Despite rising interest rates and the possibility of a recession, deal activity involving wealth and asset management firms remains robust, partly because of a surging interest in private credit firms.
During the 12-month period ending in May, there were more than 300 mergers and acquisitions with wealth or asset managers in the U.S. — slightly outpacing the total number of deals in 2021, when markets were more amenable to companies buying and selling one another, according to a PwC report.
Fearing a recession, buyers with capital and strong balance sheets — making them less dependent on borrowed money — have been pursuing deals. Meanwhile, would-be sellers have been working to improve their efficiency and profitability to drive higher valuations, in hopes of getting a deal done before a possible recession, PwC said.
Private wealth management firms accounted for the majority of deals — 276 mergers or acquisitions — in the past 12 months. Beyond a short list of huge wealth management groups affiliated with banks, such as Bank of America and Morgan Stanley, the wealth management industry is highly fragmented, with thousands of professionally run businesses consolidating or getting acquired by private equity firms.
Although there are far fewer deals in the more mature asset management industry, all types of firms are considering transactions. Even the largest firms are eager to get bigger in their pursuit of greater scale. A deal could help them grow existing parts of their business or bolt on new capabilities. BlackRock’s acquisition of Kreos earlier this month, which cannonballed the world’s largest manager into the venture debt business, is a prime example of the trend.
“If you don't have that diversified platform, you're looking to expand that platform,” said Greg McGahan, the U.S. wealth and asset management leader at PwC. “And, obviously, one of the hottest asset classes that I see today is private credit. And I think there's a lot of things that are driving the growth in private credit.”
After a lost decade due to low interest rates, it’s now a lender’s market in private credit. The failure of Silicon Valley Bank and other regional banks, combined with an aggregate pull-back from financing by others, has helped fuel borrower demand. Family offices and other investors are eager to invest in the asset class, which is offering the potential for good returns, albeit with some expected defaults. If they don’t have it already, asset managers want a piece of the action.
Firms with diverse businesses have more consistent revenue, are more attractive to investors, and are demanding higher multiples, McGahan said. (Ares Management, the $360 billion firm known for private credit, has been diversifying in other ways.) Large, diversified asset managers trade at prices roughly 28 times their fee-related earnings. Smaller managers trade at an average of 22 times their fee-related earnings, or even lower if they aren’t diversified, he said.
But there are a lot of opportunities to acquire private credit and other alternative investment managers because these firms need capital to grow, McGahan explained, adding that the options include bringing in minority investors, going public, or selling themselves outright.
“The product is in demand. So if you're the private credit manager, how are you going to continue to grow your platform? How are you going to find the available capital to grow your platform? One of those things you must be considering is potential deals,” said McGahan.
Product mix is only part of the growth and valuation puzzle. Asset managers are also doing deals to strengthen their distribution, just as Franklin Templeton did when it acquired Putnam Investments for $925 million earlier this month. McGahan expects there will continue to be a “convergence” of asset management and insurance companies.
PwC anticipates deal activity will continue at its current pace and that more large deals are coming. (Even though it’s not a financial services firm, the successful initial public offering of restaurant chain Cava last week soared 99 percent at its debut.)
“Our clients are really hoping for this market to turn and there was just a very successful IPO a week ago, not in the asset management space, but it's caused a little bit of a ripple effect across the markets and people think that the IPO market might open,” McGahan said. “There are quite a number of asset managers I am working with that have the intent to go public and are really looking for the capital markets to turn. And if they do, they're gonna pull that trigger.”
