Industry consolidation continues at pace. Rigorous fee transparency requirements under MiFID II, rising operating costs and growing competition from WealthTech/robo-advisers are forcing managers to combine.

Overview

Current market

• Consistent; high activity levels

We are seeing

• Market consolidation—mostly smaller deals. Some medium-sized deals. No mega-mergers in H2 2019
• Consolidation amongst fund platforms (e.g., Allfunds's acquisition of Credit Suisse InvestLab, MFEX's acquisition of Société Générale's Luxembourg global fund trading business, etc.)
• Fintech investments:
  • Open Banking (e.g., Eurizon's minority stake in Oval Money)
  • Online wealth management services (e.g., Allianz's minority stake in Moneyfarm)
  • Robo-advisory (e.g., BAWAG's minority stake in Finventum)

Key drivers/challenges

• Industry-wide pressure on profitability:
  • Rigorous fee transparency requirements under MiFID II
  • Rising compliance and BAU operating costs
  • Competition from WealthTech/robo-advisers
• Differing bank prerogatives—some banks seek exits (e.g., Schroders' disposal of 41% of RWC Partners), while others seek new opportunities (e.g., ING's acquisition of 45% of NN Investment Partners)
• Rise in "acqui-hires"—smaller transactions aimed at securing specific expertise/client management teams (e.g., Waverton's acquisition of Timothy James, Ludlow's acquisition of Ivan A Hargreaves, etc.)
• Wide buyer universe for non-core operations— financial sponsors, insurers, sovereign wealth funds, foreign trade buyers and financial services conglomerates

Trends to watch

•  Importance of ESG—increasing client demand for 'ethical'/'impact' investment opportunities (e.g., Schroders' acquisition of a majority stake in BlueOrchard)
•  Consolidation amongst direct lenders
•  Growth in outsourcing arrangements (e.g., State Street's provision of investment management services to Lazard Asset Management)

Our M&A forecast

Sustained high levels of consolidation activity as managers continue to experience the effects of MiFID II. Online wealth management services and robo-advisory are unlikely to be hugely value-accretive in the short term.

6 key things to consider in the context of asset/wealth management M&A

We have helped clients navigate some of the more complex legal, regulatory and practical considerations that have driven consolidation in asset/wealth management sector, in the wake of MiFID II. We proactively identify the relevant issues to mitigate potential concerns and galvanise deal synergies. Here are six key things to consider:

Deal structure

• What will be bought/sold? Who are the sellers?
  • Note: Many European asset/wealth managers have grown organically over time, which may mean that multiple sets of shares and/or partnership interests may need to be identified and transferred.
• Will all sellers exit on the same basis or on different terms?
  • e.g., rollover, lock-ups, etc.
• Are the commercial prerogatives of all owners fully aligned? Does any seller have the right to veto the deal?
  • Note: If there are multiple sellers, the ability of the majority to 'drag' minorities into the sale will be key.
• How will the target group be valued?
  • i.e., likely metrics and adjustments.
• What does the buyer intend to do with the target group after closing?
  • i.e., operate as stand-alone, integrate into own business, reposition legacy investments, etc.
• What is the most tax-efficient acquisition structure?
• Are there any carve-out issues?
  • e.g., IT/distribution/payroll/HR dependencies, shared customer contracts, etc.
• Other legal considerations
  • e.g., public disclosure requirements in respect of listed funds, deal term restrictions imposed by listing rules, mandatory tender offer requirements, etc.

M&A process

• Will the target be sold through an auction or a bilateral process?
• What is the proposed deal timeline?
• If dealing with multiple sellers, will the sellers jointly appoint a single 'sellers' representative' to negotiate sale terms on their behalf? Will each seller need independent legal representation?
• What due diligence materials would be provided to potential buyers?
  • are all target management members willing to participate in the sale process?
    • e.g., management presentations, Q&A, etc.
  • any specific legal considerations?
    • e.g., wall-crossing, data protection, antitrust, etc.
  • do any special arrangements need to be put in place?
    • e.g., 'clean teams', standstill arrangements, etc.
• If on the sell-side, how will target management/employee confidentiality and loyalty be maintained during the due diligence/sale process?
  • e.g., employee NDAs, transaction bonuses/other incentives, etc.

Deal value

Purchase price mechanics can be complex, time-consuming to negotiate and materially impact the transaction process. Key considerations include:

• what will the purchase price comprise?
  • e.g., cash, stock or mix & match.
• when will the purchase price be paid?
  • i.e., bullet payment at completion or deferred over a period after completion.
• if deferred, will payment be contingent/calculated on performance of the target over a specified period of time?
  • what protection against 'artificial' reduction of the earn-out value by the buyer should be put in place?
  • would security for payment be needed?
    • e.g., escrow, guarantees, etc.
  • will tax-efficient alternatives be offered to selling individuals?
    • e.g., loan note alternative.
  • how would an earn-out impact the buyer's ability to integrate the target group after closing?

Completion certainty

• Depending on the licences held by investment management vehicles within the target group, changein-control notifications/approvals involving multiple financial regulators may be triggered
• Antitrust notifications/approvals may also be triggered, largely depending on overlapping revenue footprint of the buyer and the target group
• Our experience is that buyers often seek to mitigate their risk in the period between signing and closing through:
  • bring-down of contractual warranty protection
  • pre-completion undertakings which provide oversight/control over the target group's operations
  • purchase price adjustments based on AuM/AuA/net revenue run rate
  • walk-away rights if the AuM/AuA at closing is below pre-agreed thresholds
  • key man conditions/thresholds
  • material adverse change termination rights

Employment matters

• For many buyers, a key deal driver is accessing and retaining talented investment professionals with asset class experience and expertise
• Retention of top talent is often about incentive arrangements. Key considerations include:
  • who are the "key individuals" without which the buyer will be less inclined to proceed?
    • Note: identifying the relevant individuals early and understanding their remuneration packages (through due diligence) will be key to formulating an effective strategy to retain them post-closing.
  • what is the impact of the proposed transaction on existing target management incentive arrangements, and in particular on vesting triggers?
  • what retention packages would the buyer be willing to offer to key staff?
    • e.g., new service contracts for key staff (as a condition to closing), "skin in the game" through a new management incentive programme.

Regulatory matters

• Buyers will be particularly focused on:
  • existing regulatory and compliance weaknesses of investment managers within the target group
  • impact of recent regulatory changes on the target group's operations
    • e.g., MiFID II, etc.
  • the target group's preparedness to comply with new regulatory regimes
• In our experience, deal timetables are often extended due to interaction with financial regulators. Key contributing factors include:
  • buyers taking longer to complete their due diligence, since regulatory diligence is now as much about the future as it is about the past
  • regulators increased scrutiny of buyers' business plans and the effect the proposed transaction would have on the target group's clients
  • the transaction being used by regulators to require changes to the target's post-closing governance arrangements
    • e.g., appointment of additional independent directors.

Publicly reported deals & situations

Asset/wealth management market consolidation

Profits across Western Europe's €6 trillion private banking sector fell 8% to €13.5 billion in 2018 from €15.4 billion in 2017, the most since the global financial crisis (FT–September 2019)

Deal highlight:

White & Case represented Amwal LLC, one of Qatar's leading asset managers, in the transfer of certain investment management funds and mandates to Aventicum Capital Management, an asset management business controlled by Credit Suisse

Mid-sized:

• Ostrum Asset Management & La Banque Postale: Merger of asset management operations (December 2019)
• Trea Asset Management: Acquisition of Novos Activos Financeiros Espana (December 2019)
• Donner & Reuschel: Acquisition of Berenberg's asset management business unit (October 2019)
• Tilney: Acquisition of Smith Williamson (September 2019)
• Nykredit & Sparinvest: Merger (June 2019)
• Abu Dhabi Financial Group & SHUAA Capital: Merger (June 2019)

Smaller:

• Brooks Macdonald: Acquisition of Cornelian Asset Managers (November 2019)
• Brewin Dolphin: Acquisition of Investec's Irish wealth management business (November 2019)
• Banca Generali: Acquisition of 90.1% of Valeur Fiduciaria (October 2019)
• BT Asset Management: Acquisition of Certinvest Pensii (October 2019)
• Eastspring Investments/ Prudential: Acquisition of 50.1% of Thanachart Fund Management (October 2019)
• CFO Sim: Acquisition of 52% of Alpe Adria Gestioni Sim (September 2019)
• Delen Private Bank: Acquisition of Nobel Asset Management (September 2019)
• AFH Financial: Acquisition of Mulberry IFA (September 2019)
• AFH Financial: Acquisition of AE Garment IFS (September 2019)
• Aventicum Capital Management: Acquisition of selected funds and mandates of Amwal (September 2019)
• Kingswood Holdings: Acquisition of WFI Financial (August 2019)
• KBL European Private Bankers: Acquisition of Bank am Bellevue (August 2019)
• Azimut: Acquisition of Rasmala Egypt Asset Management (August 2019)
• Goldman Sachs Asset Management: Minority equity investment in Slate Asset Management (August 2019)
• Charles Stanley: Acquisition of Myddleton Croft (August 2019)
• Brown Shipley: Acquisition of NW Brown & Co. (August 2019)
• Liontrust Asset Management: Acquisition of Neptune Investment Management (July 2019)
• Edmond de Rothschild: Acquisition of 34% of Eraam (July 2019)
• ICEA Lion Group: Acquisition of Stanlib Kenya (July 2019)
• Bellevue Group: Acquisition of Adbodmer (June 2019)
• Hauck & Aufhäuser: Acquisition of Crossroads Capital Management (June 2019)

Direct lending M&A

• Bain Capital Credit: Acquisition of Immobiliare Stampa (November 2019)

Restructurings

• Prudential: Split of Prudential and M&G to create two FTSE 100 companies (October 2019)
• Investec Group: Demerger of Investec Asset Management (August 2019)

'Acqui-hire'— search for top talent

• Waverton Investment Management: Acquisition of Timothy James & Partners (December 2019)
• St. James's Place: Acquisition of Policy Services (December 2019)
• Ludlow Wealth Management: Acquisition of Ivan A Hargreaves & Co (November 2019)
• AFH Financial: Acquisition of Broadleaf Financial (September 2019)
• Wren Sterling: Acquisition of T D Armstrong Financial Planning (July 2019)
• 1825: Acquisition of Grant Thornton's Independent Financial Advice unit (July 2019)
• Alpha FMC: Acquisition of Axxsys (June 2019)

'Data'—the name of the game

• Confluence Technologies: Acquisition of StatPro Group (September 2019)

Fund platform consolidation

• BNP Paribas: Acquisition of 22.5% of Allfunds (October 2019)
• The Share Centre: Acquisition of 13,000 accounts from J.P. Morgan (October 2019)
• Allfunds: Acquisition of Credit Suisse InvestLab (September 2019)
• MFEX: Acquisition of Société Générale's Luxembourg global fund trading business (June 2019)

Differing FI prerogatives

Tag-out:

• Schroders: Disposal of 41% of RWC Partners (October 2019)

Tag-in:

• Standard Bank: Acquisition of Stanlib Ghana (July 2019)
• Schroders: Acquisition of majority stake BlueOrchard (July 2019)
• ING: Acquisition of 45% of NN Investment Partners TFI (July 2019)

Cooperation arrangements

• State Street: Provision of investment manager operations outsourcing services to Lazard Asset Management (June 2019)

High buyer appetite

Deal highlight:

White & Case represented Houlihan Lokey, financial adviser to private equity investor Epiris, on Epiris' public offer for IFG Group

Financial sponsors:

• Carlyle Group: Acquisition of Harwood Wealth Management (December 2019)
• Epiris: Acquisition of IFG Group (August 2019)

Insurers:

• Prudential: Acquisition of 50.1% of Thanachart Fund Management (September 2019)
• Legal & General: Acquisition of MyFutureNow (August 2019)
• Mutua Madrileña: Acquisition of 20% of Cygnus Asset Management (July 2019)

SWFs:

• QIA: Asset management JV with Credit Suisse, Aventicum Capital Management (August 2019)

Foreign buyers:

• Lincoln Peak Capital: Acquisition of 27% of RWC Partners (October 2019)
• Fosun: Acquisition of TENAX Capital (July 2019)
• Fosun: Hauck & Aufhäuser's acquisition of Crossroads Capital Management (June 2019)

Financial services conglomerates:

• BCS Financial: Acquisition of Uralsib Asset Management (September 2019)
• Sumitomo Mitsui Financial Group: Acquisition of TT International (August 2019)

Management/MBOs:

• Craigs Investment Partners: Acquisition of 49.9% of Craigs Investment Partners by management (December 2019)

Technological embrace

Established players embrace fintech:

• Verium: Acquisition of significant minority stake in DSwiss (December 2019)
• Alpha Financial Markets: Acquisition of Obsidian Solutions (November 2019)
• Eurizon: Acquisition of minority stake in Oval Money (October 2019)
• Allianz Asset Management: Acquisition of minority stake in Moneyfarm (September 2019)
• M&G Investments: Participation in £110 million Venture funding round for Sonovate (September 2019)
• BAWAG: Acquisition of 49% of Finventum (June 2019)
• SimCorp: Acquisition of AIM Software (June 2019)

Turbo-charge for WealthTech:

• Mergence Group: Acquisition of 2Engage (November 2019)
• Rosecut: Successful Seed funding round, led by Qventures (October 2019)
• Scalable Capital: €25 million Series C funding round led by BlackRock, HV Holtzbrinck Ventures and Tengelmann Ventures (August 2019)
• Savity Vermögensverwaltung/ Finventum: Equity investment by BAWAG (June 2019)

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