Why private equity wants to invest in wealth managers

To hear Shaun Hauser describe it, private equity’s growing interest in the wealth management business is a no brainer. The Founder & CEO of Wellington-Altus sees this trend as global, originating in the Untied States and spreading worldwide. In 2024 alone private equity firms investing $20.89 billion (USD) into wealth management firms in the US, Canada, and Europe. Hauser believes that the characteristics that shape wealth management as a whole, and Canadian wealth management in particular, should see that interest continue to grow.

“When you take a step back and itemize the characteristics of the industry, they're what most businesses would covet. Our revenue is recurring and generally pegged to markets. Markets generally go up 6 to 8 per cent over long periods of time. So you have this kind of ready-made long-term increase of your top line that's above inflation, just by getting up in the morning,” Hauser says. “You have high barriers to entry…there's no real tangible cost of goods sold. So we don't have to build factories and make widgets and have inventory and purchase raw materials. We don't have any receivables issues. We don't have to wake up in the morning and worry if we are going to get paid today, because everything's automated.

“Your number one variable cost is your people. Your number one variable line item on the expense side of things is what would be called commission on the income statement. Well, commission is insulated and correlated to revenue. So when revenue goes down, typically your number one variable expense goes down in a correlated fashion. There are a lot of characteristics that, when you add them up, become pretty appealing.”

Using the experience gained from his firm’s recent $400 million deal with US-based Kelso & Company, as well as an earlier $100 million investment from Cynosure Group, Hauser outlined how Canadian wealth management firms can approach the prospect of private equity deals. He explained how his firm assess the prospect of these partners and what they did to ensure their team was fully onboard with the investment.

While the private equity interest in wealth managers is global, Hauser notes that the Canadian industry has a few specific appeals. He sees Canada in the “early innings” of a move towards independent wealth management, mirroring the US move from bank sponsored broker-dealers, or wirehouses in the US, to independent firms. Hauser sees the massive presence of the big six banks as another incentive for private equity to back independent firms.

“I don't know if there's any other nation like Canada where you have, effectively speaking, six government sponsored agencies that run between 65 and 72 per cent of every investable dollar,” Hauser says. “If those six Schedule 1 banks grow anymore, you know, like it would be hard to even call this environment competitive.”

If the banks can’t grow much more, Hauser says, then they become expense driven businesses. He argues that a business more focused on managing expenses to meet a quarterly earnings target is less focused on growth. Entrepreneurs, he says, are less interested in those kind of environments. He argues that his own firm’s success in growing AUM to almost $50 billion has largely come from attracting and supporting entrepreneurial advisors who want to grow.

As these factors drive more private equity interest into independent Canadian firms, those firms’ leaders need to start assessing potential partners. In Wellington-Altus’ case that process began with some inward reflection and a great deal of due diligence around their eventual investors. Hauser explains that he focused on the quality of the management teams at these firms. He found partners with long-term views, who shared his idea of what defines success, and who wanted to support without putting their hands on the steering wheel. He found partners who don’t expect unrealistic returns, but who want to invest in a business that consistently delivers on the characteristics that make wealth management firms attractive in the first place.

For other firm leaders, Hauser explains that beyond assessing a private equity firm’s valuation projection for their business, they should look at what can’t go on a spreadsheet. The quality of leadership and the quality of communication are vital factors for any wealth manager to understand. He also believes firm leaders should assess expectations around potential future M&A deals and scenarios around cap-ex deployment. He believes these qualitative factors should be paramount in any eventual decision to partner with private equity.

Those partnerships, when they come about, can also cause anxiety among the wider members of the organization, who can fear the changes that a new partner might bring. Hauser says that at Wellington-Altus, proactive communication within the organization helped them bring their teams onboard from the start.

“We were very proactive in communicating to our stakeholders saying, ‘this is what we want to do, and this is why.’ Upon reflection, that that was something that we would probably do again if we had to do it over, because the situation was nothing but positive for us,” Hauser says. “We never feel the need to be clandestine around our actions because, quite frankly, this is a really good news scenario.”