May Market Review / M&A and Funding in Wealth and Asset Management in Europe and North America

I have been pre-disposed for a little while in terms of being able to maintain my weekly rhythm for posts, so will now take the opportunity to provide a more detailed update on what I have been seeing in relation to deals, funding, and innovations across the wealth management and wealth technology landscape in different geographical spheres in the past month.

Overview

As an overall observation, I would note that around the globe one is seeing more and more capital focus on technologies and platforms that support the integrated concept of financial advice, and investment service provision. ?While there are certainly in Continental Europe, strong interest in the interaction of these elements on a purely software basis to serve the needs of different types of archetypes that deliver these services within their overall operating model, there is also significant investment into scaled platforms that offer this through an approach that covers both regulatory capabilities as well as technology.? Firms that can successfully blend financial service capabilities through brokerage, custody and regulated operational fulfilment with software applications needed by financial planners, and investment advisors are able to demand premium multiples.

A second observation I would make is that the interest in these two elements of the value chain is occurring at the same time as the growth of funding of AI powered organization who facilitate operational and performance improvements in these two areas occur.? This implies that non only is there a strong belief that both independent and restricted advice growth will be a significant factor in the future success of wealth management firms, but that this will be one of the primary targets for advancement through the presence of AI in different parts of the client and investment lifecycle.? In markets, such as the UK, US, and Canada, where there are much more significant numbers of independent firms in the advisory ecosystem, there is much more innovation emerging that is leveraging large learning models, neural networks, and other deep learning systems to facilitate operational leverage, alongside more relevant personalized insights, and actions.

A final observation noted in the past month relevant to the wealth management industry as a whole is that the appetite for the democratization of private market access remains strong, and still innovative, especially as it relates to the solution designs themselves and the clientele that they are looking to serve. ?I had expected that a significant slowdown in liquidity events for PE and VC investors, and a cooling in some segments of exiting valuations might have slowed down the evolution of new types of retail and HNW asset management organizations, but it seems like the broader trends related to longer private market holding periods, non-correlated return profiles, and risk diversification have continued to underpin the overall investment thesis. Because of this, the infrastructure that needs to support performance reporting, risk management, liquidity management, and lower cost product structuring and administration is also evolving. ?Much of this innovation is being led out in locations like Luxembourg, Singapore, and offshore centres that can be used by American and UK tax residents.

Transactional Landscape

I have been active myself in the transactional landscape quite a bit in the last couple of months, and thus will comment on certain transactional themes and markets as a result.

French M&A Activity / Deals

France has been, over the past 3 to 5yrs becoming a much more interesting and dynamic market when it comes to the participation of private equity investors in the financial advisory, wealth management and wealth technology landscape. ?This reflects 1) the level of profitability enjoyed by French IFA firms, 2) the popularity of more complex tax efficient vehicles in the wealth management and financial planning arena, and 3) the degradation in the quality of the solution design of banks and insurers that were dominating the market in the past, creating more and more asset gathering and service opportunities for independent firms. As a result of these factors, many of the leading independent groups are backed by international and local private equity firms and have embarked on a consolidation strategy that has seen them gain market share in key wealth solutions from banks and insurance companies. This was underscored in the past month by 2 transactions in particular, 1) the majority acquisition of the Crystal Group, one of the major IFA consolidators in France by Goldman Sachs Private Equity, and 2) the purchase of Harvest Software by Montagu Private Equity and TA Associates.

The first of these transactions has seen GS take a significant position in a private equity backed firm what is now one of the top 3 IFA consolidators in France, and one of the few that also, via its ownership of Primonial, with a footprint that extends into other European countries. It also sees them by into an organization that is one of only a very small number who have made a significant investment in creating many key elements of their technology offering, thus following an approach that has proven successful in building unicorn valued businesses in both the UK as well as the US.

The second of these has seen Five Arrows (a subsidiary of Rothschild & Co) achieve a very significant multiple on the take/private acquisition they executed back in 2019 with Harvest and subsequently built into the dominant vertical software solution and distribution platform provider servicing IFAs, Insurance Co’s, and Banks (Private, Universal and Retail) in France.? Harvest, in its early years, created some of its strong enterprise value by being extremely effective in creating some operational leverage, and greater presence across the advisory, planning, and client lifecycle value chain, while more recently it has started to build value through more direct participation in the distribution of the underlying wealth products themselves, i.e. unit linked wrappers, funds, and alternative investments.? Harvest has certainly been able to leverage its market dominant position, as well as the positive tailwinds I mentioned on the outset to build a very strong incumbent position in the local wealth management ecosystem, and will now, under new owners, seek to build upon this and enter adjacent geographies.

Germany M&A Activity / Deals

In recent months, Private Equity investors have started to pay more interest to the advisory and distribution channels in the German market. ?While a lot of attention half a decade ago seemed to be on the expectation that the Germany would be a significant adapter of digital asset management, this hasn’t proven to be true, even while the neobroking landscape, led by Trade Republic has advanced its presence. As a result, attention has been moving back toward the evolution of advisory services in Germany, with investment both directly from broker pools, as well as by private capital on advisory and investment management solutions.

In the past month, there have been two transactions that I have seen to underscore this. The first was the purchase by PE backed Cleversoft Group of Tetralog AG.? Cleversoft has been a firm that has been pursuing mostly a strategy that is focused on different elements of regulatory and business control and risk management in the middle office, but with the acquisition of Tetralog, the company will now be in a position to interact with the front office financial planning, wealth advisory and investment decision making areas.? In Germany, most of the software solutions that are servicing the independent wealth and advisory community along with the savings banks have been delivered via integrated software and consulting organizations, and in the case of Tetralog, this is no different.? Cleversoft, who are already active in the KYC and KYP space should be able to leverage their solutions in these governance, control and suitability areas through what Tetralog systems does, even while it may find that it needs to consolidate the solutions portfolio, modernize its delivery & service models, and bring some consistency to pricing.

FEfundinfo also made a foray recently into Germany, and particularly in areas related to know your product and product suitability with the acquisition of Dericon. This acquisition extends the footprint of FEfundinfo services from asset management into capital markets and advances their presence in areas beyond core coverage in fund vehicles.? Dericon delivers data management solutions for product governance that extends instrument coverage greatly for FEfundinfo, as well as offers them access to a vendor with core software, workflow, and data competencies to support structured and derivative product manufacturing and distribution.? The acquisition provides added benefits as far as distribution given the company’s relationship with Sparkassen Banks in Germany and Austria, and thus further extends their distribution network to these countries, alongside their capabilities in the UK, Luxembourg, and France.?

US M&A Activity / Deals & Rumours

In many ways, given the shift in the distribution landscape taking place on Continental Europe, it is not that surprising that PE firms are looking for targets that seem well placed to exploit the evolving shifts, but even in a mature market, like the US, Private Equity firms are also seeking out opportunities to acquire companies that have a special relationship with financial and investment advisors.?

Most of the interest seen in the past few years has been in the Total Asset Management platform or TAMP segment. This segment is defined by organizations that organically or through acquisitions have been creating full service platforms that help investment advisors place client assets into different types of multi/asset model portfolio solutions.? The underlying building blocks that allow advisory firms to find the most suitable type of investment solution as well as management style have continued to become a facet of these platforms, mostly through acquisition, so that they not only play a complete role in the entire portfolio management lifecycle but increasingly in the financial planning and advisory workflows that will are part of the client lifecycle from accumulation and goal planning, through to deaccumulation and retirement in all its different stages.

Assetmark was acquired just over a month ago to reflect private equities interest in acquiring a large scale presence in this space, and rumours abound that Envestnet is also being courted by one or more private equity firms too.? The interest in Envestnet, given the way the public markets has treated its performance is not that surprising, but on this occasion, it seems like management believe that they can more successfully navigate through a combination of pricing, regulatory, and business transformational headwinds away from the demands of being a publicly listed company.

UK M&A Activity / Rumours

These types of developments have also become a more noticeable facet of the UK market in the past few months.? In the past year, most of the attention in the advisory and direct platform space was on private equity backed companies that needed to find owners who were prepared to further invest in their scale up and modernization exercises, but more recently attention has become more focused on platforms that are deemed to be sub/scale in their wealth management solution area (M&G, Brooks Macdonald for example), have been deemed failures as solutions for restricted advice, product, and investment solution distribution (Abrdn), or have been “found out” through the regulatory changes that have been taking place around cash management, consumer duty of care, and overall product suitability. (HL)

It is not yet clear to me exactly, with the general election less than 6 weeks away whether the macro uncertainties that could follow a change of government will bring to the wealth management industry overall, but certainly there has been an impression that the ratings of some of the leading firms of two to three years ago, esp. those that are seen as either monolithic in their business model, or running too many disparate propositions has slipped badly, and that this is creating opportunities for new players as well as for major changes in the ownership structure and value propositions of many platforms.? Furthermore, it appears that those who are involving themselves more with bringing advisory and planning capabilities into their overall solution design are being rewarded for these efforts if they are executed with enough scale and capacity behind them.? This may go some way in explaining why firms in the AI scalable advice space that I work with are seeing significantly more enquiries, not only from consolidators in the advice space, but also from platforms that intend to either open, or aggressively seek to expand their intermediary flow relationships.

Funding around the Globe in Wealth and Asset Management Technology

M&A activity, esp. when it involves financial sponsors often needs to be focused on either a certain level of scale and presence, or if executed at the corporate level, on bolt-ons with the potential to accelerate go to market geographical and client share of wallet ambitions, and in the past month, when it comes to wealth management and technologies that serve certain elements of the value chain, we have seen just that.

When one looks at the funding picture, all of the dynamics that I am seeing across the globe generally are about:

1.??????? Backing B2B business models, with many in the wealth and asset management space also having a degree of B2B2C functional capabilities associated with them.

2.??????? Looking for new solution designs that seem likely to better serve younger investors in their pursuit of building wealth through a less traditional advisory engagement model.

3.??????? Building through software and AI platforms that can advance know how. Advancing know how can mean bringing more margin in/house from externalization, something that might be applied to advancing investment management skills, or in expanding the service offering, i.e. through advances in planning solutions for advisory focused firms.

4.??????? Building new software platforms that at their core are about changing the operational profile on how something gets done.? This something could be a highly specific and manual task today or could be an entire set of capabilities that may be addressed through legacy solutions.

On the basis of these features, the funding deals and new companies that caught my attention in the past month comprised:

1/ Nebo Wealth (nebowealth.com) and Jump (jumpapp.com) that are both sitting in the financial advisory workflow and planning areas in the US and are exploiting data science in different ways to assist advisors with managing their time and the quality of their advice.

2 / Fundpath (fundpath.com) and Fundcraft (fundcraft.lu) that reflect two different challenges for the asset management industry, the first being about improving the quality, diversity and interactions with professional distribution channels through intelligence, while the second is about bringing the full control for managing all aspects of fund administration, accounting and distribution in house so as to improve the quality of the LP/GP relationship, and the cost/time it takes to launch new alternative product solutions

3) Blossom (blossomsocial.ca), Plenty (withplenty.com), and Savr (savr.com) that all are seeking to develop direct client relationships but are each taking quite a different perspective on which archetype they want to cover, and which solution design they believe makes sense for that client type to consume through them.? ?While the platforms are quite different as D2C investment offerings, they do share some commonalities when it comes to the way they all want to use more mixed media to educate and inform, they all want (in their own way) to bring better investment results through collaboration, education, and insight to their users, and they all believe that those in their early to mid 20’s and extending to their mid 30’s seek investment help in a different ways from the past generations that sit on much more traditional investment platform designs and functional capabilities. ?It remains to be seen of course whether the “refresh” and innovation these experiences offer will reach enough scale, but certainly the leadership that sits behind Plenty and Savr in particular do appear to have spent significant time trying to understand the particular clients they want to serve and thus have created a differentiated offering in terms of design and capabilities, based on that.

4) Stratiphy (stratiphy.io) and StratxAI (stratxai.com) that, while they certainly are aiming at addressing different levels of sophistication in their target client segments, are both seeking to leverage a combination of lo code/no code thinking along with AI modelling to provide new tools for alpha discovery in investment management.? The important aspect of these applications is not based on the fact that they are alpha seekers in their own right, but rather that they help quantitative investors accelerate their ability to build, test, optimize and deploy strategies that would otherwise be too cumbersome to build, or would take too long to optimize.

Conclusion

As I mentioned at the outset, I haven’t had the time to continue with my weekly cadence and thus this piece is longer in order to consolidate trends, m&a activities, and early stage funding into a single and broader document.? Hopefully it is clear however that while there is certainly diversity in the overall picture, there is also a very strong pull within the transactional space toward firms that are building platforms and solutions to address the needs of financial and investment advisors in a next generational and vertically integrated way. There is clearly also investment taking place across the value chain in asset management, with a particular focus on situations and technologies that can assist asset management firms in building more successful practices that, through technology are leaner, more effective in their front and back office operations, and can bring more sustainable value into their practices.