Genstar Capital.

Echelon expects the momentum to continue this year, estimating after the first quarter that 2022 will see a new industry high of 338 deals, and the final figure could be higher.

“As we approach the end of Q2 22, this estimate appears to remain mostly accurate, perhaps even conservative,” said Barnaby Audsley, vice president of Echelon.

Featured image by Drew Sanders/PitchBook News

Dolores W. Simon