Private equity influence on wealth management is big and getting bigger

The 38 direct PE investments in wealth management last year compares to 23 in 2020 and 11 in 2019. Now PE is eyeing the wealthtech space.

With 2021 marking another year of record-level consolidation in the wealth management industry, the latest research from Echelon Partners takes a deep dive into the “changing dynamics across every part of the wealth M&A ecosystem,” including the growing influence of private equity.

Echelon counted 307 deals in 2021, an increase of nearly 50% over 2020, which saw 205 deals. In addition to the dramatic rise in the number of deals, the report shows that 145 of the acquisitions involved firms with more than $1 billion under management, which compares to last year’s record of 78 acquired firms managing more than $1 billion.

In total, Echelon reports $576 billion worth of advisory assets were acquired during the year, and the average seller had more than $2 billion for the first time ever.

This year’s report takes a closer look at the impact of private equity capital on the increasing pace and magnitude of the consolidation trend.

“Whether it is establishing platforms focused on consolidation, conducting add-on acquisitions, or providing growth capital to wealthtech’s next unicorn, there continues to be significant interest from this group,” the report states. “Private equity was directly or indirectly involved with over two-thirds of all deal activity in 2021.”

The report cites private equity capital as “one of the largest contributing factors to higher M&A activity.”

“Comparing buyer composition from five years prior, financial acquirers have become much more active in deal volumes, which were previously dominated by strategics,” the report states.

Not only are PE-backed firms driving much of the deal activity, but private equity investors continue to buy up chunks of the wealth management space, as shown by the 38 direct PE investments last year, up from 23 in 2020 and 11 in 2019.

“As private equity ownership becomes more common in the industry, we’re likely to see a continuing number of private equity-to-private equity deals and instances where one private equity firm invests in a business that is already part-owned by another private equity firm,” the report states.

Beyond pure-play wealth management, the Echelon report also looked at how M&A activity is starting to include wealthtech as a subcategory of financial technology.

The 108 wealthtech deals in 2021 represented a 123% increase over the 48 deals in 2020.

Echelon expects the pace of consolidation to increase in stride with demand for financial technology solutions.

“Wealthtech M&A exploded in 2021 as key deals related to the following themes were prevalent: increased personalization of portfolios, distributed platform access to alternatives, and the overarching race to build the best all-in-one outsourcer platform for advisers,” according to the research. “The technification of wealth management has been expedited by transitory forces, and deal activity has followed suit.”