M&A boom a sign of the times

In recent months, consolidation pressure has been a major theme in the international wealth management market. A number of leading international wealth managers have launched major restructuring in recent months – HSBC, Merrill Lynch and EFG, to name just a few – and there have been at least four wealth management deals with ticket prices topping $500m (€380m) in the last year alone. Driving this activity are the twin themes of scale and compliance, and large and small firms alike are readjusting to the changing global economic environment.

Indeed, in our latest Deal Tracker report we track transaction activity since the start of 2011. During this period, there have been at least 63 reported wealth management acquisitions around the world with deal value of $587bn.

Remarkably, of these deals, which all took place between Q1 2011 and Q3 2012, 38 per cent of the acquired firms were located in the UK. This reflects the run up to the new regulatory regime in the country, which will come into force at the start of 2013. The raft of legislation, known collectively as the Retail Distribution Review, has significant cost implications and favours firms with the scale to implement changes to compliance, systems and processes.

Thus, the regulations have been seen by larger firms as an opportunity to expand in the UK as smaller firms seek an exit. With this in mind, it is perhaps unsurprising that of the 24 institutions purchased in the UK, 21 were firms with less than $2bn in assets under management.

What has been happening in the UK is a microcosm of the global picture. As regulations get tougher around the world and compliance costs start to spike, firms are reconsidering which markets they regard as core. And, it is not only compliance that is driving this trend. The changing economic climate has also forced firms to consider where to focus their growth efforts to create scale.

Naturally, these themes have had an impact on valuations. Looking across the full 21 month period, we see that the price of deals has fluctuated from 0.28 per cent to 5.08 per cent of the target firm’s assets under management.

And, as ever in the wealth management market, valuations are most closely correlated to business model and whether the transaction is domestic or cross-border. For example, the average price for a domestic independent financial advisor is 1.4 per cent of assets under management, while a private bank averages around 2 per cent and more if it has cross-border reach. Indeed, on average international wealth management transactions reach valuations of 3.8 per cent of assets under management.

The results highlight that in spite of the economic slowdown, wealth management remains an attractive investment in the financial services sector. This is perhaps hardly surprising given the pressure on profits in the investment banking sector. But, the theme in wealth management is not so much one of downsizing, but rather of careful restructuring to ensure efficiency in lean markets.

Cath Tillotson is managing partner at wealth management think-tank Scorpio Partnership