The business of wealth management M&A in North America has changed from the frenetic pace of recent years, with rising interest rates and other forces playing a part. This article examines data on transactions and what other stories suggest is happening in the space.
While the leading researchers of RIA mergers and acquisitions disagree on the exact number of deals in the first quarter, it’s clear that the advisory acquisitions business is entering a new phase.
DeVoe & Company has counted 63 transactions for the first quarter, which would mean that for the first time in nearly a decade, the year opened with a weaker first quarter than the previous year.
Competitor ECHELON Partners, however, says there were 75 transactions in Q1 and Fidelity recorded 67 acquisitions.
But there’s general agreement that volume is plateauing and the halcyon days of frantic bidding by overspending buyers continually goosing up multiples has cooled considerably.
Deals “getting more creative”
“The bottom hasn’t fallen out, but multiples are tempering,” Advisor Growth Strategies founder John Furey said in an interview with Family Wealth Report. “Both parties are getting more creative to get to the number they’re looking for and there’s much more emphasis on earn-outs and ‘earn-mores’ based on future performance.”
This year’s first quarter numbers extended the 20 per cent decline in volume the industry saw in the first quarter of 2022 – the first six-month slowdown the industry has experienced since 2018, according to DeVoe’s RIA Deal Book report.
A declining stock market and rising interest rates “conspired to compress revenues and increase acquisition costs,” the report stated. Advisors were also “actively evaluating” the implications of inflation, a stalled economy, and human capital challenges, while “slightly compressed” valuations, increased transaction expenses and distracted sellers “contributed to the deceleration.”
Backed by private equity and leveraged with debt, these major acquirers are particularly sensitive to rate increases, the RIA Deal Book report notes. Higher rates increase the cost of financing current transactions and the debt service on the loans from the consolidators’ historical transactions balloon. These costs not only erode future profits but can also limit access to additional capital or threaten debt covenants.
Nonetheless, private equity-backed firms continued to flex their muscles, as Mercer, WEG, Pathstone, Allworth Financial, Beacon Pointe Advisors, Cerity Partners and Mariner Wealth Advisors all made multiple purchases in the first quarter.
Despite the flattening market, and an arguably over-subscribed pool of buyers, private equity’s appetite for RIAs remains voracious.
Successful firms report getting a never-ending stream of inquiries from PE firms. And a trio of former United Capital executives are forming yet another aggregator, Modern Wealth Management, backed by a reported $200 million war chest from New York-based Crestview Partners.
Plus ca change…