We expect potentially significant assets under management (AuM) to change hands in the coming years in Switzerland as a result of potential reorganisation in the EAM market. Incumbents should carefully assess their strategic options to benefit from such trends and optimise shareholder value.
Fundamental changes affecting the Swiss independent wealth management industry (margin pressure, generational changes, technology) – together with the new FINIG/FIDLEG regulatory framework – will add pressure to the long-term shareholder value creation potential of incumbents. Market participants therefore need to consider their strategic options to remain relevant and/or grow the value of their business.
Smaller market players will be the most disrupted by incoming regulatory developments.
The above structural changes will induce a degree of market consolidation in our view. In particular, smaller external asset managers (EAMs) with up to CHF200-300 million AuM will be the most impacted by cost base increases and thus of their critical mass thresholds. We expect such players to be the most likely to exit the market amid future challenges or go into retirement – as succession issues of ageing business owners will also be a key driver of reorganisation in the sector in the coming years.
For such market players, we believe that classical M&A will not be an option given the prohibitive costs of performing share transactions for acquirers, who are primarily interested in a target’s client relationships rather than its legal structure. Smaller EAMs will be able to transfer their clients to other, more established and larger EAMs or to some extent to their depositary banks – although banks are generally not able to offer the multi-booking capabilities that most EAMs require. Such transfers of businesses are typically structured through revenue-sharing agreements over several years, rather than a sizeable up-front price.
On the other hand, we expect some of the mid-sized EAMs (CHF300-700 million AuM) to potentially sell or merge themselves through more classical M&A transactions for succession planning management or critical mass achievement, with the larger players (over CHF1 billion AuM) acting as consolidators as being generally better equipped to do so.
Consequently, larger integrated businesses shall benefit the most from future sector reorganisation, as they already benefit from significant competitive advantages – strong allocation and manager selection expertise, client consolidation capabilities, compliance capabilities and relationship manager toolkits that have been built due to their size and economies of scale.
Assessment of the financial value of strategic options available
We nevertheless believe that it is a must for wealth management business owners to objectively weight the long-term financial value to be derived from the strategic options available to their business i.e. remaining as is (status-quo), growing through acquisitions, merging or selling. The timing for a possible M&A event should be carefully considered by recognising the value of one’s business in the cycle. While obvious, chances of an attractive valuation in a sale or merger scenario are much greater to be achieved when a business is still on a positive track, especially from a profitability contribution standpoint – which is the core metric considered by acquirers (rather than purely AuM volume) and which could be further pressurised in years to come because of regulatory and sector developments.
In countries which have already been impacted by increased EAM regulation, such as the UK and Germany, consolidation is now advanced with a reduction in the number of players. While FINIG/FIDLEG will come into full effect in only a few years from now, we are led to believe that the trend observed in neighbouring countries could be well replicated in Switzerland, with potentially up to CHF100 billion AuM (out of the CHF800 billion managed by EAMs currently) to be transferred to a new home in the medium term.
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Changes in the Swiss EAM industry are likely to lead to consolidation. Up to CHF 100 billion of AuM could change hands. For those considering selling, acting early is likely to secure the best result.