Asset management M&A is still on the table this year after a banner 2020. Potential upside from cross-border distribution and public comments from would-be acquirers like JPMorgan (NYSE: JPM) and State Street (NYSE: STT) could keep consolidation in high gear, according to a note from Credit Suisse analysts. The prospect of a federal tax increase on capital gains is further incentive to accelerate deal timetables now. With so many tailwinds, there looks to be plenty of room for private equity to take a seat at a dealmaking table normally dominated by strategics.
Pandemic mergers proceeded at a robust clip globally and for North America in particular last year. The acceleration that began in 2017 rebounded again amid the pandemic, as asset managers’ book values were hit by crisis-induced equity market lows. Better capitalized insurers, banks and brokers stepped up to take advantage of lower valuations.
Much of the sector’s consolidation has been led by strategics, but the deals inked highlight the attractiveness of the sector overall. Franklin Resources (NYSE: BEN) enhanced its separately-managed account business by acquiring Legg Mason for $4.5 billion last August. Morgan Stanley (NYSE: MS) diversified its direct to consumer wealth management offerings through its $13 billion purchase of E*TRADE, announced in February 2020.
One of 2020’s biggest deal drivers leaves scope for private equity to participate going forward as well. Analysts see team lift-outs as a fast-track to upgrading firm capabilities in attractive verticals like exchange traded funds, direct indexing, and environmental, social and governance. There’s no reason that financial sponsors, known for their relationships with operators, can’t build and buy their way to niche product offerings that would be attractive to larger sector players on exit.
And then there’s the reality that private equity is already in the mix. Case in point: Wells Fargo (NYSE: WFC) sold Wells Fargo Asset Management to GTCR and Reverence Capital Partners in February for $2.1 billion. The deal is billed as an opportunity to allow management to focus on its institutional, wealth management, and retirement clients outside of the bank’s brokerage unit. The PE firms brought on Legg Mason veteran Joseph Sullivan to be the executive chairman of the rebranded asset management unit, while retaining unit CEO Nico Marais.