Scale through consolidation has become another way for UK wealth managers to maintain the digital pace, explains Matt Stamp, generating larger budgets for acquiring the technology critical to the future of the sector
Over the past decade, wealth management has been transformed by the rise of digital solutions. Wealth managers recognise they must embrace technologies that will enable them to engage with younger generations, operate more efficiently and strengthen long-term client relationships.
As a result, the wealth management sector is undergoing a sustained period of digital transformation, with many firms building an ever-more diverse remit of digital services. This requires deep and rich technology solutions that can orchestrate transactions across global financial instruments, markets, currencies and asset classes. For most, the question raised of how to attain these complex solutions is answered through acquisition.
Among UK wealth managers, scale through consolidation has become another way to maintain the digital pace, generating larger budgets for acquiring the technology critical to the future of the industry.
Buyers across the wider financial services and technology arena are increasingly seeing wealth management as a core sector for investment - and specifically the UK as a key growth market.
Changes in the last two years to pension legislation, allowing owners to access higher proportions of their savings earlier, is one example of trends driving the growth of assets under management across the UK market. Paired with an ageing population and the sophistication of the UK wealth management sector, this ensures the UK is at the top of the acquisition wish-list for international competitors and global players.
International financial services software and technology firms know that building their own wealth management platforms in order to enter a specific market rarely works. It takes years to develop technology and software specific to any developed market and still more to build up a strong customer base. For many, the only way to acquire the specialist knowledge and intellectual property required to compete successfully in the UK is through acquisition.
The problem is that scaled wealth management tech providers, with networks of established relationships and deep domain expertise, rarely come up for sale. Buyers are hungry to acquire providers that can fulfil their changing needs but opportunities remain scarce.
Last month, financial technology company FNZ acquired JHC Systems, a leading UK-based provider of platform software to the UK wealth management industry. This was a significant deal in the sector, creating the UK's largest technology platform servicing a broad range of the UK's top wealth managers. The competition for JHC was fierce, involving a high number of interested acquirers, all with different strategic visions for the business.
Given the scarcity value of scaled technology providers in key markets, coupled with the consistent valuation dynamics for software businesses across the market, valuations for assets in and around this sector continue to be higher than market norms.
This trend may be expected to continue as well-funded buyers fight it out for high-quality mid-market assets -for example, the current public auction and bidding war between several parties on Australian wealthtech provider GBST. In the year to date, in addition to JHC, UK closed mid-market deals have included Microgen, Asset Control, Acturis, Pirum Systems and RiskFirst.
For the shareholders of technology providers considering an exit, there are some key points to focus on: how is your technology positioned versus the competition? Are your solutions futureproof and do they solve the key commercial challenges facing wealth managers? Have you evolved to a ‘software as a service' model (timing of this will be key for buyers and investors)? As client understanding and demand for hosted solutions strengthens, how does this impact your current and future deployment models?
Due to the attractive dynamics of the sector, we do not expect interest and competition to reduce any time soon. We expect the current wave of consolidation to continue - for the right opportunities - specifically in the European, Australasian and North American markets.
Increasingly, both established players and big disruptors in the global market are likely to go through further significant M&A and liquidity events - for example, the London Stock Exchange's recently announced £27bn acquisition of Refinitiv - as they reach key scale points, benefitting from opportunities to move into new strategic territories and new product areas.
Matt Stamp is a partner at international technology M&A advisory firm Acuity, which advised JHC Systems on its acquisition by FNZ
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