In the ongoing process of consolidation sweeping the industry in Switzerland and the rest of the world, wealth and asset managers have to be alert. Whether you’re a potential buyer or seller, there are important points to keep in mind to gauge whether a deal is the right thing, whether the moment is right, and how to maximise the value from the transaction.
In this blog post we survey the global consolidation scene and give some pointers to help wealth and asset managers – in Switzerland, but elsewhere too – navigate mergers and acquisitions smoothly and profitably should the occasion arise.
1. What are the main features of consolidation within the global wealth & asset management sector?
In major wealth and asset management hubs we’re observing an ongoing process of consolidation. The Swiss private banking market is a good example, with consolidation reducing the number of banks primarily active in wealth management by 31% between 2010 and 2017, from 182 to 1251. In this blog post we shed light on the current consolidation trends, identify the drivers of consolidation in wealth management, and formulate the strategic imperatives for buyers and sellers involved in mergers and acquisitions (M&A).
Our commentary and subsequent recommendations are based on two main sources. Firstly, between 2016 and 2018 we observed over 1,000 transactions in eight key wealth and asset management hubs (you’ll see how they were distributed in Figure 1). Secondly, we have analysed the key financial ratios of the world’s 40 largest private banks to create a database serving as a representation of the most significant global players in the sector (the results are summarised in the diagram in Figure 2).
Figure 1: Deal count in key wealth and asset management markets from 2016 to 2018
Sources: PwC Analysis; Mergermarket
Let’s first look at the main trends in wealth and asset management M&A we identified on the basis of our analysis of 1,000-plus deals between 2016 and 2018:
- Portfolio optimisation: In recent years, increasing regulatory and compliance pressure has prompted many banks and asset managers to concentrate on their core business to exploit better economies of scale. This has generally involved acquisitions or disposals to focus on their core clientele − in other words a smaller number of their largest and most profitable core markets.
- Offshore to onshore: Financial centres such as Switzerland that have traditionally had many of their clients come to them from abroad have realised the need to take the bank to these ‘offshore’ clients. This has led to a struggle to strengthen local presence in markets abroad, particularly in the Asia-Pacific region, by means of acquisitions. The result has been a number of significant transactions where global private banks have acquired wealth and asset managers in Singapore, Hong Kong and other hubs.
- Increasing prices: Probably the most useful multiple when it comes to valuing a private bank is the goodwill to assets under management (AuM) ratio. Since 2017, we at PwC have observed an increase in goodwill paid relative to assets under management. In other words, transactions are getting pricier for the buyer.
In Switzerland, we measured an average goodwill to AuM ratio of 1.7% for the years 2017 and 2018, way above the 0.5% observed between 2009 and 20162 . This trend can also be seen in English-speaking markets such as the UK or the US, where deals have historically had higher goodwill to AuM ratios than their Continental European counterparts (again, see PwC’s 2018 report for more details). As recently as May 2019, Goldman Sachs announced that it would acquire US wealth manager United Capital (approximately US$ 22 billion in AuM, US$ 80 million in equity) for US$ 750 million. This gives a goodwill to AuM multiple of 3%, indicating an extraordinarily high valuation3 - Quality over quantity: We’ve observed that the prices paid for client assets in transactions are driven less by pure volume than by the quality of these assets from the bank’s or wealth manager’s point of view. In other words, buyers are willing to pay a premium for portfolios of certain types of mandate or more profitable clients. This development is particularly noticeable in asset deals (as opposed to share deals).
- Concentration: Overall, continuous consolidation can be observed in major global wealth and asset management hubs. Most often, smaller players (in Switzerland, foreign bank subsidiaries in particular) sell their business to competitors or to larger players that are actively consolidating the market. In Switzerland, we have observed an average of eight private banking deals a year since 2002 (see PwC’s 2018 study for more details).