Are you thinking about deploying capital?

  • Viral Desai, Author |

2 min read

Wealth management bolt-on transactions were a theme before the pandemic and have continued to be so during it. I expect such transactions will continue. This is not just the case for smaller wealth managers looking to grow their revenue base, distribution and wider capabilities, to get them to AUM levels that help generate cost savings. It is also true for larger asset managers looking to take advantage of this strong fee earning segment of the market.

Deal activity will be fuelled further as active managers seek to fight off the challenge from the passive investor products and platforms. In October 2020, and again in November, it became clear, that ‘wealth (or ‘private client’) offerings are not only attractive to the asset management industry, but also the larger banking community.

Banks (particularly those with strong cash flows) continue to hold greater levels of capital relative to the regulatory requirement and capital buffers set by regulators. Yet, they are prohibited from making distributions to shareholders in the current climate. Given this, it seems logical that acquisitions are back on the table, particularly for prospective buyers that have already done an in-depth assessment of their balance-sheet risk in a post-COVID-19 world. Furthermore, in volatile times, diversification through acquisitions that provide a stable fee generating income stream would be music to investors’ ears.

Contrary to banking, and particularly investment banking activities, asset and wealth management activities are ‘capital light’ businesses. So, diversifying an investment bank with a stable income stream through a successful acquisition not only reduces operational risk but will result in an improvement in a bank’s return on equity. 

The key drivers from cross-sector financial services transactions (e.g. banks and wealth managers) are likely to include:

 

  • realisation of the benefits of an existing relationship
  • distribution network synergies for the wealth manager
  • wealth/private client cross-selling opportunities for the bank
  • diversification from more volatile income streams for the bank
  • increased footprint and geographical expansion
  • scale and pure size benefits, which may lead to further cost synergies
  • improved operational efficiency, including digitisation
  • an improved customer experience.

Once a business plan has been put in place, the challenge of course is to determine the right price for a good business and the strategy to develop it. In a competitive market, properly assessing the pre-deal, in-deal and post-deal benefits of a tie-up are key. Not ascribing any value to the post deal synergies may lead to unsuccessful bids, but overestimating the value benefit – well – that will probably only secure an exit for a well-informed seller, as opposed to a buyer.

If you would like to discuss any of the recent trends or market themes, please get in touch.

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