Lovell Minnick managing partner and investment committee chair Bob Belke tells Mergers & Acquisitions about the bright spots in a frothy wealth management market, and opportunities to craft staying power in asset management.
Bob Belke’s view on financial services is long. He started at Lovell Minnick as an associate in 2000 and has seen the dealmaking landscape change. The New York private equity firm focuses on investments in financial services, financial technology and related business services. No longer is his firm a rarity as a specialist. “The PE industry in the last couple of decades has come around to that,” he says. “These days it’s unusual to see firms we’d go up against on a deal who don’t have a background on the deal.”
From that vantage point, Belke says the financial services sector as a whole has hit frothy multiples. The nearest comparable period may be the eve of the financial crisis. Belke is quick to clarify he doesn’t see another bust coming necessarily, but a toppy pricing environment does create challenges for buyers.
Lovell Minnick, for its part, has leaned into the challenge through its buy and build strategy.
“Our investors say, ‘How do you handle that on the buyside?,’ and it’s a couple of things,” Belke explains. “We’re not afraid to pay a market multiple for a platform, but want to be able to grow out of that multiple both organically and inorganically. We’ve been spending time on a lot of add-ons, one to two per month across our portfolio. That’s a way, in the environment we’re in, to stay ahead.”
Wealth management remains a very attractive space for private equity, with many firms acquiring platforms to consolidate a fragmented industry. Strategics Focus Financial and CI Financial have also been acquisitive recently. Despite a recent flurry of activity, Lovell Minnick still sees opportunities going forward.
“The value of human advice is one of the most valuable spots in the chain of financial investing,” Belke says.
Look no further than Pathstone. Lovell Minnick acquired the ultra high net worth-focused registered investment advisor in November 2019. After investments building out the company’s environmental, social, and governance offerings and a number of bolt on acquisitions, Lovell helped Pathstone double its assets under management in about 18 months.
In asset management, private equity is particularly interested in active managers. Many firms have seen outflows driven by the rise of relatively inexpensive passive investment alternatives, while pricing has been soft due to performance issues.
Lovell focuses on niche asset managers that can maintain pricing power. “Find those areas where you can have specialist knowledge, where fees are defensible and have growth,” Belke says of his firm’s investment strategy. “It’s not easy to do.”
Take Matthews International Capital Management, a U.S.-based asset management firm exclusively investing in Asia. The company’s long track record offering local investors exposure to Asia has created a defensible moat.
Traditional European and Australian asset managers trade between 13x to 16x next twelve months’ earnings, according to a Credit Suisse analysis earlier this month. That compares to the 10x average multiple sported by traditional US asset managers. Firms have grown back into strong valuations after a pandemic-driven dip in equity values hit valuations.
Private equity is already getting a slice of the action. 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.
Future deals may likewise focus on platforms with scope to grow distribution and niche offerings.