Asset and wealth management: Deal dynamics during COVID-19

The impact of COVID-19 on the sector

The health and performance of the asset and wealth management (AWM) industry is inextricably linked to the overall economy, and the last six months have been challenging for the majority of industry players. Market volatility has impacted most operators within the industry. However, the operational and financial implications to each participant are largely dependent on their position within the value chain and their exposure to specific asset classes.

While asset managers have suffered a direct hit to earnings, markets have thus far rebounded well. Furthermore, the sector has certainly proved its resilience; managers typically boast strong balance sheets and there remains strong demand from investors for money to be well managed, particularly during more uncertain times.

Investment platforms have performed relatively well since the lockdown earlier this year. They have benefitted from an increase in trading volumes and a rush to open new ISA accounts in the immediate aftermath of the COVID-19 crisis. Many financial advisors and wealth managers have equally developed a more diverse revenue stream and have been somewhat insulated from the market falls. Demand for protection products, for example, has certainly grown in recent months.

Margin pressures have, however, intensified across the industry and the immediate revenue outlook looks more challenging. This is creating a more urgent need to differentiate, acquire capability and/or build scale.

M&A activity during 2020

We have seen a total of 65 deals announced across the industry between January and September 2020, a reduction of 22% when compared to the same period in 2019, but on par with 2018. The total disclosed value of transactions in the nine months to 30 September 2020 was £874m - a decrease of 46% on the prior year, reflecting a smaller number of larger ticket transactions.

Key deals announced this year include:

• Schroders’ acquisition of Sandaire
• Brooks Macdonald’s acquisition of the Lloyds (CI) wealth management business
• Liontrust’s acquisition of Architas’ UK multi-manager and advisory business
• Bridgepoint’s acquisition of EQT Credit
• Jupiter Fund Management’s merger with Merian Global Investors
• Warburg Pincus’ investment into the newly formed Tilney Smith & Williamson
• Interactive Investor’s acquisition of Share plc
• AnaCap’s acquisition of Wealthtime
• ARA Asset Management’s acquisition of Venn Partners
• M&G’s acquisition of Ascentric

What is driving current activity?

Continued investment appetite from private equity: The industry continues to attract significant investment interest from private equity. This year we have seen the announced acquisition of Wealthtime by AnaCap; Carlyle’s acquisition of Harwood; and the investment from Warburg Pincus into the newly formed Tilney Smith & Williamson. COVID-induced share price falls amongst the listed players has also fuelled interest in exploring value creation opportunities within the public sector.

Ongoing consolidation within the advice sector: Despite the pandemic, we continue to see ongoing consolidation within the highly fragmented advice space, with a total of 46 deals reported so far this year. Fairstone and Ascot Lloyd, two of the more active consolidators, have announced c.15 acquisitions between them.

Resurgent appetite for driving consolidation within the platform market: We have seen three notable platform deals in 2020, two of which have been driven by private equity - AnaCap’s acquisition of Wealthtime and JC Flowers backed Interactive Investor’s acquisition of Share plc. The recent acquisition of Ascentric by M&G reinforces another continuing trend we are seeing across the industry - one of vertical integration and a desire amongst managers to secure product distribution.

Asset managers acquiring scale and capability: Jupiter’s merger with Merian Global Investors continues to demonstrate the need to amass scale within an industry suffering from continuing margin compression. We are also seeing a continued desire to build capability in higher growth alternative asset classes; Bridgepoint acquired the €4.5bn credit business of EQT in June of this year.

Future outlook

The ongoing COVID-19 pandemic has clearly created uncertainty and volatility in markets with managers being further squeezed on margins. Furthermore, we have come to the end of a near decade-long bull-run and managers will now need to be more nimble in devising strategies to deliver enhanced returns.

We expect M&A to feature going forward as acquiring scale becomes ever more critical with smaller providers more likely to struggle with increasing regulatory pressures. Equally, firms will look to invest in differentiated capability to drive returns in higher growth asset classes.

The current crisis is also likely to provide the kick start the industry needs to invest in digitisation and transforming operating models (front-to-back). We expect firms to look to M&A to acquire technology, modernise and to rebuild in order to operate successfully in the future.

Overview of activity by sub-sector

Financial advice

• Carlyle Group’s acquisition of Harwood Wealth Management Group plc
• Fairstone and Ascot Lloyd, maintaining their reputation as two of the industry’s most active consolidators, have announced multiple deals this year as they continue to scale and consolidate the UK market

Asset management

• Jupiter’s acquisition of Architas’ UK multi-manager and advisory business
• Jupiter’s acquisition of Merian Global Investors
• Bridgepoint’s acquisition of EQT’s credit division
• Stonehage Fleming’s acquisition of Cavendish Asset Management

Platforms

• AnaCap’s acquisition of Wealthtime Limited
• Interactive Investor’s acquisition of the Share Centre (Share plc)
• M&G plc’s acquisition of Ascentric (Investment Funds Direct Limited)

Wealth management

• Schroders’ acquisition of Sandaire
• Brooks Macdonald’s acquisition of Lloyds Bank International’s wealth management arm
• Warburg Pincus’ financial backing of the merger between Tilney and Smith & Williamson
• IPS Capital’s merger with Prospect Wealth Management
• Pacific Asset Management’s (PAM’s) strategic partnership with Fidelius Group