Even With Slowdown in M&A, Private Credit and Crypto Will Remain Hot

Deal momentum slowed in the second quarter of 2022 amid growing global macroeconomic and geopolitical uncertainty. 

In a 2022 midyear look at asset and wealth management deals, PwC said the slowdown could signal a continued easing in the second half of the year. However, the report noted that while deal markets slowed a bit in the first half of 2022, asset and wealth management deal volume didn’t hit rock bottom. 

According to the report, deal volume remained at a “strong pace” in the first half of the year, with 109 deals announced by May 15, an 11 percent increase over the same period in 2021. Notable transactions included UBS’s acquisition of Wealthfront for $1.4 billion, AllianceBernstein’s acquisition of CarVal Investors for $1.4 billion, and Carlyle’s acquisition of a portfolio of collateralized loan obligations from CBAM for $787 million, the report said. 

Moving forward, PwC noted that in the current rising interest rate environment, investment activity in the private markets has continued to grow. “With alts managers sitting on over $2.5 [trillion] of dry powder and continuing to enjoy premium valuations and interest rates on a precipitous rise for the first time in several years, we expect [that] private credit managers in particular will come to the forefront as attractive targets not only for traditional asset managers looking to penetrate the private markets sector, but also for other members of the private markets ecosystem, such as private equity firms,” the report said. 

Traditional asset managers will benefit from expanding into private credit because it will create a much-needed fixed-income product amid the volatility of the equity markets, the report said. For example, the report noted that some traditional firms have started to expand their credit capabilities, including Franklin Templeton, which operates credit manager Benefit Street Partners but announced in June that it had acquired Alcentra, BNY Mellon’s European credit arm. 

“The acquisition will approximately double Benefit Street’s AUM and expand its European presence,” the report said. 

PwC also expects private equity firms to dive deeper into private credit. While private equity firms are already familiar with and active in these products, it anticipates that PE firms will be “evaluating transformative platform investments in private credit, especially as macroeconomic cycles begin to turn,” the report said. 

In digital assets and cryptocurrency deals, PwC sees opportunity for mergers and acquisitions. Crypto assets and products have suffered through a brutal market correction in the first half of 2022, with PwC noting that Coinbase’s valuation has decreased to a sixth of its valuation in the fourth quarter of 2021. “This moderation in valuations should [serve] to make it easier for larger, cash-rich regulated players (exchanges, brokerages, asset managers) to explore M&A opportunities in the crypto space,” the report said. “They are most likely to be interested in crypto players with weaker balance sheets, especially players with unique intellectual property or an established position catering to specific customer segments.”