A new Fidelity report examines how private equity is reshaping the M&A landscape and increasing options for independent advisory firms.
Fidelity Clearing & Custody Solutions released the Insights on Sources of Capital and Independence report, which finds that established firms with demonstrated track records of consistent growth have been receiving the bulk of capital funding.
According to Fidelity, this results in the formation of unique “ecosystems,” as platform firms and strategic acquirers increasingly use this capital to fund and acquire smaller firms. In the first quarter of 2018, strategic aggregators were responsible for more than two-thirds of M&A transactions, which is up from 47% in the first quarter of 2017.
As external capital providers are increasingly drawn to larger firms, assets are further concentrated at the top, according to Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions.
“Those large firms are then investing in smaller ones, often using a model that keeps the owners involved as the business grows and develops,” Slater said in a statement. “That’s a significant shift in attitudes, and is opening up new opportunities for small firms who are open to embracing this more collaborative perspective.”
There are two predominant ecosystem models through which private equity capital is making its way down from providers: the direct investment model and the intermediary model, according to the report.
In the direct investment model, investments are made in a platform firm that uses the funds for organic and inorganic initiatives. For example, private equity firm Lightyear Capital acquired equity positions in large advisory firms, including Wealth Enhancement Group, Advisor Group and HPM Partners. The large advisory firms then made smaller firm acquisitions, which helped them to build significant scale.