Year to Date Review in Wealth Management

With this week’s news that Adrian Durham, the founding CEO of FNZ FNZ Group , where I formerly worked, stepping down from this role after more than 20yrs at the helm, to become a “contented” special advisor to a company that has been valued at over US$20bl by shareholders prepared to invest further US$1bl in funding (via a preference note) under the new leadership of Motive Partners Motive Partners founder, Blythe Masters, I thought it was a good opportunity on the 1st of September, to reflect on what has thus far been a tumultuous year in wealth management.

At the core, whilst there have been a few transactions that have been led by wealth market participants, such as UBP UBP - Union Bancaire Privée , Indosuez Wealth Management Indosuez Wealth Management , HSBC HSBC , and ABN-AMRO ABN AMRO Bank N.V. , particularly in relation to each of their regional private banking ambitions, or insurers pursuing through their benefit arms Mercer , greater participation in delivering a range of pension and investment consultancy solutions, most of the real action has been led by the emergence of financial sponsors as the main buyers, and backers in the wealth management segment.

Of course, much of their participation has been based, continuing a trend that began more than 5yrs ago, on the pursuit of different types of buy and build strategies.   Initially, many financial sponsors were pursuing to build scale to acquire appropriate underlying client exposure to both the right segments, as well as geographical domains in wealth management. This strategic aim still remains relevant today in very large and fragmented markets, such as those in the US and France for example, but in other markets like the UK, new strategies related to the service offering, particularly as it relates to the myriad of planning and investment services that can be consumed by higher net worth clients, have begun to take precedence.  This hasn’t slowed down the transactional flow, but the nature of the deals being announced, and the targets being pursued is taking on a different shape where expertise and service capabilities are driving value enhancement for SMEs being pursued by consolidators and aggregators.   

While this type of diversification clearly can generate significant commercial value by creating multiple and repeatable advisory fee lines of business, it also, in my opinion, requires leadership to create and manage a platform that is both extremely strong in data management and also highly integrated in the way in which it delivers a holistic framework for consumption by both the firm’s own participants as well as the client.    As far as I can see, this has not exactly been a strength, nor to date the priority task it should be for builders, and thus probably goes a long way in explaining why the primary trend in wealthtech oriented venture capital has been around US, UK, and French start-ups that are focused on operational efficiency and scale in practice management, and particularly how AI solutions can be initiated alongside data management technologies to address specific workflow and business process needs of advisory, compliance, and administration functions. 

While the picture of adoption is still patchy and delivered often in an “experimental or sandbox” fashion, rather than as an enterprise rollout, financial sponsors backing consolidation and service diversification to build their value proposition will continue to explore using these capabilities as a means of launching better platforms for client lifecycle management, administration, and repeatable value creation for the remainder of this year and beyond.

Beyond this, 2024 is also shaping up following the announcement of the acquisitions of both UK based Hargreave Lansdowne Hargreaves Lansdown , as well as US based Envestnet Envestnet, Inc , not to mention the successful sale of Harvest Software Harvest EU in France by Five Arrows, as a year where take private deals have emerged as executable and exciting transactions for the wealth management and investment segments.   There have of course been attempts made in the past twelve months on assets like Allfunds, Temenos, and Abrdn for private equity alone or in partnership with a Trade buyer, to try to execute take private, but it is only with these latest deals that both internal stakeholders, and external institutional shareholders have come together with an aligned position on value and opportunity, to make these deals happen.

When I try to address the question of “why now”, clearly the fact that there has been an inevitable decline in the attractiveness of public markets combined with the large wall of assigned capital to the private market certainly cannot be ignored.  Scrutiny on management of publicly listed companies has always been a “high cost”, but had been warranted by other considerations, such as liquidity, and capital market access, but with both of these positives weakening, and PRI, DEI and ESG reporting and governance requirements growing alongside many other regulatory reporting responsibilities, leadership of many firms, especially those with market caps under US$10bl are much more open to financial sponsor conversations now then ever before, often supported by activist shareholders frustrated by market multiples that are forever discounting scale, repeatability, and dividend generation.

I also think that many types of regulated or semi-regulated financial service firms, especially those that were founded 20+ years ago face a raft of transformational challenges, some based on technologies, and others based on operational and commercial models that cannot be easily “sold” to shareholders who want to hold investments that are able to deliver an effective growth strategy, based on rising cash EBITDA, stronger cashflow and consistent and persistent cost control.  This is not meant as a criticism on the investment attitude of institutional investors, but since transformational programs can often adversely impact all of these elements and necessitate a significant adjustment in how business is conducted, not to mention the overall commercial change that will need to be navigated while technology and operational disruption is high, institutional investors managing pension and insurance assets, are naturally “gun shy” about their commitment. 

While I am not convinced that taking a company private and changing the nature of the cap table and stakeholders dramatically in the process is always the right answer, it does, from the experiences I have seen, provide the opportunity for a timetable and investment reset that is advantageous to a newer “performing” management team. Financial sponsors, with new fund commitment mandates measured beyond 7yrs can be the ideal partners, especially in situations where negotiated prices can be executed 30%+ below all-time highs, and the right leveraged structure adopted.

It remains to be seen of course whether the raft of subscale wealth management players that continue to exist publicly will turn toward private equity for transformational support as we get back to business, but with the way that regulatory change is continuing to occur in anglo saxon markets, as well as the manner in which pension reform is impacting retirement planning and behaviour all over the developed world, it seems clear that interest in “potential situations” will remain strong among private equity investors keen to find ways of unlocking value that is trapped by the cost/benefit risks of both digital and business transformation.