Private Wealth Management - Deals 2023 outlook
Rising interest rates and a significant reduction in available capital have caused a slowdown in Wealth Management M&A over recent months, with risk appetite much lower than the boom experienced during 2021. Supply chain hangovers, the war in Ukraine and post-pandemic inflation have all contributed to greater uncertainty in markets. The hurdles to closing deals have also been further raised with the current market environment leading to volatility in valuations and divergences in expectations between bidders and sellers. As a result, some deals have been aborted or put on hold during the fourth quarter – (some of) those may however resume in the new year. We expect deal flows to pick up towards the second half of the year, supported by several tailwinds.
Consolidation thesis
With the market still being highly fragmented, consolidation plays will likely remain a key driver behind deals as margins are coming under increased pressures both in terms of top-line and rising costs - falling market valuations have only increased the pressures.
“One-stop-shop” model
The evolution of wealth management firms is continuing to be characterised by a change from pure product-based advice to a goals-based advice model that increasingly demands a multidisciplinary approach. This “one-stop-shop” model including tax advisory, family office services, wealth structuring products amongst others has developed to meet investor demands to invest in various asset classes from a single-entry point on public and private markets.
Therefore, larger wealth management players are expected to fill in product offering gaps by investing in smaller more strategic targets. We also expect interest to focus on acquiring key capabilities across the technology spectrum whether it be for cost-cutting measures, increasing efficiency, dealing with regulation alongside the push to expand product offering. Increasing focus to add ESG and Impact investing capabilities will also drive deals as market participants are looking for speed to market rather than building the expertise in-house.
Private Equity as buyers
Private Equity has become increasingly attracted to the scalability and roll-up potential of asset servicing and wealth management platforms and we see additional activity being driven by these players who need to deploy large amounts of capital. We see (private equity backed) players having reached critical mass in certain regions start looking to expand to new markets and become more global.
Luxembourg External Asset Managers (EAM)
Luxembourg counts more than 100 EAMs, which together manage EUR +50bn across different asset classes. While relatively small compared to assets managed by the Private Banks, EAMs have outgrown the latter in recent years (15% CAGR) and this trend is likely to continue over the coming years.
After witnessing several transactions in Luxembourg over the course of 2022, we expect continued deals activity in 2023, supported by the quest for critical mass and a broadened service offering, interest from international players in the Luxembourg EAM market, as well as succession planning for some local EAM players.
Sources:
- PwC.com
- ABBL/CSSF External Asset Managers Survey
