Both have come to pass, yet M&A activity is on track for yet another record year, according to DeVoe & Company’s RIA Deal Book report for the third quarter.

The report stated that there was a “perfect storm of factors that should be compressing valuations and dragging down M&A volume.” Those factors include stock market volatility, interest rate increases, looming or actual US recession, employee turnover, and extreme global uncertainty. Nonetheless, “it is business as usual in RIA M&A land,” according to DeVoe.

Why?
“Wealth management M&A has passed the point of no return,” said veteran M&A investment banker Peter Nesvold, partner at Republic Capital Group. “There are more than a dozen professional acquirers in the industry. They are in the business of buying RIAs, not trying to time the market. At least so far, the decline in the equity markets hasn’t been enough to shake that.”

Nearly all of those aggregators are backed by private equity, noted Karl Heckenberg, CEO of Emigrant Partners and Fiduciary Network.
 
“Private equity raised a lot of money in 2019 and 2021,” Heckenberg said. “Given their incentive to deploy and the continued interest in wealth and alternative asset management, I don’t think you will see multiples drop much in 2022 and even early 2023.”

Sub-$1 billion deals driving market
Sales of small and mid-size firms are driving this year’s heavy volume, according to the Deal Book report from DeVoe and Company. Activity by RIA sellers with less than $1 billion in assets increased 54 per cent from the same period a year ago.

This surge in activity is partially due to delayed sales from the Covid era, the report said. After working extensively with clients during the pandemic, firms with under $1 billion in assets “engaged with latent succession and external sale strategies, which are now reflected in the numbers,” DeVoe said.

RIAs with less than $1 billion in AuM account for about 70 per cent of all transactions year-to-date, and 2022 is on track to potentially double the total number of transactions from 2020. This is a reversal of the trend the industry experienced over the past two years, when larger firms were the most active sellers.

The uptick in small and medium sellers, and the decrease of large and mega sellers, dragged down the average seller size. Only 6 per cent of transactions through Q3 2022 involved firms with $5 billion or more in assets. The industry average AuM of sellers during the first nine months of 2022 was $884 million, a 20 per cent decline from the 2021 average of just over $1.1 billion.

What lies ahead?
“2022 has been a tough fundraising environment so I would expect to start to see the effect of that trickle into the market in late 2023 and 2024,” said Heckenberg. 

“You may have a slowdown in the private equity backed aggregators due to a sharp increase in rates and sellers will likely push off sales for a year or two to get their revenue back to 2021 levels.”

In addition, advisory firms “who have had the markets at their backs the last few years and underinvested in infrastructure” can expect to see top line growth slowing and compressed margins, according to Heckenberg.

“Deal terms are starting to adjust but it’s still a very active market,” he said. “The debt financing market has been the leading indicator and it’s slowed to a crawl on new debt deals.”

Nesvold cited rising interest rates and “the amount of leverage on some sponsor-backed platforms” as risks that may “trigger some covenant issues if the economic picture worsens meaningfully.”

Nonetheless, “M&A is as robust as ever,” he maintained. “Even with further macroeconomic weakness, I see deals still happening – particularly for minority transactions, which is now more than a third of our work.”

Validation
As if to underscore those sentiments, a new RIA aggregator was unveiled this week: former RIA executives Scott Rister and Paul Stetz launched Transcend Partner Group, which will be backed by independent brokerage firm Lincoln Investment.

And Sequoia Financial Group, an Akron, Ohio-based RIA with $10 billion in assets, sold a minority stake to private equity firm Valeas Capital Partners for $200 million.

Sequoia has bought eight firms so far this year and plans to use the capital infusion to do more deals as more as Baby Boomer owners of small RIAs retire and sell their practices, according to Tom Haught, the firm’s CEO.