RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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RIA Valuation Insights


Industry Trends Wealth Management

Wealth Management in Turbulent Times

Navigating the Challenges Ahead

2022 proved to be a challenging year for the stock market as a whole and the RIA industry.  With persistent inflation, rising interest rates, a tight labor market, and heightened geopolitical tensions, it’s no surprise that this resulted in the decline of nearly all stock market sectors over the last year, which was especially true for the RIA industry. But with the prospect of a potential recession in 2023, the worst may still be ahead. 

Industry Trends Transactions

RIA M&A Update

RIA M&A activity set new records in 2022, even as macro headwinds for the industry emerged throughout the year. However, deal volume was most significant in the first half of 2022 and began to cool in the second half of the year, particularly in the fourth quarter. Although transaction volume is still up over the prior year, there has been a decline in the size of these transactions.

Industry Trends

The Eye of the Storm

RIAs Outperform the S&P 500 in Q4 2022

The RIA industry saw a strong fourth quarter rally, driving most categories of publicly traded investment managers to outperform the S&P in the last quarter of the year. Alternative asset managers, however, declined from their early-November peak to perform in line with the S&P during this period. In our blog this week, we take a look at the performance of the RIA industry by sector and AUM in the fourth quarter of 2022.

Industry Trends

‘Twas the Blog Before Christmas…

The 2022 Mercer Capital RIA Holiday Poem

It has become a tradition for the RIA team at Mercer Capital to end the blog year with a “unique” annual summary of industry events, riffing off Clement Clark Moore’s classic “A Visit from St. Nicholas.”  We hope all of you in the investment management community are enjoying the holiday season and looking forward to the many opportunities of the new year.  We look forward to hearing from you in 2023.  For now, please enjoy the finest only holiday poem written about money management.

Industry Trends

Shifting Gears to 2023: Six Trend Changes for RIAs

Don’t Let Your Clutch Slip!

As the RIA team at Mercer Capital looks back on 2022 and ahead to next year, we’ve noticed a few themes emerge in discussions with clients that we expect to hear more about in the new year.  Don’t think of these as predictions but simply the current state of market behavior—the implications of which will soon be evident.

Asset Management Industry Trends

Westwood Looks to Replace Lost AUM and Revenue with Salient Partners Acquisition

Two weeks ago, Westwood Holdings Group completed its acquisition of Salient Partners’ asset management business. The deal is expected to add $4 billion in AUM and $31 million in annual revenue to WHG, pricing the total consideration at 1.5% of AUM and just under 2x revenue. Masking losses through acquisitions is typically a risky proposition, but this may be an instance where it actually makes sense.

Call Reports

Buyer’s Remorse? CI Financial’s M&A Binge

On the earnings call last week, CI Financial reiterated intentions to separate its U.S. wealth management business and Canadian asset management business through an IPO of its U.S. wealth management business. While CI has had apparent success at completing deals, investors have not been on board with the strategy. The firm’s deal pace is slowing, and the focus has shifted to deleveraging and attempting to unlock the value of the U.S. wealth management business built through the planned spinoff.

Current Events Industry Trends

Rough Quarter in a Rough Year

Q3 RIA Performance Was Mostly Bad, But in Lots of Different Ways

Most of the 9/30 quarterly results are in, and public RIA performance was all over the map.  Mostly, it was a rough quarter in a rough year.  Sagging AUM led to revenue cuts which dropped straight to the bottom line.  Some firms mitigated their downside by cutting bonus compensation and marking down earnout payments for acquisitions.  We did a survey of a cross-section of asset and wealth management firms.  Ultimately, it appears some business models are working better than others.

Industry Trends Transactions

Rising Interest Rates Will Likely Affect More Than Just RIA Stock Prices

Higher RIA Aggregator Bond Yields Could Portend Lower M&A and Transaction Multiples in 2023

Before this year, yields didn’t move much and generally stayed between 2% and 8%, depending on the term and credit quality of the issuer.  That all changed last November when the Federal Reserve and other central banks began raising interest rates to fight mounting inflationary pressures in the global economy.  Now RIA aggregator bond yields are in the 6% to 14% range after fairly steady gains throughout this year.

Asset Management Industry Trends Wealth Management

Multiple Contraction Drives Returns for Publicly Traded Asset/Wealth Managers

While multiples for publicly traded asset and wealth managers have been hit hard this year, RIA valuations in the private market have been more resilient as a proliferation of professional buyers and capital in the space have supported deal activity and multiples. Nevertheless, market conditions are beginning to have an effect. Run rate performance for most firms is down significantly, and borrowing costs for leveraged consolidators are rising. The upward momentum in multiples that persisted throughout last year has stalled, and deal structures have started to shift more of the purchase price into contingent consideration to bridge increasingly divergent buyer and seller expectations. Read more about it in this week’s post.

Industry Trends

One Step Forward, Two Steps Back: RIA Stocks Finish the Quarter Down 10% after a Fast Start

Most RIA Stocks Have Lost Nearly Half Their Value Since Peaking Last November

The RIA industry extended its losing streak last quarter with all classes underperforming the S&P, which also continued its decline. The market itself is part of the problem as this industry is mostly invested in stocks and bonds, which have been down considerably since the first of the year. The additional underperformance for asset and wealth managers is likely attributable to lower industry margins as AUM and revenue fall with the market while labor costs continue to rise.

Asset Management Industry Trends

Asset Management Without a Net

This Time, There Is No Fed “Put”

As September of 2022 came to a close, asset management is experiencing one of the most challenging years in history.  Losses are both deep and widespread.  The consequence is a tough quarterly letter to pen to investors, a hit to revenue, and an even bigger impact on profitability.

Industry Trends Transactions

RIA M&A Update

The continued strength of RIA M&A activity amidst the current environment dominated by inflation, rising interest rates, and a tight labor market is noteworthy, given that all these factors could strain the supply and demand dynamics that have driven deal activity in recent years.  Rising costs and interest rates coupled with a declining fee base will put pressure on highly leveraged consolidator models, and a potential downturn in performance could put some sellers on the sidelines until fundamentals improve. 

Current Events Industry Trends Wealth Management

Market Indications of RIA Value are Mixed, To Say the Least

Unicorn or Glue Horse?

The differential in interest in public investment management businesses and private investment management businesses isn’t sustainable. Will higher interest rates eventually wear down leveraged acquirers, as they have in other growth-and-income sectors? Will PE investors start to question the merits of trading companies from fund to fund instead of testing valuations in the open market? Will the public RIA group follow Pzena’s lead and go private? Or will public investors’ newfound interest in dividend stocks lead them to RIAs? It’s tough to forecast a public RIA resurgence but never say never.

Asset Management Transactions Wealth Management

Reconciling Real-World Transactions With the Fair Market Value Standard

When business owners think about the value of their firm, they frequently think in terms of the dollar value that they believe they could sell the business for in an arms’ length transaction. However, the nuances of real world transaction terms in the investment management industry can often obscure what’s being paid for the business on a cash-equivalent basis. In this blog post, we explore various transaction structures employed in the industry and their relationship to fair market value.

Practice Management Wealth Management

How Does Your RIA’s Client Base Affect Your Firm’s Value, and What Can You Do to Improve It?

We’re often asked by clients what the range of multiples for RIAs is in the current market.  At any given time, the range can be quite wide between the least attractive firms and the most attractive firms.  The factors that affect where a firm falls within that range include the firm’s margin, scale, growth rate of new client assets, effective realized fees, personnel, geographic market, firm culture, and client demographics (among others). 

In this post, we focus in on the client demographics factor, explain how buyers view client demographics, and explore steps some firms are taking to reach a broader client base.

Industry Trends Practice Management

RIAs Are a Value Investment in a Growth Obsessed World

Maybe That’s Okay

We think of investment management firms as a “growth and income” play. The space has attracted capital specifically because RIAs produce a reliable stream of distributable cash flow with the upside coming from market tailwinds and new clients. For all the trade press touting interest in RIAs, investing trends over the past fifteen years have had a mixed impact on the investment management community.

For asset managers, cheap capital makes stock picking less important. Persistent alpha is harder to prove. Passive and alternative products are more competitive. Investment committees are surly. Fee pressure is rampant.

For wealth managers, cheap capital has made diversification look kind of pointless and bordering on stupid. In the rearview mirror, owning anything other than the S&P 500 has, since the credit crisis, looked like a mistake. While this may not have had an immediate impact on revenue and margins, it does nothing to cement advisor/client relationships.

But what about valuations? Where do RIAs fit in an environment that favors growth stocks?

Transactions

Far(ther)sighted or Blind Ambition: Tech Platform Nets RIA a Big Price

Farther Finance Advisor’s Recent Capital Raise Implies a Valuation at 20% of AUM and 20x Run-Rate Revenue

We’re sometimes surprised when we hear about buyers paying 20x EBITDA for RIAs with under $1 billion in assets under management, so you can imagine our reaction to MassMutual Ventures, Bessemer Venture Partners, and Khosla Ventures paying an implied valuation at 20% of AUM and 20x revenue for Farther Finance Advisors, a start-up, tech-heavy RIA with $250 million in AUM. We’ll explore the logic and potential pitfalls of this valuation in this week’s post.

Practice Management Transactions

Bear Markets Cost RIA Sellers, But Boost Buyers

A Public Service Message That Earn-outs Aren’t Always Earned

One reason deal activity can remain strong in tough financial markets is that buyers can use earn-outs to control what they pay for deals, offering more money in the event that markets recover and justify higher valuations, and managing their outlays if performance lags. For sellers, the relevant consideration is bear markets may tank a big part of their expected deal consideration, well beyond their control. A falling tide may not simply work to the detriment of sellers, but also hand buyers a bargain purchase when markets improve. Earn-outs align interests in the near term but can provide asymmetric benefits in years ahead.

Industry Trends Transactions

Pzena Going Private Could Have Larger Implications for the Investment Management Industry

Last week Pzena Investment Management, Inc. announced that it had entered into an agreement to become a private company again via a transaction in which holders of PZN Class A common stock would receive $9.60 per share in cash, a 49% premium to its closing price before the announcement ($6.44). In this week’s post, we attempt to rationalize this premium and any implications for the investment management industry.

Asset Management Current Events Industry Trends Practice Management

Schwab’s 2022 Benchmarking Study Offers Insights Into the RIA Industry

How Does Your RIA Measure Up?

Schwab recently released its 2022 RIA Benchmarking Study.  The survey contains responses from over 1,200 RIAs representing $1.8 trillion in AUM to questions about firm operating performance, strategy, and practice management.  The survey is a great resource for RIA principals to see how their firm’s performance and direction measure up against the average firm.  In our blog post this week, we highlight some of the key results of the survey.

Investment Management

Mercer Capital provides RIAs, trust companies, and investment consultants with corporate valuation, litigation support, transaction advisory, and related services