The acquisition of Crux Asset Management, announced today (31 May), is yet more proof that the UK wealth and asset management industry is undergoing a period of the rapid and sustained consolidation.
The deal, which will see Lansdowne Partners buy 100% of Crux’s share capital, is indicative of a widespread and far-reaching trend in the sector; historically low UK equity multiples, and a surfeit of private equity money, have made the sector a hotbed for corporate activity in recent years.
It is no secret that UK equities are trading cheaply, and the wealth and asset management sector is no exception. Investors pulled a staggering £25bn from funds last year as they grappled with a cost-of-living crisis and returns from stocks and bonds falling in tandem. These headwinds have gnawed at assets, weighing on fee revenues and profits.
Portfolio manager Nick Train highlighted the case of Schroders in Finsbury Growth & Income’s latest results, arguing that its 459p share price was very cheap by historical standards. Shares in the giant asset manager are roughly the same price as they were a decade ago.
Premier Miton’s shares are down 35% over the last year, with the asset manager reporting net outflows and a considerable slide in profits as market stress took its toll on the firm. The challenging market has hurt returns, and share prices have fallen across the sector irrespective of company fundamentals. In this sense, one company’s misfortune can become another company’s opportunity.
Low valuations have been swooped upon by potential buyers, whether they be peers or PE firms. Ken Wotton, manager of Strategic Equity Capital, says the substantial valuation discount in UK publicly listed companies, relative to what corporate buyers and PE have been prepared to pay for similar unlisted companies, has created some of the “widest pricing discrepancies” his firm has ever seen.
Rathbones’ £839m acquisition of Investec Wealth’s UK arm stands out as cheap, considering it will create a national firm with funds under management and administration exceeding £100bn. In addition, Wotton identifies investment manager Brooks MacDonald as a good case study for this price arbitrage opportunity. He says despite strong cashflows, structural tailwinds and a diversified return profile, the company trades at a significant discount to its unlisted peers.
Such attractive valuations have been seized upon in recent times, with Royal Bank of Canada’s £1.6bn acquisition of Brewin Dolphin being another example. Wotton points out that Brooks currently trades at less than half the multiple that Brewin commanded when it was acquired, despite both companies having ostensibly similar strategies.
Brewin was undoubtedly the larger entity at the time of acquisition, with 30 regional offices, more than 2,100 employees, and approximately £58bn in assets under management, but Wotton highlights Brooks’ growth potential.
“[Brooks] has positioned itself to be a consolidator in the market, having acquired a number of smaller competitors as part of their ‘buy and build’ strategy – another growing M&A trend in the sector driven by the mis-pricing opportunity in UK equities.” He says the firm is just one of many publicly listed wealth managers trading at deep discounts despite strong fundamentals.
Another potential target is Quilter, which has seen its share price halve since it floated in 2018; NatWest and several private equity firms, including CVC Capitals Partners, were circling the wealth manager last summer, but no bid materialised.
Unsurprisingly, there is little sign that a slow-down in corporate activity is on the horizon. Daniel Baade, CEO of corporate finance boutique Dyer Baade & Company, says the industry has much more room for consolidation, with only a handful of truly national firms in existence. “We expect to see this number going up over the next few years,” he says.
Martyn Chappell, head of UK wealth management at Dimensional Fund Advisors, says nearly 55% of firms are actively looking to engage in some type of M&A activity within the next two years, up slightly from 52% in 2022. “Among firms actively considering M&A, the top three responses indicated that 27% want to acquire a firm, 23% want to acquire a team, and 26% want to be acquired,” he adds.
The desire for consolidation is clearly coming from both sides of the negotiating table, as margins shrink and economies of scale become more important.
Baade argues larger firms with deep pockets have a clear competitive advantage over their smaller peers. “It makes sense for owners of small or mid-sized firms to sell to a larger consolidator who has the resources to invest in infrastructure,” he says. “Clients will most likely benefit, as services and support levels will become more standardised. Furthermore, larger firms will usually also employ a number of specialised experts, who will be able to provide clients advice on a wider range of topics than smaller firms can.”
Richard Lewis, a partner at financial services consultancy Capco, concedes that M&A activity may alarm some clients, but he regards it as a net benefit: “M&A activity may cause concern for clients, who may be worried that their adviser will change, that they will have a different range of investment options available to them, or that they will be less important as a customer to a larger firm. However, we rarely see those concerns become reality and, most often, consolidation leads to improvements in the service that clients receive.”
However, both parties must be mindful of the potential pitfalls, says Dimensional Fund Advisors’ Chappell: “Bringing two organisations together is complex and loaded with downside risk. And failure does not just risk ruffling a few feathers, it can undermine the very purpose of the deal and destroy any financial value it was intended to create.
“Issues may arise if the two firms do not sync well on things like the client experience and investment strategy. If the two sides do not share a common goal, not only will the immediate transition risk derailment, but it might take years to overcome differences, if ever.
“Problems may also arise if there is disagreement between firms on the transition timeline. The key components of integration will have been considered when the deal is struck, such as how people and processes gel. The missing component in these conversations is often expectations of timing. The acquirer may be keen to crack on and sense resistance from the outgoing leadership. Or it may be the other way around. There may even be more fundamental disagreements on how to prioritise the phases of the transition. Ironing out these wrinkles early is helpful.”
Analysis of industry data by behavioural finance experts Oxford Risk revealed that the combined value of assets under management of UK wealth managers acquired in 2022 was £137bn, compared to £87bn for those acquired in 2021. One would not bet against this figure climbing again this year.