As deal activity continues to accelerate into 2020, M&A opportunities remain an area of focus for public asset and wealth management companies. Notably, however, there is a growing gap in the multiples for private vs public companies which may prove a challenge to M&A for public companies. At the macro level, there are several trends which continue to impact the industry, including fee pressure, the continued bull market, regulatory overhang, and technology advancements. As we do every quarter, we take a look at some of the earnings commentary from investment management pacesetters to scope out the dominant trends.
Theme 1: Many public asset and wealth managers are eyeing M&A opportunities, particularly in the wealth management industry.
- [I]t's always been a goal of ours within M&A to increase the size. But I think there's just a few more opportunities today with some of the pressure on smaller firms, keeping up, keeping pace with technology spending and services that are required for their investors. So we're just seeing a few more opportunities for roll-ups. -Greg Johnson, Chairman & CEO, Franklin Resources
- [W]e're seeing a lot of [M&A] opportunities out there. We have always had a strong interest in private wealth businesses. We find that private wealth businesses are attractive on many fronts particularly because the assets are very sticky, and it dovetails well with what we've been doing around here for 2.5 decades at our Trust company. So we've seen a lot in that area, and we've seen a lot of teams that are stranded, that are looking for a home. And for us, we'd be particularly interested in a firm that has private wealth and has some of the capabilities that we don't currently have such as fixed income. -Brian Casey, President, CEO, & Director, Westwood Holdings Group
- As we have discussed previously, the current M&A environment for wealth management firms remains both active as well as expensive. Silvercrest, however, is involved in multiple conversations at any given time … Regardless of the environment, Silvercrest will opportunistically seek to effectively deploy capital to complement our organic growth … There is a possibility down the road that as the RIA business matures and professionals find themselves unhappy at much larger roll-up type firms or in that situation, they may start to look around the way some of their colleagues are at the brokerages, which is not a fertile hunting ground for us and our business model. It's possible that down the road, that there could be some RIA-type lift outs, but we're not running around seeking those. If you look at the business, the wealth management side with RIAs is highly concentrated. It's not a large number of firms that control a majority of the AUM, Silvercrest being lead among them. -Richard Hough, Chairman, President, and CEO, Silvercrest Asset Management Group
Theme 2: While public companies see opportunities in wealth management M&A, high pricing is a key consideration particularly in light of historically low multiples for publicly traded asset and wealth managers.
- Of course, we know that private equity and other wealth managers in the mass affluent wealth space are very, very active. And some of the EBITDA multiples being discussed here in the 15x, 16x-plus area, even in businesses that don't actually have the acquisitions closed yet, for example. So it is a very highly competitive space from a rollout perspective because the economics just make so much sense. -Matthew Nicholls, Executive VP & CFO, Franklin Resources
- We're certainly looking in [the wealth management] space, and we are keen observers of the price and multiple escalations that's going on there. As we think about our wealth management business and M&A opportunities there, it's really about driving scale. -Ben Clouse, Senior VP, CFO, Treasurer, Waddell & Reed Financial
- One of the challenges is that the public multiples and the private multiples still do have a disconnect … We really have to think about strategically and long term and creating value for those transactions that would make sense, we would definitely think about it. Obviously, our view is that the multiples that publicly traded managers are trading at are not in line with historical multiples. So we look at it long term. We look at it what is the right way to build value for the future in terms of that. But again, we're disciplined in terms of how we assess those alternatives. -George Aylward, President, CEO & Director, Virtus Investment Partners
Theme 3: Macro trends like fee pressure, the continued bull market, regulatory overhang, and technology advancements continue to shape the industry.
- I think we are likely to see more pressure on top line, driven by continuing price competition in the business. At some point, we'll see an equity downturn that will put more pressure on companies. We're -- we think we enter that environment from a position of clear strength with not only a number of market-leading franchises, but also strong balance sheet, strong culture, strong leadership, continuity of approach, focus on this business, great relationships in the market, history of innovation … So we're not all that optimistic at the moment about near-term trends in our industry, but are quite optimistic about our relative position within asset management. -Thomas Faust, Chairman, CEO, & President, Eaton Vance
- 2019 was marked by heightened geopolitical and trade tensions which created volatility in financial markets. Uncertainty around the U.S. and China trade negotiations, Brexit and other concerns about a slowdown in global growth all impacted investor sentiment, driving industry flows into safer fixed income and cash strategies, cash assets throughout the year … Macro forces are impacting the wealth industry, including a more challenging market environment, heightened customer expectations, more regulation, technology advancements. And this is driving demand for a deeper portfolio -- analytical and risk transparency, portfolio construction, product and scale. -Larry Fink, Chairman & CEO, BlackRock
- I regularly speak about the changing distribution landscape: the rise of the wealth channel and relative decline of the traditional institutional market; the importance of reaching people digitally; globalization, a buyer's market in terms of fee structure and vehicle preference; demand for customization and tailored solutions. -Eric Colson, Chairman, President, and CEO, Artisan Partners Asset Management
- Value investing, as we practice it at Pzena Investment Management, is the process of studying businesses whose stocks have collapsed, of gathering enough data to make a reasoned judgment about whether the history of the business and industry remains a useful guide for estimating future earnings and for investing when the range of outcomes skew solidly in our favor. We sit at one of those moments where a small number of market darlings have driven market returns to record levels and caused enormous dispersion between value and growth strategies. And yet, we judge that with an opportunity set that looks as good or better than it did a decade ago, the odds of our deep value approach succeeding in the next 10 years seems like a much better place to be than to bet that the winners of the past decade continue to defy analysis. -Richard Pzena, Chairman, CEO, and Co-Chief Investment Officer, Pzena Investment Management
- I do think that in an environment where fees are decreasing and costs are increasing, a lot of firms have to sort of think about, particularly in the smaller end, will they be better off partnering. I think the better firms are not in a situation where they have to do something, but they'll certainly consider looking at that. And then on the demand side, there are probably fewer firms that have the financial flexibility to be in the market. -George Aylward, President, CEO & Director, Virtus Investment Partners
Summary
Earnings calls this quarter brought to light the varying challenges and opportunities that asset and wealth management firms face.
On the asset management side, macro trends like the shift from active to passive investing have forever changed the active asset management industry, and asset managers are having to re-think their cost structure in order to stay competitive. Increasing operating leverage through acquisitions and outsourcing has allowed asset managers to protect their margins despite declining fees.
For smaller wealth managers, an active M&A market and high private market multiples provide an attractive alternative for owners seeking exit options. Interestingly, there is a growing gap between private and public company multiples. The higher multiples we’ve seen for relatively small wealth managers are seemingly at odds with some of the historically low smaller public company multiples, which begs the question of whether mean reversion is on the horizon.
