Private Equity & Wealth Management Vertical Merger, Mar 22 2019
- Onex will acquire 100% of Gluskin Sheff for C$14.25 per share, implying a 28% premium to closing share price on March 22 with $445m cash.
- Onex Chairman and Chief Executive Officer Gerry Schwartz described the deal as a complementary fit for the two firms’ core competencies in terms of legacy, strategic objectives and track record of successes
- No expected growth nor synergies are disclosed, yet management has strong confidence into the integration after the acquisition that was undertaken for 8 years
Private equity (PE) is an alternative investment class and consists of capital that is not listed on public exchange. Private equity firms usually leverage investors (LPs) and external financing to invest into smaller private companies with upside potentials. The sector has grown a CAGR of 13.7% since 2005, outpacing the growth of hedge funds (7.5%) and asset management (7.7%). Currently, they manage over 3.65 trillion in global assets around the world.
Private Equity heavily relies on firm’s strategic approach as they consistently encounter three problems: gaining the access to capital, identify upside potential and constant due diligence/communication work. Often private equity firms would have to complete with asset managers and different asset classes for capital, yet it a vertical integration of wealth manager would ease the problem to a great extent.
Wealth management, alike financial advisory but it is carried on an individual level. Thanks to the advanced of information technology and data development, wealth management services are more accessible to people with different levels of wealth than ever before. Wealth managers tend to provide needs assessment according to individual’s goals and provide investment and insurance options for individuals to pursue.
To complete in the wealth management, there are three key success factors being cost, human capital expertise and optionality of investment. Speaking onto optionality of investment, nowadays there are rarely wealth managers that have access to non-public funds, as most investment products are public equities and fixed-income securities. Being able to access into the private equity market, could provide a differentiable advantage to wealth managers as other competitors will not be able to get into that space.
Onex is one of the oldest private equity firms with a hyper-successful track record. Its business structure has segmented into Onex Credit fund, Onex Partners PE fund and ONCAP PE funds. Onex’s businesses have assets of $51 billion, generate annual revenues of $32 billion and employ approximately 217,000 people worldwide. Their track record of successful buyouts including WestJet (2019), BSN Sports (2010–2013), Celestica (1996 — Present), CSI (2006–2010), Cineplex (2002–2005), Husky (2007–2011)
It’s strategic approach is to seek companies with great leaders that are priced fairly, Onex believes to one’s management team could drastically impact a company’s future. Therefore, the Onex’s management team is the largest investor because they believe the prosperity of the company they work at. The competency of workers onto portfolios and market updates are critical yet if they would have to seek for potential acquisition, their competency onto financial markets is heavily considered as an influencing factor.
Gluskin Sheff is a 36 year-old Canadian wealth management firm that had recently begun to diversify from extremely high net worth private clients and institutional investors to mid-socio-economical level. Gluskin Sheff is dedicated to meeting clients’ needs by delivering strong risk-adjusted returns together with the highest level of personalized client service.
According to EY Wealth Management Outlook Report, that private wealth management is forecasted to be growing at CAGR of 6% over the next five years. Commercial banks like BMO and RBC have stepped in and began completing for market shares yet the competitions are fierce. Similar to credit card industry, customer acquisition has become super difficult but its high switching cost nature has helped wealth manager to accumulated gigantic pool of capital. A merger towards private equity would furnish the access to private equity which would be phenomnial to wealth managers, modern investors value optionality and more informed about industry’s successes. A private equity that shares similar values and legacy to Gluskin Sheff will further elevate Gluskin Sheff’s predominant position.
Analysis & Implication
Similar mergers have occured in the past years. For instance in earlier 2019 BMO acquired Nesbitt Burns Inc, the Bank of Nova Scotia acquired Jarislowsky Fraser Ltd and in 2017 CI Financial. As to strategically expand its wealth management options by extending their product offerings including private equity funds options
The expected income would ease both parties’ problem with completing for capital inflows without interrupting the operations of these two companies. Management has not explicitly mentioned any forecasted synergies and expected growth. Thus, it is obviously going to further supplement both business models at a very fundamental level.
In the future, there are uncertainties about the strategic discrepancies of the merger. Onex’s PE funds might be pressured by Gluskin Sheff’s wealthy investors. The Onex’s acquisition also impacted the executive management of Gluskin Sheff as the focus of the company might have shifted away from the past. The integration and communication between both stakeholder are essential, in addition to Onex’s capability to generate returns would be the driver of the company in the short/mid-term.