Private equity financials themes of 2022 and beyond

US RIA consolidation

It has been another busy year for M&A in the US registered investment advisor (RIA) space, where experts say multiples have peaked but are expected to remain elevated. PE interest in the industry is set to continue, although a former director at Mercer Advisors Inc remarked that the pool that “makes sense for a financial sponsor to invest in” has shrunk because there was an initial rush into the space. “There are probably a couple of diamonds in the rough,” the specialist said. “I think there’s still runway for firms that have taken on some level of investment, if they’re doing well, for follow-on investment or additional investors to come in.”

It remains a seller’s market that is being driven by greater competition for well-run and growing businesses, an executive at a New Jersey-based financial advisor and recruitment company said. The “enormous” wirehouse breakaway trend is also fuelling this environment as these advisors take steps to prepare for their future sale. “They know that the M&A market is hot and so they’ll spend the next 3-5 years building the firm.”

In an Interview on RIA aggregator Hightower and its operating environment, the expert noted that the inflationary and interest rate environment is now starting to impact the cost of borrowing and thus cost of acquisitions overall. The former executive director at Hightower expects there to be a limited number of 20x EBITDA multiples and believes the 9X-10X range is more realistic. They also see the breakaway trend accelerating, bolstering the rationale for continued M&A.

B2B payments

The B2B payments sector has exploded with new entrants through rapid digitisation as
COVID-19 disruption highlighted the need for more reliable payment methods. At the same time, there is a growing cohort of next-gen workers willing to use apps to send and receive payments digitally. “Those two things converged together, and quickly, almost every business realised that they needed to have a better way to move money, certainly pay employees,” a former VP at Automatic Data Processing Inc (ADP) said.

Several point solutions providers are experiencing significant growth as a result, although the long-term question has become focused on which businesses will survive as standalone models, particularly given the tough macroeconomic environment. This is expected to drive M&A over the coming years, presenting opportunities for PE investors as well as strategic acquirers.

Which businesses are expected to drive industry growth? Our Interviews suggest activity will be highest in the SMB segment. “In some ways, the last two years have been a tailwind for all players because digitisation among SMBs has increased dramatically,” a former executive at Plastiq said. Our Interview on Plastiq also demonstrated how owning different parts of the ecosystem benefits economics and scaling.

Global Payments Inc sees B2B as a “huge growth market”. A former director at the
company said the company’s acquisition of Evo Payments enhances its solutions on
accounts receivables/payable automation and back-end reconciliation, as well as its
position for cross-border transactions. B2B transactions and payments are “more
sustainable” from a margin perspective, the specialist said.

TAMP industry

The turnkey asset management programme (TAMP) industry is healthy and growing –but also evolving. In an Interview focused on SEI and its operating environment, a former executive at the company also said some of the TAMP players’ main headwinds relate to the “dynamic” competitive landscape, where fee compression remains a challenge.

We heard that many TAMP solutions are becoming broader and more holistic. SEI has been shifting its focus from offering in- house products only to adopting a more open architecture model. Although this approach is lower margin for the company, the rationale is to enable it to target a wider pool of assets, grow assets under administration and, ultimately, boost profitability.

While SEI could cannibalise some of its own higher margin business by offering greater access to third- party products, this is a challenge facing the industry at large, the expert said. Among the industry’s tailwinds is the trend of entrepreneurial advisors leaving wirehouses to start their own organisations – a dynamic that “continues apace”. The ageing workforce is also triggering consolidation and as PE firms try to capture economies of scale, the expert said there is a role for TAMP to succeed in that shift.

With that said, the specialist noted that it can be difficult to differentiate within the TAMP business, particularly given mounting fee and margin pressure. We also heard a recession could hurt TAMP businesses in the near term, but also create long-term opportunities as more advisors decide to outsource key functions such as compliance. Although the landscape is competitive, the TAMP client “tends to be fairly sticky”, the expert said.

Click here to access the full report, Private equity themes of 2022 and beyond.