Barring a shock to the system, RIA mergers and acquisitions are on pace for another record year — although not sporting the blockbuster numbers some observers anticipated.
DeVoe & Co. and Echelon Partners, two of the industry’s leading consultants, each project slightly more deals this year than last; DeVoe estimates there will be around 150 transactions, while Echelon projects over 180 deals. DeVoe recorded 40 transactions in the third quarter; Echelon reported 43.
The two firms
Cetera was included because it has a “very sizable RIA that functions as a wealth manager,” says Echelon CEO Dan Seivert. But David DeVoe, managing partner of his eponymous firm, describes Cetera as “a broker-dealer,” adding “our research is focused primarily on RIAs.”
Both DeVoe and Echelon agree that the trends driving acquisitions show no signs of slowing down. The aging of firm owners and a need for succession planning; continued pressure to improve scale efficiency; an influx of private equity capital and high valuations are all contributing to continued strength in the M&A market.
Echelon’s Q3 deal report warns that rising interest rates as a result of the Federal Reserve Board’s credit tightening policy may be a “potential headwind” for M&A activity “as buyers are faced with rising financing costs.”
Nonetheless, the report continues, “late cycle consolidation can be expected to continue as RIAs remain attractive assets for buyers and sellers seeking liquidity.”
Focus Financial announced five transactions in the third quarter.
DeVoe’s Q3 report speculates that the M&A totals for 2018 may be less than anticipated because an increasing number of advisory firm owners are putting succession plans in place —and delaying sales until those plans are implemented.
But around 70% of firms still don’t have a succession plan, DeVoe notes. As a result, “the supply of firms that will simply have to sell externally will push M&A numbers up over the next five to seven years.”
M&A activity in the third quarter was characterized by both aggregators and large RIA firms emerging as lead buyers and a plethora of multibillion-dollar deals.
Focus Financial attracted the most attention in the aggregator/consolidator category, raising over $500 million in a July IPO and announcing five transactions in the third quarter.
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RIAs including Rockefeller Wealth Management and EP Wealth made a strong showing as buyers, increasing their share of deals from 38% in 2017 to 45% to date this year, according to DeVoe & Co.
Echelon recorded 26 M&A deals involving sellers with $1 billion or more in AUM through the third quarter, compared with 29 comparable deals in all of 2017.
Buyer interest in these firms, the firm says, can be attributed to the belief that their platforms “possess the ideal mix of size and development” and that $1 billion-plus firms “often have more infrastructure, systems, management and financial wherewithal.”
What’s more, most of these large firms have over $3 million in EBITDA, according to Echelon. “Private equity buyers seek this as a cushion to protect financial performance in the event of a market downturn,” the firm’s Q3 report states.