Wells Fargo Asset Management's new private equity owners may be just what the business needs to help it achieve scale and compete in the $1 trillion AUM club, industry players say.
Parent company Wells Fargo & Co. announced Feb. 23 it was selling its money management business with $603 billion in assets under management in a $2.1 billion deal to private equity firms GTCR LLC and Reverence Capital Partners. The split between the two firms was not disclosed. The deal followed months of speculation over whether the unit would be sold and to whom, with Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. previously named as potential suitors.
The sale came as no surprise to WFAM CEO Nicolaas Marais, who played a central role in deciding on the firm's new owners throughout the six-month process, he said in an interview.
Mr. Marais also highlighted how being separated from Wells Fargo will benefit the firm. "Either we are central to your value proposition, or ... you should cut us loose ... because we will need investment, we'll need time."
The important thing, Mr. Marais said, was that the sale "was not imposed on us."
The one surprise in the news of the sale was the relatively low price compared to similar M&A deals, such as Morgan Stanley buying Eaton Vance for $7 billion, Invesco Ltd. acquiring OppenheimerFunds for $5.7 billion or Franklin Resources Inc.'s $4.5 billion acquisition of Legg Mason Inc.
"This signals that there's probably some challenges in the business," said Dan Erichson, vice president of the New York-based investment bank Park Sutton Advisors LLC. He was also surprised that the transaction wasn't a strategic acquisition. "I think the price that was paid here and that it went to private equity indicates that flow activity wasn't great."
Steven M. Levitt, managing director and founder of Park Sutton Advisors, was also struck by the low price, but said "it speaks to challenges facing the long-only asset managers, including large ones in this environment where assets are flowing to passive and people are looking for differentiated strategies that deliver alpha."
Sources noted that WFAM has not achieved the scale of its peers and market leaders, with many in the $1 trillion AUM club. And an analyst note by Moody's Investors Service Inc. also noted that 33% of WFAM's $603 billion in AUM is invested in money market funds, which "typically earn lower fees. ... This business may be challenged in the year ahead as long-term interest rates have begun to rise," the note said. Money market fund net inflows were $67 billion in 2020, the note said, while other assets recorded net outflows of $3 billion. The remainder of the firm's AUM was not split out by asset class.
But transaction details aside, the deal was welcomed by industry players and touted as an opportunity for San Francisco-based WFAM to increase its offerings to clients — something highlighted by the buyers themselves.
GTCR and Reverence Capital said they intend to invest substantially in the money manager's technology and distribution channels. And Milton Berlinski, Reverence Capital's co-founder and managing partner, has said that not only do they plan to build WFAM's AUM to $1 trillion over the next five years, but they also plan to allocate significant capital to build up its investment products. The private equity firms also confirmed they are open to the idea of doing more acquisitions to reach that AUM target.
The real challenge, however, is how the manager's new owners plan to build up its AUM and make the company — a traditional long-only manager that specializes in fixed income — competitive in a field where most institutional investors want alternatives, ETFs and ESG products.
"The business will probably need to adapt and change because it's a traditionally focused business, providing mainly long-only equities and fixed income," said Jonathan Stern, a New York-based partner with investment bank Berkshire Global Advisors. "They don't have much in the way of alternatives or private markets capabilities that a $600 billion soon-to-be independently run firm will probably need."
Sources agreed that the deal was mutually beneficial for both the bank and the money management business. For Wells Fargo, it can now focus on its core competencies, such as its wealth management and retail brokerage businesses; while WFAM gains more autonomy, has new owners willing to invest more resources into the business — not to mention provide more competitive compensation for its executives — and isn't constrained by banking regulations.
