Wealth manager M&A to rise as competition heats up

Robert Hare Lloyds

With increasing competition amongst UK wealth managers and continuing interest from both private equity and foreign buyers, the sector looks set to see yet more mergers and acquisitions in 2015 and beyond. 

M&A activity in the wealth management industry is already strong, with recent data from Scorpio Partnership revealing that the UK was the most popular country for deal activity in 2014, following major transactions, including Rathbone Brothers’ acquisition of Jupiter Asset Management’s private client and charity investment arms. 

A broad look at the UK’s wealth management sector reveals a fragmented industry with many smaller players still operating in niche areas. However, shifting market dynamics could speed up the pace of deal activity in the UK’s wealth management industry. 

Changing client needs could prove a key driver of deal activity. Investors now expect wealth management providers to offer real time access to their capital via the latest digital technology, alongside more traditional face-to-face advice. A recent report by Mercer UK highlighted the adoption of ‘smart technology’ including social media and mobile technology as integral to remaining competitive in the UK wealth management market. 

Clients are also placing increasing focus on value, with DIY investment tools growing in popularity as a lower cost alternative to discretionary type fees. Firms are now looking to offer low cost direct-to-consumer models to supplement traditional channels. 

These shifting demands are prompting many wealth managers, particularly more traditional firms, to make significant changes to their business, while increasing the possibility of further consolidation in the industry. 

Brewin Dolphin, for example, has undertaken a business improvement programme, which has seen the company listed as a top UK takeover target in a recent report by analyst Liberum. At the opposite end of the wealth management market, smaller firms are also being forced to either sell up or migrate to a larger platform due to the significant investment required to implement this type of technology. 

Institutional investors such as private equity and asset management firms have been at the forefront of M&A activity as they look to diversify into new asset classes. Transactions such as Permira’s acquisition of Bestinvest and Bridgepoint’s purchase of Quilter & Co highlight private equity’s growing interest in the sector during the past couple of years.  

There are several reasons behind the uptick in interest. Private equity buyers are attracted to wealth management firms because the majority are capital-light, cash-generative businesses. Once set up correctly, a wealth management firm has a good operating leverage with profitability outpacing a rise in costs.  This offers potential investors the opportunity to make a decent return on their capital.  

In many cases private equity firms have spotted a turnaround opportunity. They recognise some wealth management firms require an injection of capital and fresh ideas to overhaul their business model if they are to deliver the type of service now expected by investors. 

Asset managers and insurers are also attracted to wealth management businesses by the positive dynamics of the sector. Improving stock markets and an ageing population, combined with changes to the UK pensions system giving people more control over their savings, has created a larger market for wealth managers to operate within. 

A further driver for M&A activity looks set to come from foreign institutions. UK wealth managers may well appeal to international buyers interested in breaking into both the wider European market and the UK more specifically, thanks to its enduring reputation as a leading financial centre. US firms may also have a particular interest in buying UK wealth managers if sterling should weaken further against the dollar. 

Signs of potential international deals have already appeared with Canada-based Canaccord Genuity president Paul Reynolds indicating last year that the firm was interested in making further “bolt-on acquisitions” in the UK wealth management market. 

Another factor is the likely boom in M&A activity is regulation.

Undoubtedly, the introduction of the RDR was a key driver of consolidation in wealth management as many business owners sought an exit. Those deals have subsided but new regulation under Mifid II looks set to bring further costs for the industry and, with it, the possibility of yet more consolidation. 

Recent falls in the price of wealth management businesses for sale have prompted some to question whether deal flow can be sustained. However, the market remains fragmented with many smaller players. It is likely the forthcoming months will bring further changes as firms exit the sector, bulk up or look to service more profitable areas to cope with the ever changing market dynamics.    

Robert Hare is managing director of pensions, wealth and stockbrokers at Lloyds Bank Commercial Banking.