A once-in-a-generation consolidation in the wealth management industry has private equity firms and acquirers eyeing the chance to build up their portfolios of businesses with steady cash flows.

Founders and other senior executives are weighing retirement at the same time that PE investors have been drawn to wealth managers' recurring asset-based fee revenue, high levels of client retention and potential to hasten growth through acquisitions. Some wealth managers are using PE backing to make acquisitions, further fueling consolidation.

"You are looking at an industry that has recurring revenue and that is growing through acquisitions, and a lot of firms are growing quite rapidly—that's why private equity is excited about it," said Scott Hanson, a co-founder of wealth management company Allworth Financial, which is backed by financial services-focused PE investor Lightyear Capital.

In the first half of this year, private equity firms and their portfolio companies backed 48 asset management deals worldwide worth a total of $6.7 billion, including both direct investments and add-ons, according to PitchBook data. The deal count and value are both among the highest figures of the past 12 years, and the sector is on track to exceed last year's record of 82 management deals involving PE investors.
   
Private equity investment in the wealth management industry is not new; however, along with its attractive business model, the industry's fragmented state—which offers the potential for consolidation and provides private equity investors an opportunity to conduct roll-up transactions for value creation—is another factor in the increase in PE activity.

Larger wealth managers are capitalizing on all these factors to pursue accretive acquisitions and accelerate growth beyond what can be achieved through attracting clients naturally over time.

Allworth Financial is one of the wealth managers that have taken advantage of the trend in order to expand. The serial acquirer has bought 21 wealth managers in the last five years, growing its total assets to more than $15 billion from $2.8 billion in early 2018, according to Hanson.

M&A activity in the wealth management industry has gone up dramatically over the last couple of years, with some soon-to-retire advisers struggling to find successors and seeking to monetize their life's work through a sale to a strategic buyer or a financial sponsor, he said.

"A wealth management firm is typically a small firm run by a founder and a handful of staff," Hanson explained. "They want to make sure their clients are taken care of after they retire, and, at the same time, they wish to realize the economics of the businesses they have built. So we are seeing a lot of these firms are selling themselves out to larger acquirers."

A recent report from Cerulli Associates estimates that more than a third of advisers managing roughly 40% of total industry assets are expected to retire within 10 years, yet one in four of them do not have a succession plan.
PE firms' increasing presence in wealth management also contributed to record M&A activity last year, as these investments helped strategic buyers build larger war chests to scoop up deals.

There were 307 mergers and acquisitions announced in the industry last year, and PE was directly or indirectly involved in 60% of total acquisitions, according to investment bank Echelon Partners. In 2020, the deal count was 205.

In the first quarter of this year, acquirers backed by PE firms accounted for almost 55% of wealth management acquisitions, the Echelon report shows. The most active acquirers in the first quarter were wealth managers with PE backing, including Creative Planning, backed by General Atlantic; Beacon Pointe, backed by KKR; and Mercer Advisors, backed by Oak Hill Capital and Genstar Capital.

Echelon predicts that the momentum will continue this year, estimating after Q1 that 2022 will see a new record of 338 transactions in the industry, and the final figure could be higher.

"As we near the end of 2Q '22, that estimate appears to remain mostly accurate—perhaps even conservative," said Barnaby Audsley, a vice president at Echelon.