Berkshire Global: An update on the mergers and acquisitions landscape in wealth management, financial technology and private markets

The global mergers and acquisitions market collapsed in 2023, weighed down by rising interest rates and lingering questions about the health of the economy. That said, there were some pockets of strength, including wealth management, where the trading process was nominally down from the previous year but robust compared to the recent past.

With 2024 now nearing its halfway point, I reached out to some colleagues at Berkshire Global to get a better sense of the current dynamics impacting specific market segments and to look ahead. Their extensive experience and deep market knowledge will provide valuable insights:

• Bomy Hagopian, CFA, Partner, co-leader of Berkshire’s wealth management practice
• Mitchell Spector, partner, who leads Berkshire’s financial technology coverage and practice
• Ted Gooden, partner, who founded Berkshire’s private markets business

Bomy, how do you think 2024 will perform compared to last year regarding M&A activity? Also, could the second half of the year be stronger if rates were cut?

Bomy: Due to a number of factors, we expect it to be another strong year for mergers and acquisitions in the asset management industry. First, the number of private equity firms entering the sector to support acquirers continues to increase, while existing acquirers remain highly active and engaged. Second, financial advisors continue to age, and mergers and acquisitions represent a solution to the industry’s ongoing demographic and succession planning challenge. Additionally, the costs associated with running an RIA are rising rapidly, whether it’s expenses to improve technology or keep up with compliance issues.

Therefore, smaller companies’ desire to reduce those cost burdens, as well as free up management time, will also likely fuel more deals in the future. Finally, not only are more wealthy people wanting financial advice, but existing clients also want more specialized service offerings. This increased demand within the consumer market for additional services should also support increased M&A activity.

As for rates, a more accommodative Fed could encourage more activity and lead to a stronger second half of the year. However, the forces impacting the current landscape are so profound that rate policy, while not an afterthought, will not be the primary driver of operations, one way or another.

Ted, there has been a boom in private credit in recent years. What impact did it have on the negotiations?

Ted: We are seeing a growing appetite from investors, which is starting to drive strategic interest from RIAs to access private credit, private equity and even some real estate investments. These private market managers have benefited from a pullback on various types of traditional bank lending, which accelerates the acquisition of deals for private markets products. Now that RIAs are starting to see the value in these products, their use is likely to continue despite the ups and downs in interest rates.

These private market products generally must be offered in semi-liquid form, such as an interval fund. Advisors also require them to present a variety of risk tolerances for their clients. Properly establishing private credit funds for RIAs takes a lot of time and resources due to the need to educate both advisors and their clients. There is therefore still a lot of untapped potential in distribution to the retail market.

One consequence is that acquisition opportunities exist for asset managers to acquire distribution platforms whose sales teams have relationships with independent RIAs and broker-dealers. A second consequence is that in some cases asset managers are starting to consider acquiring investment companies in private markets. And a third consequence, to top it all off, is that larger, institutionally focused private markets managers are considering acquiring complementary private markets product companies that also have industry reach. RIA.

Moving on to fintech and wealthtech. Mitch, what are the current prospects for closing the deals? To what extent have soaring valuations in the tech sector impacted the landscape more generally?

Mitch: Last year unfolded a little slower than expected, largely due to high interest rates, but fintech and wealthtech mergers and acquisitions accelerated in the latter part of 2023. Difficulties in the financial market , especially for smaller businesses, have also led to restructuring and cost cutting. 2024 started with little deal flow, as often happens at the beginning of the year. On the bright side, the retirement technology sector has seen several large deals. AI capabilities will attract significant attention in deals for companies that have unique offerings instead of standardized products or that use surface-level AI simply to capitalize on hype.

As stock prices rise, larger operators are primarily looking for sellers with sufficient scale to make relevant acquisitions, including those with high valuations. This willingness to buy targets of a certain size, revenue growth, and in-demand technology indicates that mergers and acquisitions are set to increase throughout the remainder of 2024. Additionally, venture capital funding has begun to re-emerge, which, in future, it could allow some of these growing fintech and wealthtech companies to sell to strategic buyers who have strong relationships with wealth management firms, who are the ultimate buyers of their products.

Bruce Cameron is the co-founder of Berkshire Global Advisors,
the leading investment bank for M&A financial services and partner of the firm.

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