Author: Tom Lewin, Head of Financial Institutions Group, M&A Advisory

We believe the UK’s wealth sector is attractive for investors thanks to its long-term fundamentals. M&A looks set to remain a key strategy for driving growth and creating shareholder value.

Consolidation has been one of the most significant themes in the UK’s wealth sector in recent years. According to Investec analysis, the top five largest consolidators by volume have announced over 120 acquisitions since 2018.

As our latest report on the wealth sector shows, we believe that M&A will remain key to the sector’s growth.

How do markets see the wealth sector?

For publicly listed firms, the current macroeconomic uncertainty has seen organic growth slow, with assets under management (AUM) dragging due to market movements.

As a result, price-to-earnings (PE) multiples have also been squeezed, with PE multiples for wealth managers now standing at 12.1, compared to the five-year average of 15.0.

Meanwhile in the private markets, there are more than 30 private equity-backed businesses across the sector. There was a flurry of activity in 2021 with 15 new investments. Private investment has slowed this year with seven new investments as of October 22.

As our latest report shows, deal activity has been resilient over the last three years, with a quarterly average of 34 M&A and IPO transactions. This year to date has been above average for the three quarters to date.

Sector trends

When it comes to current valuations, the markets appear to be overly discounting near-term risks and are failing to reflect the long-term fundamentals of the sector.

We believe there are four reasons that the long-term fundamentals of the UK wealth sector are positive:

The vast ‘advice gap’ and rise of the mass affluent

The UK wealth market is fragmented, with the ‘mass affluent’ segment (commonly defined as those with investable wealth of between £100,000 and £250,000) set to grow the fastest. As the mass affluent cohort grows, demand will grow for financial planning as these people look for solutions to fund their retirement.

There are offsetting drivers of macro uncertainty

For wealth companies, rising interest rates will partially offset the impact of the short-term decline in net inflows, at the profit before tax level. We also believe that market volatility will increase the demand for financial advice, as people look for ways to navigate the uncertainty.

Favourable structural factors are driving demand for wealth offerings

Changes to the pensions market have led to a structural increase in AUA (explanation). At the same time, increased flexibility and choice for savers have increased the demand for advice. Meanwhile, fiscal policy changes – or even the discussion of potential changes – have also led to an increased desire for financial advice.

Vertically integrated models can benefit from sector trends

Vertically integrated models (where a firm combines offerings such as financial advice, platforms, or investment management) are the best placed to generate good outcomes for both clients and shareholders. The declining number of financial advisers in the UK will benefit vertically integrated firms by supporting margins.

Read our report for more insight.