In mid-June the wealth management industry learned that Fisher Investments had sold a $3 billion minority stake to outsiders. Although such transactions have become relatively common over the past decade, this one was a bit unusual because a sovereign fund—the Abu Dhabi Investment Authority, or ADIA, openly and directly invested in the firm. Compare that to a similar deal in 2023 where ADIA made an investment in CI Financial’s U.S. wealth unit (now called Corient) as part of a Bain Capital consortium. These might be the first among many deals to come.
Last year, my partners and I published “Welcome to the Jungle,” a white paper (which can be found at www.dpripro.com) that provides a road map for industry participants on how we believe the wealth management industry will evolve over the next 10 to 15 years. Included in the paper’s many prognostications are several reasons sovereign funds will become the prime source of capital for the advisory industry’s largest firms and aggregators in the coming years.
First, sovereign funds are charged with building intergenerational wealth over many decades, and the wealth management industry provides a compelling opportunity. It is both stable and fast growing, and the emergence of multiple large aggregators has created an opportunity to put to work material amounts of money for a long time.
Equally important, one of the greatest competitive advantages for any industry participant is an owner with a very long investment horizon. Organic growth is by far the largest opportunity to build enterprise value over the next 10 to 15 years as the number of potential clients is likely to more than double. However, client recruitment is brutally hard and requires a lot of patience. Partnering with a sovereign like ADIA shifts an organization’s focus to what the business will look like in 15 years instead of the next few quarters or even years.
Sovereign funds already indirectly own stakes in most aggregators. A large portion of the PE fund capital currently invested in aggregators was provided by sovereigns.
However, these organizations also undoubtedly have observed PE firms repeatedly selling the stakes they own in wealth managers to themselves, shifting them from maturing funds to new ones, using the sovereigns’ money to get paid increasingly larger management fees over time. Directly buying stakes in large wealth management firms will save such capital providers hundreds of millions of dollars.
That said, taking money from a sovereign fund is not without risk. These organizations are political entities, responsive to foreign governments, including many from countries in the Middle East with human rights policies that are often in conflict with the values of large numbers of Americans.
That said, what was most surprising about the Fisher transaction was not that ADIA provided capital but that it did so openly, and that this aspect of the investment was trumpeted in the media. It will most certainly trigger more than a little scrutiny of Abu Dhabi’s record and policies, which could potentially damage Fisher’s brand and even scare away large numbers of current and potential clients.
There are numerous other sovereign funds (such as Norway’s Government Pension Fund Global, the Canada Pension Plan, the Ontario Teachers’ Pension Plan, Singapore’s GIC, etc.) that could provide the same kind of long-term capital but without the accompanying political baggage. And many will likely take a hard look at the great long-term investment opportunity that the U.S. wealth management industry offers.
Nevertheless, direct investments by sovereign funds will most certainly impact the industry’s competitive landscape. Today there is a continuum of aggregators, ranging from those that are already fast-growing, fully integrated businesses to many that are simply confederations of small businesses that have largely been somnambulant for more than a decade.
Integrating the latter and then reigniting their client recruitment programs will be an arduous task requiring a great deal of time, money and patience. Unfortunately, they currently are mostly backed by PE firms with only three-to-five-year investment horizons, far too short a time frame to generate attractive returns on the necessary investments.
However, this calculus will fundamentally change if sovereign funds disintermediate PE firms as the core source of aggregator capital. That will enable them to transform into much more formidable competitors focused on organic growth and capturing market share rather than worrying about near-term profitability.
Mark Hurley is the CEO of Digital Privacy & Protection.