The first quarter of each year often brings a feeling of quiet in the M&A business that can be interpreted as either the calm before a storm of activity, or a signal that the year will be light in terms of transactions.
What will it be for 2012? Our forecast is that certain segments of the wealth management and asset management industries will in fact be very active in pursuing and executing M&A or restructuring transactions in the year ahead.
Financial advisors, asset managers and broker-dealer / custodian executives should be prepared to closely watch the following five spaces within the financial services industry, as they could potentially see key business relationships - or, indeed, their own businesses - transform significantly in the near future:
- Wealth Management and RIA Firms. Pushing expected transaction levels upwards will be significant numbers of wealth manager and RIA firms seeking much-needed succession plans. Like other industries, boutique money managers and wealth advisors are experiencing the aging of leading-edge baby boomers. Going beyond pure demographics, this trend is likely to accelerate for the following three key reasons:
First, major participants in this arena, including large custodians, are examining how to help finance management buyout transactions. Their close proximity to this marketplace both excites and worries them as they strive to build their ties to these rapidly changing organizations.
Second, private equity firms and serial acquirers are stepping up their acquisition activities in the belief that a diverse portfolio of wealth management firms is a good bet for growth.
Finally, transactions in this space are becoming easier to execute on because of increased sophistication in valuation processes, based on careful breakdowns of customer base dynamics and other value drivers that go well beyond basic revenue multiple calculations.
- ETF Creators. Most industry forecasters expect ETF's to outpace the growth rate for mutual funds and separate accounts achieving consistent double digit growth in assets in 2012. That good news has already led to attractive valuations for transactions like Wisdom Tree.
The challenge is that "many are called but few are chosen" in this space. Net flows are dominated by a handful of large players and a relatively few clever smaller firms, and potential sellers with an existing footprint believe the party is far from over. At the same time, larger firms are typically reluctant to pay for growth that has already been achieved.
That said, this year will find at least ten large firms finally entering the fray with start-up products (according to recent SEC filings). Because there are only a few potential high-quality acquisition opportunities, prices will remain high.
- Active ETF Fund Units. Active ETF fund units will achieve high valuations because of their potential to grab market share from traditional products. For example, Innealta, Eaton Vance, and Astor all made bold strides in late 2011 to boost prospects for actively-managed ETF product.
Equally important, pension rules will allow for greater use of these vehicles over time, changing their primary focus from currency trading vehicles into robust equity and fixed income investment vehicles. From the current 5% of the market, we believe assets in active ETF fund units could triple over the next two years, further enhancing the appeal of companies in this space as acquisition candidates.
- Specialty Asset Managers. The ability to deliver pure differentiated exposure to a sector or asset class that provides low correlation to the broader markets provides a powerful boost to valuation. Specialty asset managers focused on emerging markets, distressed debt, commodities and real estate will all benefit from the near-term environment. Heightened market awareness of beta and alpha separation is evidenced by the observation, "It is not return on my money that matters most, it is return of my money." Another favorite has become, "I can't spend relative performance."