Ask any expert about the outlook for the UK wealth management sector and the default answer is always “more consolidation”.
This is a very good answer given the multiplicity of meanings that “consolidation” can encapsulate. It covers just about everything relating to future sectoral structure.
In most instances, the term is used as an alternative to “significant merger and acquisition activity”. However, “consolidation” can also be used to signify almost the complete opposite: a state of relative stasis as well as just about anything in between..
Looking forward to 2023, the last of these meanings seems to be the most relevant as far as the UK wealth management sector is concerned.
There will be continued M&A activity, especially within the advice and wealth/financial planning segments.
But within the “core” segment, which encapsulates the private client investment management and former private client stockbrokers, M&A activity will probably be relatively muted for a variety of reasons notwithstanding its still fragmented nature.
There are two main factors that are likely to limit deal flow within the “core” segment.
The first reflects the underlying economic and monetary conditions. A combination of rising interest rates, a much tighter fiscal policy and shrinking available capital will collectively constitute significant headwinds to significant M&A activity.
For much of the past decade, the “core” wealth management sector has been a sellers market. Prospective sellers have been able to get their asking price thanks to a combination of acquirer appetite and easy money. And this has been reflected in the multiples paid for acquired firms.
During 2022 this all changed, however.
Within the investment management sector, valuations have fallen by around 50 percent according to research commissioned by the Lindsell Train investment trust, a London-listed investment trust. It is likely something similar occurred within the “core” wealth management sector.
The second factor limiting deal flow is a relative shortage of potential merger targets, especially as far as top tier firms are concerned.
Royal Bank of Canada’s acquisition of Brewin Dolphin for £1.6 billion and Raymond James £278.9 million purchase of Charles Stanley removed two of the bigger independents off the market.
This leaves Rathbones, along with Evelyn Partners as the only two potential top tier firms available for purchase.
But potential buyers will probably have to pay around £2 billion to acquire either.
Who would do this during 2023?
As far as UK institutions are concerned it is difficult to identify any wealth management firm that would be willing, or able, to pitch this amount of money on an acquisition.
Both look too big to interest Martin Gilbert, who is currently attempting to build a significant wealth and investment management firm.
But anything can happen, and probably will.
It is not beyond the bounds of possibility that a foreign institution could come into the market. Either firm would make a very good catch for a foreign bank that wished to acquire a stake in the UK wealth management market.
Furthermore, Evelyn Partners might come into play, not least because Permira, one of its private equity backers may wish to realise its stake in the company.
Trying to identify a potential foreign acquirer is a thankless task.
Given their activities within the UK retail banking sector J.P Morgan and Goldman Sachs could be interested. So could Morgan Stanley if it decided to re-enter the UK market.
One source of potential M&A candidates could be forced sellers.
Margins may be relatively buoyant, even in today’s market, relative to other sectors. But the reality is that many “core” UK wealth management firms across the spectrum are either loss making or make relatively small profits.
Given that trading conditions don’t look that great for 2023 some firms might be compelled to put themselves up for sale.
Identifying possible candidates is very difficult, however.
There should be no shortage of potential buyers, however, if the statements made by chief executives and company chairman in annual reports and trading statements are concerned, however.
Nonetheless, one gets the impression that M&A focus will be very much on “add ons”.
For “core” institutions this will probably amount to more financial/planning firms in an attempt to build out their service offer as well as acquiring additional distribution capabilities.
Similar reasoning might tempt some firms to acquire a so-called “fintech” or a firm that has distinct ESG investment capabilities.
The big advisory/wealth planning firms that are beginning to emerge might be tempted to acquire an investment management capability.
Turning to the latter sector there will probably be no decline in M&A activity, although a much tighter monetary environment may provide a constraint.
The reality is that although many acquirers are backed by private equity firms many deals are funded by debt. And this will become much more expensive.
