What’s changed in the RIA M&A market

NEWPORT BEACH, CALIFORNIA - Interest in acquiring independent advisory firms appears to be at an all-time high.

Not only are more transactions getting done than ever before, but executives at Echelon Partners’ annual Deals & Dealmakers Summit who negotiate deals say that for every successful acquisition, approximately 10 to 20 were considered but never closed.

And Dan Seivert, Echelon’s CEO, says he believes hundreds of deals for firms under $100 million in AUM aren’t even being reported.

Some in the industry worry about a deal bubble, but few believe the enormous demand for advisory firms will abate anytime soon. So what has changed over the past year as a result of this unprecedented activity?

• Higher valuations

Since deal terms are confidential, it’s difficult to quantify how much multiples have increased. Overall, valuations are “a little bit higher,” Seivert told conference attendees. Valuation multiples of EBITDA for firms with less than $1 billion in assets have held steady, ranging from mid- to high-single digits, Seivert said in a follow-up interview.

The biggest jump in price has been for large firms with over $1 billion in AUM, even more so for RIAs with more than $10 billion, Seivert said. EBITDA multiples have leaped from low double digits to the mid and even high teens, according to Seivert and senior dealmaker executives at the conference.

The poster child for such lofty valuations has been Goldman Sachs’ purchase of United Capital in May for $750 million at a valuation estimated to be in the high teens. The next benchmark number is expected to come from Mercer Advisors, a major consolidator with $16.5 billion in assets, which is currently being shopped by private equity owner Genstar Capital.

• Better deal terms for sellers

The seller’s market for advisory firms has resulted in faster closings, shorter earn-out periods and more protection for sellers, especially from stock market downturns, according to industry executives at the conference.

“There’s more latitude around market movement to share the risk [between buyers and sellers],” said Mercer Advisors CEO Dave Welling.

Most M&A deals typically involve a combination of cash and equity, but the seller’s market is tipping the balance in favor of more cash than equity, M&A dealmakers say.

“There’s more cash at close, that definitely has changed,” said Rush Benton, senior director for Captrust Financial Advisors. “It’s a symptom of the increased competition.”

But sellers asking for more cash when the deal closes usually will receive less overall consideration, says Carolyn Armitage, managing director at Echelon. “The buyer is assuming more risk,” Armitage explained.

• Expanded buyer resources

Private equity continues to pour capital into the RIA M&A market. PE firms have accounted for nearly two-thirds of deals for RIAs with over $1 billion in AUM over the past year, and more than two dozen PE firms are active in the market, according to Echelon research.

Large and well capitalized RIA consolidators and strategic buyers have also become dominant players, accounting for nearly half of all deals, according to Echelon. Banks, once a major buyer of RIAs, now only account for less than 10% of the market.

“We’re seeing bigger, deeper-pocketed buyers,” said Ed Swenson, COO of Dynasty Financial Partners. “Big players have entered the market in a significant way this year, Goldman Sachs being a good example. And I think we’re going to see more of that.”

Bigger buyers with more capital has meant bigger deals.

Echelon recorded 28 deals for firms with $1 billion or more in AUM in 2015. Last year that number increased by 71% to nearly 50 transactions.

These large firms are seen as “ideal platforms” for growth by buyers, according to Seivert. What’s more, most have over $3 million in EBITDA.

“Private equity buyers seek this as a cushion to protect financial performance in the event of a market downturn,” he explained.