Wealth Management: Why is JP Morgan Acquiring Nutmeg?

Big news in UK wealth management: JP Morgan is acquiring the digital wealth manager Nutmeg. It seems that the U.S. banking giant has big plans for the UK, as it has been slowly but surely working on a digital bank for a few years already. It is due to launch later this year, and the acquisition will naturally complement its product offering. JP Morgan was already on the hunt for acquisitions. The move is interesting from two point of views. Firstly, why would JP Morgan acquire Nutmeg? And secondly, why is the fintech selling itself to the American bank?

What is Nutmeg’s business?

JP Morgan Nutmeg

First thing first, what is Nutmeg?

Besides the spice used in hot beverages, obviously… Like in Starbucks’ infamous Pumpkin Spice Latte.

Nutmeg is a WealthTech, which simply means a fintech company focused on wealth management. In other terms, it is a wealth manager. Founded in 2011, it has now more than 140,000 clients and has accumulated over £3.5 billion ($4.9 billion) in assets under management (AUM). That makes Nutmeg the UK’s biggest digital wealth manager.

Moreover, it is a robo-advisor, a low-cost automated investment platforms that manage money using algorithmic execution.

However, to put it in perspective, the largest asset manager in the UK is Legal & General, with a whooping $1,440 billion AUM. And the tenth largest, Baillie Gifford, has $263 billion AUM. So you can see that Nutmeg has been doing well, but hardly enough to really challenge the incumbents…

What is JP Morgan up to in the UK?

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We need to explain what Nutmeg is. No need for that for JP Morgan, really. That’s what brand awareness is all about. In a nutshell, it is a c.$3 trillion bank with $120 billion in revenue. It is the result of a lot of M&A activity since the 90s, but can trace back its roots to the end of the 18th century.

You can see in JP Morgan’s plans to launch a digital bank a reflection of the never-ending Wall Street rivalry. That is with its old foe Goldman Sachs. Marcus by Goldman Sachs has been a big success, as part of a broader strategy by the investment bank to diversify in consumer finance. And you guess it, after an initial launch in the U.S., Marcus attacked the UK market.

The reason for that is, despite the geographic distance, that there is a certain similarity in terms of personal financial products between both countries. Combined with the same language, makes an expansion there easier.

And the UK is a great place for fintech.

Also, to be clear, JP Morgan is already in the UK with its investment banking division. So even though it is building its digital bank “from scratch”, this is not a greenfield launch in an unknown country.

Why should we care?

There are two sides to this story.

JP Morgan Nutmeg 2 sides

Nutmeg

The wealth manager had enjoyed strong growth and accumulated quite a decent amount of assets. But asset management is a scale game, and it is possible that Nutmeg felt that it was not going to be possible alone to get to the next level.

Even though the market is quite concentrated at the top with a number of smaller players, Nutmeg would hardly make the top 40. How many years would it take to grow enough to be a heavyweight?

The robo-advisor originally partnered with JP Morgan in November last year to launch a new ‘Smart Alpha’ portfolio range. Partnerships are a good way for fintechs to grow and reach new customers. However, it is possible that the fintech felt that it was not going to be sufficient to grow further.

Then, there is the fact that Nutmeg had raised over $150 million in venture capital funding over the years. Ten years on, that is when investors start to ask what the exit strategy is. And it seems that M&A was more plausible than an IPO, given that the wealth manager is not yet profitable.

JP Morgan

Even though the U.S. banking says that everything is going fine as it builds its UK digital bank, buying a fintech business tells a different story.

It was actually rumoured that instead of building something from scratch, JP Morgan could buy a UK neobank. Or merge it with its existing digital bank. It was said that the U.S. bank approached Starling Bank. If you are really certain about what you are building, you do not need to buy a business. It also adds to the complexity of launching a new bank.

However, it also shows that JP Morgan is serious about its ambition in the UK, willing to put its money where its fintech is.

Last but not least, this bolt-on acquisition will complement its product offering. It was rumoured that JP Morgan is building a digital bank, focusing on deposits at first and then consumer finance. À la Marcus. Adding a wealth management side to it will be an interesting combination…