For every merger or acquisition, another firm has decided to sell up, or spin off a business unit. And those decisions should not be treated as signs of a defeat or a backward step. Often a sale shows that a firm wants to deploy capital and human resources far more effectively.

The pandemic might have suppressed some wealth mangement mergers and acquisitions, but there have been plenty of corporate marriages to suggest that the need for strategy advice and capital is strong. The pandemic is accelerating certain changes, and putting a premium on scale, efficiency and technology access.

And part of the strategy is realizing when it makes sense to exit part of a business to redeploy capital where it generates more value. For every buyer, there are sellers who have a range of reasons for spinning off business, and these reasons should not be seen in a negative light, argues EY, the consultancy.

“The same trends that are driving acquisitions are the same ones that affect divestment logic," Andre Veissid, partner, strategy and transactions for EY’s Wealth and Asset Management Arm, told Family Wealth Report.

An EY report in 2019 found that 85 per cent of wealth managers said they planned to divest businesses, assets and portfolios within the next two years. In its 2019 Global Corporate Divestment Study, EY said the financial services sector was active in divesting. Some 40 per cent of companies made between three and 10 major divestments over the past three years, compared with just 15 per cent of firms across all sectors. The proportion of companies making divestments worth more than $100 million had risen: 84 per cent said that their last major divestment was worth more than $100 million, up from 61 per cent in 2018.

Achieving scale remains an important factor for wealth and asset management. There is also the desire by some firms to focus on their niche strengths rather than go for scale. This plays to the “barbell” shape of the industry that has been a staple term in recent years, he continued. “If you find you are caught in the middle you have to make a few hard decisions," Veissid said.

“People often associate divestment with distress but that’s not always the case,” Harris Baltch, who heads M&A and Capital Strategies at Dynasty Financial Partners, said.

There has been a slew of deals in recent weeks. Mercer Global Advisors last week acquired Summit Wealth Advisors, a Colorado firm with $130 million of assets. Mercer in early July acquired Denver, Colorado-based M J Smith and Associates, a firm serving about 490 households with assets under management of about $910 million. Mercer has also bought firms in Los Angeles and Columbus, Ohio.

Besides Mercer, deals have recently included Toronto-listed CI Financial Corp, which bought an Illinois-based wealth manager, Balasa Dinverno Foltz LLC, for an undisclosed sum. In July, Chicago-based Hightower made a “strategic investment” in Private Vista, a $1.5 billion wealth management business with offices in Chicago and Oak Brook, Illinois. In June, PagnatoKarp, the US wealth firm, was acquired by Cresset Asset Management. As a result of that transaction, Cresset acquired a business with $2.3 billion in AuM, taking combined assets to $9.5 billion becoming one of the 25 largest US RIAs. At the UHNW end of the spectrum, Pathstone, the US multi-family office, acquired Cornerstone, the Bellevue, Washington-based wealth management organization - a further example of M&A ferment in the sector. Cornerstone has about $4.0 billion of client money.

Some of these deals are made by firms partnering with a bigger firm in order to obtain back-office services, or help to build out a proposition. In some cases, they help business owners realize a business exit plan for when they hit retirement. And some firms are exiting a business area to concentrate on other fields. Some of the biggest deals are a drive to grab more market share, such as the Charles Schwab/TD Ameritrade and Morgan Stanley/E*Speed marriages. Others are a bid to penetrate a new area, such as Goldman Sachs' purchase of United Capital. For the vendors, selling a business was driven by recognition that going it alone might not remain the most optimal way to use capital.

Divestment is not a bad word
Sometimes when firms spin off a business or shed a business line it can be portrayed as a defeat, but often it is positive step in redeploying capital to areas where a company can get the best return, EY's Veissid said. He cited the example of how Steve Jobs cut a large chunk of Apple's product lines on his return to the Silicon Valley business which he had founded, pivoting the firm into one of the most successful corporations in the history of capitalism. There are other examples throughout busines history.

“You have parts of your business that don’t match up to a strategic vision…..that sort of conversation has also been given a new edge by COVID," he said. “Divestment in this case is completely rational and a sign of good stewardship,” he added. Also, for every buyer of a business, there is often someone who is `divesting'.

“It is also about taking a hard look at the product shelf and looking at those areas that are commoditized and not so differentiated,” Veissid continued. “There is a lot of opportunity for the industry to learn from other industries,” he said, reflecting on how other sectors have spun off some areas to focus on others.

There will be some divestment that is brought on by a need to retrench and contain costs, and is more defensive in nature, however.

The divestment approach must begin by thinking about how a business area fits with the group as a whole. Only once that decision has been made does it make sense to think about price.

Veissid agreed that some divestment and spin-off of business units in private banking in the past were done in order to rationalize booking centers, some of which had a regulatory aspect. “Some divestment is an opportunity for housekeeping  and removal of distractions.”

Deal types
Dynasty's Baltch said that transactions take several forms.

There's the affiliate model, where an advisor wants to affiliate with another entity to get back-office and other support, etc. There is the “tuck-in” model, where an advisor, for example, joins a new firm to transition their practice to a younger generation before retirement. And the third main type is the equity partnership model, either involving majority or minority stakes, and with members of a firm staying on as employees, etc.

With "tuck-ins", they can involve a group of aging advisors who have a pre-existing relationship with firm principals, seeking a liquidity event. On joining that practice, they will transition their client relationships to other advisors over a pre-determined period.

At Dynasty, the St Petersburg-based firm has developed an in-house investment bank to help advisors seeking to transition or acquire capital to obtain the necessary resources. (Harris joined Dynasty in March. He worked for a decade at the investment banking arm of UBS, covering the asset and wealth management sector.)

“There’s a huge network we service that is interested in doing M&A," Baltch said. "We do a lot of work evaluating transactions on behalf of firms (on the buy-side and sell-side)."

The pipeline of firms requiring capital is “picking up”, he said.

Baltch said that part of his role is about talking to businesses in the wealth space about M&A and capital-raising requirements and opportunities.

Due diligence on deals has not been made more difficult because of lockdowns, particularly where there was an existing business relationship. “A lot of M&A happening today is the direct result of conversations that started prior to COVID; the quantitative and qualitative boxes were checked, but the timing back then for a deal was off.”

This publication has noted how private equity firms, such as Warburg Pincus, have bought into the financial services/wealth sector because they like it for recurring cashflows over time.

“I think private equity has become more popular over the last few years and there have been several transactions in the space. The need for [wealth] advice is always going to change and evolve. We continue to be bullish on the space," Baltch added.