How Fintech Is Reshaping Asset Management

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Will venture capital’s bet on millennial-centric online asset management platforms pay off? How are active and alternative investors using technology to gain an edge and generate alpha?

PitchBook’s latest fintech analyst report—Part 3: Asset Management—details how a confluence of demographics, technology and regulations has begun to change the way money is managed. We outline the impact of robo-advisors and innovative online brokerages, as well as alternative tools relevant to PE, VC, hedge fund and real estate investors alike.


In addition, this analyst report includes:

  • A breakdown of private investment within the asset management ecosystem
  • Corporate M&A activity
  • Key company profiles packed with financing and valuation data

Private Investment and Corporate M&A

Deal Activity

Fintech Asset Managment Institutional investor interest in the asset management space has increased steadily since the financial crisis. The crisis revealed many flaws in the ways that money was being managed, while the ensuing years revealed the preferences of millennials managing their personal wealth and opportunities within financial services impacted by the recession. Since 2010, institutional investors have made $11.4 billion of private investments in financial technology firms in the asset management space, including private equity, venture capital, strategic acquisitions and IPOs. Interestingly, the peak in capital invested occurred in 1Q 2016 when investors poured $1.9 billion into fintech asset management firms. That quarter saw substantial volatility in capital markets, including both high-yield credit and equities.

Fintech Asset Managment

Fintech Asset Managment

The clearest trend has been the steady increase in venture capital interest in the space. Venture made a large play in 2014, accounting for 166 of the 202 deals. Further, VCs invested $788 million into the space that year, accounting for 72% of all capital invested. The period didn’t see a few outsized financings skewing figures—it was rather the sum of a number of exciting companies raising conservative late-stage rounds. During the year, many of the current industry leaders such as Wealthfront, Motif, Nutmeg, Betterment, Quantopian and Orchard raised substantial private capital.

Private equity interest in the space has also increased. So far in 2016, private equity investors have invested 49.1% of dollars in the space, eclipsing a previous high in 2013 when they made 37.9% of investments by dollars. Substantial private equity investment signals a maturation of the industry. Private equity investors have a different strategy from venture capitalists. Historically, they purchase mature undervalued companies, add leverage and make operational changes to improve revenue and profitability. However, recently PE firms have been doing more and more growth equity deals, taking a minority stake in companies. This shift is reflective in their increased participation in fintech deals. One prime example of this is Francisco Partners’ 2015 and 2016 follow-on investments in Betterment.

Fintech Asset Managment

Fintech Asset Managment

Fintech Asset Managment One symptom of the shift in investor type has been the same high levels of first-time investor participation in deals. Over 300 investors in the >400 deals in each of the past two full calendar years were making their first transaction in the space. These sustained strong numbers point to continued enthusiasm for the subsector.

Fintech Asset Managment

Institutional Involvement & Moving Forward

The shortcomings of traditional asset management have been magnified in recent years. Active managers have underperformed, and high fees have eaten up a larger share of returns in a low-yield world. Even so, the steady increase in global asset prices has made the global asset management industry non zero sum, making legacy players slow to be disrupted by VC-backed upstarts. The massive scale of legacy institutions has given them the clout and assets to derive extensive economies of scale. Furthermore, the nature of the industry makes consumers and institutions less inclined to trust counterparties, vendors and advisors without an extensive track record. However, as boomers begin to draw down retirement accounts and transfer assets to millennial offspring, we may begin to see a rush of assets being transferred to more millennial-centric platforms. Traditional asset managers will have to acquire more fintech tools in order to bolster their offerings.

As venture capitalists have poured funds into upstart asset management platforms, institutions have also seen success rolling out their own offerings. Vanguard and Schwab were late to the robo-advice game, yet their offerings each boast greater AUM than all upstart robo-advisors combined. Much of this growth comes from shifting client assets from their existing offerings. At least $10 billion of Vanguard Personal’s $50 billion+ in AUM came via transfers out of its Vanguard Asset Management advisory. Furthermore, there is room for growth as Vanguard has a much higher account minimum ($50,000) compared to other platforms. Existing platforms can use the clout that comes with a long track record and financial resources to outcompete upstarts on fees and, in some cases, UX. They may also be able to leverage existing institutional relationships to offer access to other asset classes such as private markets. Ownership of proprietary ETFs also increases the percentage of fees that go to the legacy asset manager compared to startups without the same clout. Since ETF fees make up a sizable percentage of overall revenue from passive management, being able to double dip enables these firms to gain the scale necessary to become profitable since the requisite AUM to break even currently stands in the billions of dollars for many low-cost platforms.

As investors look out for the future of their portfolio companies in the space, we expect M&A to make up a disproportionate exit route for VC investors. There are several key synergies between a variety of legacy business models in the asset management space and upstart platforms with both consumer and enterprise SaaS offerings. The lean nature of online platforms would allow acquirers to implement these systems and cut costs. On the revenue side, these innovative products and software tools will bring in sticky, younger and/or more tech savvy users who represent a recurring source of revenue. Many of these platforms simply lack the scale to reach their full potential, as AUM growth and global expansion comes with headwinds—the greatest being trust and regulatory issues related to jurisdiction. Today we see strategic acquirers pay a premium in order to drive inorganic growth. We see legacy asset managers being able to pay a higher multiple to drive recurring revenue on their massive AUM and further increase their customer retention. Since startups in the asset management space will be relatively more attractive to strategic investors when it comes time to exit, all else being equal, funds that invest in these companies will be positioned to outperform their peers given the higher multiples that we believe strategic investors will be willing to pay.

We hope this report serves as a valuable resource as you continue to explore this nuanced sector. As the industry continues to mature, we’ll keep a close eye on it and provide updates as developments unfold. As always, feel free to reach out with any comments or questions at [email protected].

Read the full report here.

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