Why more pension funds are investing in wealth management firms

Director says that the emergence of pension plan investors is part of the maturation of the private wealth management industry

Why more pension funds are investing in wealth management firms

The Ontario Teachers’ Pension Plan (OTPP) had recently announced that it had invested in Seven Investment Management (7IM), a private wealth management firm based in the UK that had $26,2 billion in assets, which was another direct investment from pension funds that had occurred this year, as reported in an article by the Institutional Investor.

According to Iñaki Echave, a senior managing director at OTPP, the pension fund had been exploring investments among European wealth managers for a few years. They considered 7IM to be one of the fast-growing financial services platforms in Europe which the pension fund intended to support.

The investment represented only a part of the $249.8 billion that OTPP had in assets but was part of the $7.31 billion private equity portfolio that was designated for financial services companies. It already included Allworth, a wealth manager in the US that was worth $17 billion, and may include even more wealth management firms in the future.

“We believe the wealth management sector is compelling given expected asset appreciation and future net flows supported by pension reforms, demand for wealth advisory, and demographics which should drive structural growth over the long term.” said Echave.

Direct investments from pension funds were considered to be rare but now had occurred twice this year. Last May, the State of Wisconsin Investment Board, Abu Dhabi Investment Authority, Bain Capital, Flexpoint Ford, Ares Management, and other institutional investors had invested in CI Financial’s US wealth management business.

This preference for wealth managers stemmed from the fact that clients of wealth managers are sticky, and their revenues were typically stable. They also had wide operating margins and showed potential for organic and inorganic growth.

Brian Luazon, managing director at Incap Group, a boutique investment bank that focused on wealth and asset management said that there seemed to be interest between pension funds and wealth managers when it comes to such investments. With the OTPP-7IM transaction, he said that it was likely for other similar deals to occur.

“It’s very good for the industry and I think [pension plans] will be a strong option for a lot of firms who are more reluctant to work with other partners.” said John Langston, founder and managing director of Republic Capital Group, another boutique investment bank that focused on advising wealth and asset managers.

“The emergence of pension plan investors is another chapter in the maturation of the growing private wealth management industry.” Langston added.

However, Langston also said that pension funds cannot replace the traditional private equity firms that had been making direct investments in wealth managers as he asserted that different buyers are better for different sellers and scenarios. He also said that some investments may be more than what a seller realizes that they want or need.

“A lot of people have a high emotional comfort with this permanent capital dynamic and they don’t think about the other side of the coin.” said Langston.

“My argument would be: try to evaluate each structure and type of partner, both the pros and the cons, and don’t allow an emotional attraction to a particular approach to cause you to overlook the downside of a particular partner.”