Our US correspondent casts his experienced eye over the latest flurry of big merger and acquisition deals and the lessons coming out of this activity.

Multi-family offices have moved front and center into the M&A arms race, and industry observers expect the competition to boost assets, talent, and scale up to heat up even more this year.

“Until recently, MFOs and UHNW firms were reluctant to participate in M&A,” industry consultant Jamie McLaughlin said. “Now they’re all eyeing each other like it’s mating season.”

Pitcairn underscored the trend last week with its acquisition of Baltimore-based Brightside Advisors, a $2.5 billion Baltimore-based RIA with an alternatives platform for UHNW clients.

Last month RIA aggregator Corient, the US subsidiary of Canadian asset manager CI Financial, snapped up Geller & Co, the New York-based multi-family office renowned for its most famous client, multi-billionaire Michael Bloomberg. 

Also in January, AlphaCore Wealth Advisory, a nearly $4 billion La Jolla, California-based RIA backed by Karl Heckenberg’s Constellation Wealth Capital, bought enTrust Wealth Advisors, a six-year old UHNW shop founded by UBS alumni Daniel Connors and Michael Crawford.

Those moves follow major deals transacted last year by two of the industry’s biggest MFO players: $100 billion-plus Pathstone, which acquired widely-respected San Francisco-based Hall Capital Partners, and $70 billion AlTi Tiedemann Global, which bought Minneapolis-based MFO Envoi and East End Advisors, a New York-based wealth management shop for UHNW clients.

High demand
“There’s a high demand for firms that have relationships with some of the wealthiest and most powerful families in the world,” said Brooks Hamner, senior vice president for M&A consulting firm Mercer Capital. â€śThese transactions could lead to additional business deals and other opportunities that the acquiring firm might not otherwise have access to.”

Because less than one per cent of US households are UHNW and most are already served by a wealth management firm, “organic growth opportunities for family offices and UHNW businesses is limited,” Hamner added. “Hence the desire to grow inorganically through acquisitions.”

Strategic pursuit of scale and a scarcity of talent that can serve wealthy clients are what’s driving MFO and UHNW interest in M&A, according to McLaughlin “It’s an arms race for people,” he said.

MFOs also want to enhance their capabilities. Hall’s reputation for investment prowess attracted Pathstone, and Brightside’s alternatives expertise was a lure for Pitcairn.

Taking the plunge
Despite bringing on Temperance Partners, the Canadian-based private investment arm of a family office, as a 20 per cent minority stakeholder last year, Pitcairn CEO Andy Busser said the MFO didn’t need capital from Temperance to finance the Brightside deal.

Temperance did, however, introduce Pitcairn to the Baltimore RIA. In addition to Brightside’s “fabulous alternatives platform,” the firm “checked every box” for Pitcairn in key areas like culture, personnel, client service and price, Busser said. “The deal was a no brainer.” 

Nonetheless, Pitcairn is unlikely to transact similar acquisitions anytime soon, Busser said, noting that the Brightside deal was the first in Pitcairn’s 102-year old history. “We’re not pursuing a roll-up strategy,” he explained. “We look at a ton of deals, but all the stars would have to align. Either the cultural fit is not right or the price is absurd.”

Accelerating momentum
Industry-wide, M&A momentum is poised to accelerate. 

RIA deal activity surged to new heights last year, as a record 272 transactions were recorded by DeVoe & Co, driven by a need for succession planning and scale, high valuations and a third quarter interest rate cut by the Federal Reserve Board.          

DeVoe expects M&A activity to “increase steadily over the next five or more years, barring any unforeseen and potentially derailing macroeconomic conditions.”

Fueled by outside capital, that activity is expected to include large MFOs. 

Pathstone is in the process of hiring a head of professional services whose job qualifications include having “experience in mergers and acquisitions and integrating new businesses.” AlTi Tiedemann has a growth war chest of nearly half a billion dollars from Allianz X and Constellation Capital. And, as Busser points out, “there’s an enormous amount of private equity money pouring into the high end of the market.” 

Red flags
But the M&A frenzy also has red flags.

After acquisitions, newly-merged firms can lose anywhere from four to eight per cent of clients, according to recent studies, noted industry consultant Mark Tibergien, the former CEO of Pershing Advisor Solutions who last month joined the board of M&A merchant bank Nesvold Capital Partners.

“A merger changes the DNA of a firm,” Tibergien said. “The reason a family hired an MFO in the first place may not be there after a merger. What was unique about a firm may no longer be unique. Another red flag is that aggregators tend to confuse size and scale. Bigger is not necessarily more efficient.”

It’s also possible that MFO mergers may be short lived.

“This demographic is a very small percentage of the overall population,” Hamner noted. “Unless there’s a dramatic increase in the number of these households, it’s hard to envision that the rate of M&A for these firms will exceed their population growth for a sustained period of time.”

In addition, private equity investments in MFOs are relatively recent, Busser pointed out. “If the liquidity when they exit isn’t good, it will have a negative impact.”