Will market headwinds change the pace of divestment?
Wealth and asset management (WAM) firms have historically been most associated with divestments where they have been subject to sale by a bank or insurer parent company or via a sale of founding shareholders. There are fewer examples of divestment of parts of a WAM business – these have typically been seen in the private banking sector where global firms have exited selected markets for risk or profitability reasons.
Riding out current market volatility is an immediate challenge for the WAM sector. Firm valuations are highly sensitive to changes to current and projected assets-under-management (AUM) levels that can be impacted by both capital market levels and net flows, the latter showing positive correlation with trends in the market. There are headwinds to firm profitability from fee compression. They are caused by a shift to passively managed assets, increased transparency of costs and charges, and a big shift in investor preferences away from core actively managed product toward alternatives and other higher cost specialist strategies that have driven a need to adapt. This has been compounded by the ongoing costs of technology investment and regulatory change.
In 2018, these factors combined to decrease AUM and the industry profit pool and drove a downward rerating of the sector. Generally, firm valuations decreased about 25% or considerably more where firm-specific factors contributed.
There is strength in scale: large businesses that can achieve economies of scale across investment categories, distribution and the firm’s fixed infrastructure are better placed to withstand ongoing margin pressures and choppy waters.
It could be a rougher ride for medium and smaller-sized asset management businesses unless they are focused, disciplined and add significant value to their client’s investment process. These players may seek mergers with peers or with a larger global player. While sector valuations have in general decreased from peak levels, successful niche firms with an attractive investment product still command a premium.
WAM firms may consider different divestment strategies to support large investments around technology and data for further digitalization of their businesses. IPOs may be evaluated for their ability to raise capital, but in other areas joint ventures are supporting cross-sector collaborations within financial services (e.g., between banks and AMs in the wealth sector). Others may look to optimize distribution, or the middle and back office, through outsourcing or by sale to a larger multi-boutique platform.
The study indicates wealth and asset management companies are more receptive to unsolicited bids than their peers: 58% say an unsolicited approach was a trigger in their most recent major divestment, compared with 53% in the insurance sector and 37% in banking. Wealth and asset management businesses are more likely to be candidates for divestment if they are a captive in a bank or insurer.