The 2 factors driving wealth management M&A boom

The wealth management sector is bucking the global trend of declining mergers and acquisitions (M&A) and could see a further uptick in 2025, thanks to two key factors.

Deloitte’s 2025 investment management outlook, authored by its national investment and wealth management leader, Neil Brown, has assessed the rate of acquisitions on the global stage.

The scale of M&A deals within the investment and wealth management industries saw a downturn in 2023 after two successive years of growth, the report noted. Namely, transactions declined by 10 per cent from 639 deals in 2022 to 576 deals in 2023.

This falling rate of M&A has gained further momentum in 2024, Deloitte added, with a 27 per cent drop in transactions at 234 in the first half of 2024 compared to 321 in the same period last year.

But despite the overall trend, wealth management firms in particular are still enjoying a strong period of inorganic growth, underpinned by two key factors.

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“The wealth management sector continues to see a high volume of transactions, primarily driven by two key factors: the focus on succession planning within acquired firms and enthusiasm for product diversification to potentially offset lower growth in private capital,” the paper explained.

Product diversification

Wealth managers and asset managers alike have identified M&A as a way to achieve product diversification and expansion.

“Despite growing assets under management in 2023, both revenue growth and profit margin expansion remain elusive for the investment management industry,” the report stated.

“This dynamic appears to be driving a noticeable shift in how investment management leaders are approaching their firms’ product strategy. Having a diverse product mix is now often front and centre for revenue growth, and implementing an effective distribution strategy alongside it will likely increase the chances for success.”

A key example of this in Australia was Magellan’s 29.5 per cent minority stake of the parent company of Vinva Investment Management, Vinva Holdings, for $138.5 million in August. Vinva manages active systematic equity strategies across Australian and global equity markets and has $22 billion in assets under management (AUM), having been founded in 2010.

This has seen it distribute Vinva’s products and investment strategies through its global distribution team as part of an exclusive distribution agreement, excluding Australian institutional clients. The two firms have already launched two funds and plan a third fund in November.

“As traditional investment managers explore private assets, forming strategic partnerships and making acquisitions are becoming key for diversification and staying competitive,” Deloitte continued.

It also highlighted BlackRock’s acquisition of Global Infrastructure Partners (GIP) as an example of this, which reached completion on 1 October. GIP is a US infrastructure investor that specialises in investing in, owning and operating complex assets in the energy, transport, digital infrastructure, water and waste management sectors.

Finally, Platinum has unveiled a Platinum Partner Series where it will partner with global institutional managers to distribute their products to retail investors. The objective of these new relationships is to build a portfolio of subadvisory opportunities over the next three years to expand its reach and grow the business.

Succession planning

While succession planning has historically been a weak spot for financial advice practices in Australia, according to Adviser Ratings, industry commentators have emphasised its importance for long-term success.

There are typically four “trigger events” which prompt a firm to consider its succession: death, disability, retirement and resignation. However, it is always better to have a succession plan in place sooner rather than later as it can take several years to train up a suitable successor.

In the event a suitable successor or second-in-command is not in place, firms often resort to M&A as a quick decision to secure the firm’s future.

Its presence in wealth and asset management was highlighted in a recent report by KPMG which flagged concerns about a lack of talent to supplant retiring senior executives.

Some 89 per cent of asset management CEOs plan to expand their workforce over the next three years but are fearful of a talent shortage occurring simultaneously with the retirement of older Boomer employees.

Mischa Bennett, managing director at Capital Executive Search, agreed he expects consolidation to be a big theme for the next 10 years.

“If you are a 60-year-old fund manager, how will you monetise your business into retirement? You either hand it over to your staff, you list the business or you sell it to an acquirer. The acquirer is likely to be the one who wins unless you have an amazing succession plan in place.

“The asset consultants are starting to bring it up as well. They are concerned about key person risk which is huge. If no one is coming through to replace a senior person, then the fund could be downgraded.”

Earlier this year, a previous Deloitte report found that inorganic growth strategies are set to double in the year ahead for financial services firms in comparison to last year.

“M&A leaders in the financial services sector are cashed up, confident, and looking to double their deal volumes, despite squeezed margins, intense mortgage market competition, and rising funding costs,” it stated in July.