Urgent: Acquisition of a private wealth management firm case study

Question

Hi guys,

I am looking for a bit of urgent advice (not a solution).

I have to work on an acquisition case study. The acquisition is of a local private wealth management firm in a niche sector by a global financial services firm. The Asset under management (AUM) is known. That's all I have as part of my case study (no other information). I can't ask because it is a written one.

The task is to evaluate industry outlook, valuation of the firm to be acquired and an approach to integrate the firms.

My concern is I have already spent good 5-6 hours on googling but I neither found any wealth management industry report.

Also, I don't have access to Bloomberg or capital IQ, so I don't even know the valuation multiples to do the valuation of the firm. Since the firm is private, so their financial statements are also not available. I am exhausted and wondering if I am moving in the wrong direction.

Where can I find such specific industry outlook reports and valuation multiples?

Or if I am moving in the wrong direction, could you please help me steer in the right direction? Maybe the valuation is to be done through some other method?

Thanks in anticipation.

Answer 1

Hi Anonymous,

have a look at the yearly released Global Wealth Report by BCG. It contains industry outlook, margins, geographical profiles, asset classes, etc. Here is the link to the 2018 report:

https://www.bcg.com/en-us/publications/2018/global-wealth-seizing-analytics-advantage.aspx

Moreover there are older reports from 2017, 2016 etc. In addition to that there are similar reports available from Credit Suisse:

https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html

Good luck! Sidi

Answer 2

Expanding my previous answer to cover the valuation aspect:

Valuation of a cash-generating asset (and from an investor's perspective, a company is a cash-generating asset) can be done by assessing how much return this asset generates over time until the investor's investment horizon. This time horizon means: "By when does will the investment be recouped?". It is expressed as a P/E-multiple (Price/Earnings-multiple). These multiples are industry-specific, but mostly lie between 7 and 15. So let's assume a P/E multiple of 10. This means, the value of the wealth menagement firm is 10x its yearly earnings (profits).

How to calculate earnigns and value of a wealth manager?

1. Understand the earnings model! Wealth Managers invest their clients' cash (Assets under Management - AuM) to generate a return, and they earn a certain share of the increase in value. Let's assume they get 20% of the increase in AuM value, and their own operating costs are 2% of AuM.

2. Let's assume that, on average, the wealth manager generates 8% year-on-year return on the AuM

3. Since we know AuM (let's assume 1 billion USD), we can now calculate the earnings = revenue - cost = [1 billion * 8%*20%] - [1 billion * 1%] = USD 16M - USD 10M = USD 6M yearly profit

4. The value of the wealth management firm is equal to earnings*P/E-multiple; hence USD 6m * 10 = USD 60m

Hope this helps!

Cheers, Sidi