The WealthTech world has received a significant amount of attention recently as the velocity of mergers & acquisitions is of the rise. From billion dollar deals to million dollar investments, the providers of WealthTech software and services are under pressure to make the right deal, find the right backers and land the right partners before the opportunities are all gone. Yet at the rate of consolidation over the past few years, this may be a short-lived space.
In our view, in coming few years the WealthTech world will likely get absorbed into the existing providers – akin to the system integrators following the millennial web-services boom or the business intelligence sector consolidation over the previous decade. The driver for all the activity in WealthTech is, as you would expect, wealth. The World Wealth Report suggests that total assets under management for global high net worth individuals will rise beyond $70 trillion (with a “T”) in the next few years.
Translated to M&A terms, in the past 18 months, roughly $1bn of WealthTech assets have changed hands in an avalanche of acquisitions as the players in this market all chase the Trillion dollar opportunity in consumer and institutional technology and services markets.
So what happens next?
The most common question we are asked is who next and at what valuation. In our view, three things happen next:
- Incumbents learn to dance
- Less money chases more money
- The music stops
#1 Incumbents learn to dance – the established players like Bank of America, SEI Investments or Morgan Stanley have watched their traditional businesses be disrupted by a changing landscape of delivery channels, business models and alternative solutions. This change has taken longer than many expected, perhaps because of more cautious digital acceptance surrounding wealth access and management, perhaps a lack of regulatory pressure or maybe discomfort with security surrounding digital delivery.
Because of their sheer size, some incumbent have struggled with the “how to move the needle” paradox that tends to squeeze out all but the largest investments. That fosters status quo, which leads to a paralyzing invention gap.
As innovation gets harder to self-create, the easier alternative is to buy it. Unfortunately, acquiring often leads to an unfilled promise of integration and the empty pursuit of the cross-sell/upsell panacea touted in deal set up. As a result, the incumbents have been forced farther out on the risk curve.
To stay ahead, they are taking on larger more transformative mergers. Two recent examples in WealthTech software include:
What happens next?
Watch for new and larger entrants to step into this attractive food chain. Think about who loves big data, B2B2C and technology.
#2 Less money chases more money – From our experience, one of the leading indicators for any niche in technology is the velocity of early stage funding. Over the past few years we’ve seen a rapid pick-up in activity as the magnetism of WealthTech continues drawing some of the most innovative investors. For example:
However, early stage money can change direction quickly. We’ve seen other sectors run dry such as banking systems where regulatory pressures squeezed out innovation and early stage money funds pivoted to areas like healthcare analytics where regulatory changes are actually fueling innovative business models.
WealthTech appears to have had its time in the sun with rapidly expanding investments beginning to curtail. We’ve watched as fresh money has fueled the emergence of “Robo” tool development however, these appear narrow in scope and market opportunity. (sidenote: only in America could the term “Robo” make such a quick comeback, rising from “robo-signing” foreclosures during the mortgage meltdown to the hot new thing in investments).
Reading through the dialogue we recently had with two early stage WealthTech companies suggests some, perhaps, frothy expectations:
“We just closed our series “A”, everyone told us we should use a $10 million valuation”… based on less than $250K in annual revenue.”
“Our raise included the “movers and shakers” of the industry along-side a “named” VC and even with less than 50 RIA customers, we already have had conversations with three [incumbent] potential acquirers”.
What happens next?
From the VC’s we speak with, the WealthTech opportunities may be thinning out and only so many aggregators, Robots and re-balancers can reasonably co-exist.
#3 The music stops – This spring and summer, the WealthTech world has seen its share of engagements and weddings as companies seek commercial and ownership arrangements in pursuit of their enterprise visions. What’s new is the amount of disruption some marriages are causing. For example, less than a year after MoneyGuidePro inked an “exclusive” data relationship with Yodlee, along comes Envestnet in a marriage with Yodlee. What happens when your partner marries someone else? You think you are in an exclusive relationship and “bang”, your “proprietary” data source is now merged with someone else leaving you lonely, but worse, possibly with a broken business model.
What happens next?
The shakeout among point solutions and suites should get more intense as the remaining opportunities dwindle. Watch for a few more key acquisitions before all the buyers are gone.
John Mathis is a Partner and Co-Founder of Harbor View Advisors bringing over 25 years of experience as an investment banker, investor, equity research analyst and management consultant. John works with companies in the areas of Software-as-a-Service (SaaS) and Technology-Enabled Services. In addition, he leads Harbor View’s Financial Technology industry practice.