After an almost 10-year bull market, the investment management sector is at an inflection point, resulting in robust M&A activity. According to the S&P Global Market Intelligence, the number of deals in the space almost doubled from 96 to 180 from FY14 to FY17, with FY18 slightly lower than FY17.
Several key themes are driving this, such as aging firm owners and their succession plans, the need for operational efficiencies and strong infrastructure, and the influx of private-equity capital which also is raising valuations. Incremental to these factors is market volatility during the fourth quarter of 2018, driven by interest rate fears, tariffs, and skyrocketing corporate debt.
The impact of the aging baby boomer demographic has been widely documented. It is also influencing the direction of investment advisory firms and whether founders decide to either transition to existing teams or sell to a corporate or private equity buyer.
Naturally, the industry is heavily dependent on personal relationships and firm culture is critical. We believe that M&A activity would be even stronger than current levels if not for deals falling apart near the finish line due to insurmountable differences in cultures and personalities between buyer and seller.
Therefore, the importance of succession planning within an organization is critical for founders, whether they decide to keep the business intact or sell it.
Recent volatility in the markets and fee compression have caused investment advisors to focus on trimming operating expenses and streamlining processes in order to maintain profitability levels. There has been a significant amount of investment spend in the space recently as companies have aimed to enhance systems and improve the customer experience.
This is even more important as the client market shifts from baby boomers to millennials, who would prefer to monitor and adjust their portfolios from a mobile app, rather than meeting at a branch.
Aside from technology spend, founders also face rising internal costs to satisfy increasing regulatory and compliance requirements. These factors create a crucial cost/benefit analysis and in most cases may result in the founder looking to join forces with another player in the space or private equity.
Influx of PE Investment
Fee-based investment management businesses have historically been attractive to private equity firms due to their stable cash flow generation.