Data & Research October 11, 2021

Adviser Industry Posts Another Quarterly M&A Record

Echelon’s latest merger and acquisition research finds U.S. private equity firms and strategic acquirers are pivoting their attention overseas as the competition for assets and talent heats up.

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Echelon has published its third quarter adviser industry merger and acquisition (M&A) update, finding that deal volume hit yet another record high.

According to Echelon, prospective tax code changes might have helped fuel the new record quarter, which saw 78 deals announced. The previous record was 76 deals, set in the first quarter of this year. The third quarter analysis shows large strategic acquirers, many of which are backed by private equity firms, maintained their status as the most active dealmakers in the wealth management and advisory industry.

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At this rate, Echelon researchers expect the number of 2021 deals to outpace the total 2020 deal count by a significant margin. They point to strong secular trends such as overall financial services industry consolidation, growing competition and a need for broader succession planning as key drivers of the rapid pace of M&A. Adding fuel to the fire are supportive capital markets, cheap debt and heightened corporate cash balances—as well as the “transitory trend” related to potential changes in tax rates that could be included in the federal budget legislation making its way through Congress.

“Private equity interest in the wealth management sector has reached all-time levels,” the third quarter report notes. “The majority of deal activity involving private equity capital has come via their portfolio companies, such as M&A powerhouses Mariner Wealth (backed by Leonard Green) and Mercer Advisors (backed by Oak Hill). This buyer group, which we largely categorize as ‘strategics’ or ‘consolidators,’ accounted for 58 transactions during the quarter. … [These buyers] are outpacing even the most grandiose of expectations.”

Simply put, Echelon says, the strategics and consolidators are dominating total M&A activity, accounting for more than 70% of all transactions this quarter and more than 50% of all transactions in 2021 year to date. Echelon also finds average assets under management (AUM) per transaction continues to increase. There were 51 deals involving over $1 billion in assets announced during Q3 2021.

“This was a giant leap quarterly for total deals this size relative to the first two quarters of 2021, and significantly higher than the quarterly levels that were observed prior to this year,” the report explains. “The quarter’s average assets per deal of over $2.3 billion highlights the strong supply of available dealmaking capital from sophisticated buyers that is allowing demand from buyers to exceed the supply of firms looking to sell, even with the significant increase in the number of sellers that Echelon has observed in the past six to 12 months.”

According to Echelon, the growth in average assets impacted per deal can also be attributed to increases from investment performance, as major indexes continue to perform well—despite some growing concerns about a potentially cooling economy.

“Overall, we expect 2021 to be another year of record average assets under management transacted due to robust equity markets, new avenues for organic growth and feverish interest from current and emerging buyers,” the report concludes.

The Echelon research also points out a notable new trend. The researchers say some strategic buyers, spurred by opportunity as well as increasing competition, have ramped up dealmaking activity in the United Kingdom—and they have already been followed by prominent U.S. private equity firms also looking to establish a presence in the region.

“One direct private equity investment from the quarter that is worth noting was Lightyear Capital’s strategic partnership with international RIA [registered investment adviser] and U.K.-based wealth management firm Wren Sterling Financial Planning Limited,” the report notes. “This deal represents an important macro-trend that has developed throughout the year: domestic private equity firms turning their attention overseas as the U.S. M&A market becomes increasingly competitive for large-scale platforms that can support M&A. In 2021, the U.K. has seen an especially large increase in deal activity and general interest from U.S.-based financial and strategic acquirers.”

Data & Research October 8, 2021

PRT Activity Anticipated to Increase Within the Decade

Several factors will likely drive more mid-market and large plan sponsors to initiate pension risk transfer (PRT) transactions, surveys show.

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Two different surveys find that the majority of defined benefit (DB) plan sponsors are seeking to cut ties with their plans.

State Street Global Advisors (SSGA) surveyed 100 U.S. corporate DB plan sponsors and found that only 5% of respondents intend to keep their plans open indefinitely, with the vast majority seeking to exit (62%) or achieve self-sufficiency (33%). Self-sufficiency is when a plan reaches a certain level of assets such that the sponsor expects to be able to sustain the plan by investing those assets on a low-risk basis and pay members’ benefits as they arise without any additional support from the sponsor.

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The latest MetLife Pension Risk Transfer Poll, a survey of 253 plan sponsors that have de-risking goals (either near- or long-term) for their DB plans, found 93% plan to completely divest all their DB pension plan liabilities. MetLife notes that this is a sizable increase from the 76% of DB plan sponsors that indicated the same in 2019.

Among those planning to fully divest all their DB plan liabilities, 20% said they plan do to so in less than two years, while 55% said they plan to do so in two to five years.

SSGA found that among those DB plan sponsors seeking an exit, 45% are also likely to pursue partial buyout risk transfers and 27% are likely to explore some form of delegation to an asset manager before total plan termination. More than half (52%) of sponsors seeking self-sufficiency strongly agree that while they work toward a long-term runoff, there is still a possibility they may change course and opt for an exit—though the costs are too high to make this a viable option today.

According to SSGA’s survey, corporate plan funded status and plan size have an impact on sponsors’ anticipated paths. When asked if the turbulence caused by the COVID-19 crisis impacted respondents’ time frame for achieving long-term pension plan goals, 44% said that their timeline had been delayed. SSGA speculates, based on respondents’ comments, that while market upheaval was a significant factor for delaying their long-term goals, higher-priority organizational demands and redeployment of capital expenditure are likely additional drivers.

MetLife, however, found the vast majority of plan sponsors (89%) reported this year that there had either been no change to their de-risking plans (47%) due to the pandemic, or that COVID-19 has increased or accelerated the likelihood they would transact (42%). This is up from the 81% of plan sponsors overall that said the same in 2020. This year, only 11% said the pandemic has decreased or delayed the likelihood of entering into a transaction—down from 19% last year.

MetLife found that nearly all plan sponsors surveyed (93%) said annuity buyout transactions completed by major Fortune 500 corporations are increasing the likelihood that they will consider an annuity buyout. MetLife notes that often, mid-sized and large companies follow the actions undertaken by Fortune 500 companies, which are typically “first movers” when it comes to DB plan management.

The MetLife survey report also says that as the pension risk transfer (PRT) market continues to mature, insurers have become more efficient in their ability to price complex benefit structures for large corporate plans and onboard and transition the benefit payment administration, while minimizing the anxiety of participants.

When asked about the primary catalysts for initiating a pension risk transfer to an insurer, plan sponsors surveyed by MetLife cited the current interest rate environment (61%), market volatility (47%), an increase of the volume of retirees (37%) and favorable annuity buyout market pricing (35%).

The increase in the volume of retirees factored into SSGA’s findings. It notes that by 2030, all Baby Boomers will be at least age 65 and most will have retired. This is the same year the greatest concentration of survey respondents, more than one-third, plan to have exited or wound down their DB plans.

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