Why PE firms like wealth management; plus we look at Lincolnshire’s acquisition of Banker Wire

Lincolnshire Management scoops up Banker Wire.

Good morning dealmakers, thank goodness its Friday. And Happy St. Patrick’s Day.

Its Obey Martin Manayiti here with the newsletter. We are closely monitoring the impact of the unfolding banking sector challenges that started with the fallout of SVB recently and how that affects private equity’s dealflow. We would like to hear your thoughts or what you are seeing with regards to this issue. Please email your insights to PE Hub editor-in-chief MK Flynn at mk.flynn@peimedia.com and myself at obey.m@peimedia.com.

Capping off the week with a theme that gripped my attention recently, today I am circling back to the wealth management sector. It’s a topic that we have covered multiple times. Last month, I rounded up eight deals in the sector.

Today we are deep-diving into a report published by Piper Sandler, a Minneapolis headquartered investment bank that showed a strong M&A market and what the bank’s co-head of asset and wealth management investment banking Aaron Dorr sees as the reasons behind it.

I also have an interview with Pieter Kodde, a managing director in Lincolnshire Management‘s origination team about the firm’s recent acquisition of Banker Wire, a company focused on the manufacturing of high-quality woven and welded wire mesh products.

Wealth management
Following this week’s report from Piper Sandler dubbed 2022 Asset & Wealth Manager Transaction Review and 2023 Forecast that showed a growing appetite for PE investments in the sector, I spoke to the bank’s co-head of Asset & Wealth Management Investment Banking Aaron Dorr on a wide range of factors influencing the sector.

Among other things such as detailing PE’s appetite in the sector, the report also indicated:
• 282 transactions in 2022, marking a 14 percent increase from 2021’s dealflow
• median wealth manager target AUM acquired dropped year-over-year to $600 million in 2022

Here are excerpts from my conversation with Dorr:

What’s giving rise to these trends?
There are some attributes of the wealth management space that are incredibly attractive to groups like private equity firms who use ongoing M&A to build out a portfolio holding company. For example, the wealth management sector is incredibly fragmented in the US. There are over 6,000 independently owned wealth management firms where the vast majority of those are privately owned by founders who are at or nearing retirement and so they are looking for liquidity.

The other side of it is that wealth management as a business is very sticky. Once you get a private client, they tend to value your relationship based on the service you provide more than the underlying investment performance.

Therefore, you have a massively fragmented space with lots of targets and have a business model where the revenues come in the door and they stay in the door. If you can buy a platform, which is what private equity firms have done, that have enough heft and infrastructure to scale efficiently, you can aggressively and accretively pursue an inorganic growth strategy. Bigger firms are buying smaller firms at a lower prices, rolling them together, getting greater combined growth and achieving an uptick in the valuation multiple that someone is willing to pay for the business, creating a win-win-win. It’s a long term trend that will continue to play out for years in the sector.

Your report indicated that though the transactions increased in 2022 as compared to 2021, the deal size was lower. What could be the reason for that?
Well, in wealth management it is because there were fewer large platform transactions versus previous years.

Why is this sector so fragmented?
To start an RIA, you just have to register with the SEC, there’s very little capital needed and you can outsource so much of the non-client elements of the business today. You basically just need a computer and access to Bloomberg [terminal] but you don’t need to invest meaningful amounts of capital like you do in other financial service sectors. It means the barriers to entry have been low historically for individuals to set up their own shops.

Going into the future, what should we expect for 2023?
We expect more of the same. Although I would say a dent is starting to be put into the fragmentation aspect of it, it is however a small dent. There are still thousands of small RIAs that will be looking to sell in the coming years and on the other side, there are a couple of dozen wealth management platforms that are backed by private equity firms that are standing ready to acquire those firms.

Dealmaking in the sector is also increasing in Europe. See PE Hub Europe’s recent rollup of wealth management deals.

Wire mesh maker
Earlier this week, the New York-based Lincolnshire Management completed the acquisition of Banker Wire, a company focused on the manufacturing of high-quality woven and welded wire mesh products.

Pieter Kodde, the firm’s managing director in the origination team, told PE Hub in an interview that the meshed wire industry will benefit from the revamp of infrastructure in the US, as local suppliers position themselves for pent-up demand of their industrial products.

Banker Wire provides a large mix of custom and stock products for both functional and decorative applications, selling through both distributors and original equipment manufacturers within the architectural and transportation sectors, pet/animal caging producers, data center racking makers, among others.

“We have seen very nice growth within some of Banker Wire’s existing sectors, and management has identified new growth opportunities in those areas which we can even pursue through our existing customers,” Kodde told PE Hub.

With this investment, the Lincolnshire managing director said, “It’s very realistic to expect a return of about two and a half to three times invested capital.”

Pandemic-fueled trends that fueled Banker Wire’s growth are here to stay, Kodde added. For example, demand for dog crates and other animal cages blossomed as people brought home pets during lockdowns, and that demand is expected to remain strong.

The pandemic also boosted demand for locally manufactured meshed wire as delivery times to receive exports during the pandemic got extended due to the snarled global supply chain.

“What we also saw as a result of covid is that people continue to have issues with importing, either because of higher freight cost, or availability of containers in general or just-in-time delivery issues, and they want a supplier closer to home,” said Kodde. “Especially because of lower freight cost, lower labor costs as a result of automation and better local quality, on-shoring is a trend we don’t believe is going away.”

That’s it for me today.

MK Flynn will be back on Monday.

Have a good weekend.