RIA M&A Activity Continues to Reach Record Highs
Despite the dip in the second quarter of 2021, RIA M&A activity continues to reach record highs putting the sector on track for its ninth consecutive year of record annual deal volume.
As we discussed last quarter, the same three demand drivers were persistent throughout the third quarter. While fee pressure in the asset management space and a lack of succession planning by many wealth managers continues to drive consolidation, looming proposals to increase the capital gains tax rate has accelerated some M&A activity in the short-term as sellers seek to realize gains at current rates.
Increased funding availability in the space has further propelled deal activity as acquisitions by consolidators and direct private equity investments increased significantly as a percentage of total deals during the recent quarter. What does this mean for your RIA firm? Read this post to find out.
Beginning With No End in Mind
The rise of “permanent capital” providers is both in response to and appropriate for the current environment of premium entrance multiples in the RIA space. While making a permanent capital investment doesn’t eliminate the depressive effects of current valuations on returns, it does help to mitigate them.
Absent self-imposed pressure to generate an exit within the foreseeable future, RIA investors can focus on opportunities for sustainable and growing distributions – the real value of investing in investment management.
Is the RIA Industry in Growth Mode or Shake-Out?
While the wealth management industry is not new, the amount of change, churn, and growth that has occurred in the industry over the past ten years make it easy to forget how far the RIA industry has come since the heyday of broker-dealers. Contextualizing the challenges facing the wealth management industry leaves one to wonder if many of these trends are no more than growing pains in the sector’s life cycle. And if so, what might such analysis suggest about the prospects for the fiduciary model?
If the Choice Is Buy vs. Build, "Build" Doesn’t Even Come Close
Are RIA transaction multiples getting out of hand? Contrary to the usual laws of supply and demand, each week it seems like we hear about another blockbuster deal rumored to have happened at an astronomical price, and correspondingly, we meet a new capital source we hadn’t known previously who is looking for way to implement an acquisition strategy in the RIA space. Is this FOMO on a grand scale, or just part of a grander moment in market dynamics?
RIA MIA activity slowed somewhat in the second quarter of Q2, but RIA markets are still on track to record the highest annual deal volume on record. As we discussed last quarter, fee pressure in the asset management space and a lack of succession planning by many wealth managers are still driving consolidation. But the increased availability of funding in the space, in tandem with more lenient financing terms, has also caused some of this uptick. But could some of this activity be attributable to the RIA rumor mill and the hype of double-digit multiples in the space?
Over the last year, many publicly traded investment managers have seen their stock prices increase by 70% or more. This increase is not surprising, given the broader market recovery and rising fee base of most firms. With AUM for many firms at or near all time highs, trailing twelve month multiples have expanded significantly, reflecting the market’s expectation for higher profitability in the future. For more insight into what’s driving the increase in stock prices, we’ve decomposed the increase to show the relative impact of the various factors driving returns between March 31, 2020 and March 31, 2021.
Despite the hiatus in M&A beginning in March of last year with the onset of COVID-19, 2020 was a strong year for RIA mergers and acquisitions and 2021 is expected to be even stronger.
Old Rules of Thumb, Recent Headlines, and the Endowment Effect
As a financial analyst, a CFA charter holder, and a generally reasonable person, I know that Zillow isn’t accurate; but as a homeowner, I can’t help myself. When I am walking around my neighborhood, I always have the Zillow App open, and am speculating about how the “Z-estimate” for my house compares to my neighbors’. And, of course, my house always is better. Why? Because I own it. It’s called the endowment effect. I (as a homeowner) am emotionally biased to believe that something (my house) is valued higher than the market would ascribe, simply because I already own it.
And you, the owner of an RIA, may believe your firm is valued higher than the market value too, and old rules of thumb and recent industry headlines amplify the problem.
Deal Activity Rebounds After Brief Lull; Deal Terms and Multiples Remain Robust
After a brief lull during the second quarter of last year, RIA deal activity surged in the fourth quarter, rounding out a record year in terms of reported deal volume. Concerns about the pandemic and market conditions were quickly shrugged off, as deal terms and the pace of deal activity returned to 2019 levels after the brief pause at the peak of the shutdown.
Catching a Falling (Butter) Knife
Last week, Macquarie Group announced its acquisition of Waddell & Reed (WDR) for $1.7 billion. At first glance, the pricetag implies an EBITDA multiple of over 11x and some are asking why Macquarie’s new CEO paid such a premium for a business whose AUM has halved over the last six years. Unfortunately, it’s not that simple. In this post, we dig into the deal economics and explain why paying a premium does not necessarily mean Macquarie over paid.
Despite Harrowing Moments, the RIA Community Is Prospering
Now, after seven months of living with the pandemic, there is still no end in sight. We might only be halfway! But despite the barrage of challenges, the RIA community has embraced WFH, profited from buoyant markets, and resumed a relentless pace of M&A. It has been, if very strangely, a very good year. Is this a sign of industry resilience? Or an awful lot of luck?
What Do You Do When Liquidity Matters More Than Fundamentals?
After the initial punditry on whether or not the 2020 market crash/recession and recovery would be “L” shaped, “U” shaped, “V” shaped, or “W” shaped, it has become clear that the recovery is “K” shaped, with higher-skilled and higher paying jobs recovering rapidly, and many lower-skill, lower-paying jobs declining. What does this mean for RIAs? Most RIA clients are higher-income professionals who are paying more attention to their investment portfolios in this environment – not less. Bullish for clients = bullish for the industry.
Last Wednesday, the SEC announced an expansion to the definition of “accredited investor” to include individuals based on professional certifications and inside knowledge of issuers while keeping the old wealth and income thresholds the same. What does this mean for RIAs, their clients, and for capital markets?
Earn-outs are commonly used in RIA deals, and we expect contingent payments to make up an even larger percent of deal consideration for the next few months, quarters, or years depending on how long the current economic uncertainty lasts. And while we hope most of our clients would be thrilled by the prospect of $335 million in upfront cash payments, we don’t want you to end up feeling as Ryan Reynolds did last week. In this post, we explain what an earn-out is, why they are commonly used in RIA transactions, and how earn-outs may be used as a saving grace for deal activity in the current economic environment.
Is Volatility the New Normal?
If one thing has become clear, it’s that market volatility is here to stay – at least for a while. In this post, we explore what this volatility means for you and for your RIA.
In this post, we look back at RIA transactions that occurred in Q1 2020 and venture what M&A will look like over the rest of the year.
Tune Your Business Model for Greater Resiliency
The value of RIAs and the future of transactions in the industry ultimately comes down to the health of the individual firms. Fortunately, there is a relatively straightforward way to assess the financial well-being of your firm, and ways of taking corrective action if your firm’s future is threatened.
Matt Crow's Podcast Interview with Mindy Diamond
This is our first blogpost in three weeks. As the Coronavirus pandemic set in across the United States, Mercer Capital adjusted to working remotely about as smoothly as I could have hoped. The RIA team here at Mercer Capital struggled to find appropriate topics to cover in our weekly blog. Regular “business as usual” topics seemed out of place, and writing about very current events, like the massive dislocations in the structure of markets, isn’t why our readers spend their precious minutes absorbing our blog. For a couple of weeks, it seemed better to say nothing than to say the wrong thing. Fortunately, Mindy Diamond of the financial advisory recruiting firm, Diamond Consulting, asked if I would help her with a podcast about the impact of the pandemic on RIA valuations and, consequently, on transaction activity.
If you don’t subscribe to the Diamond podcast, Mindy hosts the all-stars of the RIA universe like Shirl Penney, David Canter, Mark Tibergien, and Liz Nesvold. Mindy also throws in a few mere mortals such as myself for variety – and digs until she gets well past the talking points. I hope you enjoy listening to this as much as I enjoyed the interview.
Creative Planning’s Minority Sale is the Most Consequential RIA Deal So Far in 2020
It’s hard to imagine, but the most significant piece of news for the RIA community so far this year happened less than three weeks ago and is already almost forgotten: Peter Mallouk sold a minority stake in his firm, Creative Planning, to private equity firm General Atlantic. The transaction is easily one of the largest, if not the largest, minority transaction in the history of the RIA industry, and potentially provides a blueprint for others to follow.
SchwabiTrade isn’t the Only Threat to the Most Consistent Profit Stream in the RIA Community
It’s hard to see the advent of SchwabiTrade as a good thing for the RIA community – especially the wealth management community. If Schwab is looking to recapture margins from zero commission trading and low rates on sweep accounts, it need look no further than the ten thousand plus RIAs now in its eco-system.
Pre-season Soccer and the Mercer Price Tag are Likely More About Form Than Substance
We were intrigued (and skeptical) of the recent reports that RIA aggregator Mercer Advisors was looking to fetch a $700 million-plus price tag in a prospective sale by its PE backers at Genstar Capital. A 15-16x multiple on an estimated pro-forma, run-rate EBITDA of approximately $50 million results in a $750 million to $800 million enterprise value for the business, which certainly got our attention. Still, this figure could be meaningless if it’s an unlikely appraisal of Mercer Advisor’s current market value. For this week’s post, we’ll address our opinion from a fair market value and strategic value perspective.
Attention Drives Activity
It’s been a year since the Focus Financial IPO generated a similar level of conversation in the RIA community – and the transaction dominos have been falling ever since. In that same year, Victory Capital pulled off a major acquisition, Affiliated Managers Group got back into the acquisition game following a two-year hiatus, United Capital was acquired by Goldman Sachs, and Mercer Advisors is soliciting bids.
I was thinking about all of this on a road trip across the southeast last week, in-between blasting Tom Petty on satellite radio and dropping in on a few clients. At one of my first stops, a client asked if I saw a lot of M&A activity in the RIA space. Yes, I replied, but I see even more headlines about it. Plenty has changed in the RIA community in the last twelve months, but even more has not.
Fidelity’s Partnership with Merchant Investment Management
On June 10th, Fidelity Clearing & Custody Solutions and Merchant Investment Management announced a new partnership to increase wealth managers’ access to capital for acquisitions and growth initiates. The deal opens up a sizable new sales channel for Merchant, and in return, Fidelity’s behemoth platform tacks on a few additional selling points to entice M&A-minded RIAs.
No. But Goldman’s United Capital Buy Suggests the Consolidation Winds are Shifting
If there is one consistent story in these RIA rollups, it’s that building them takes longer than anybody expects. Duran worked on building United Capital for nearly 15 years. Some things require scale that cannot be acquired in one lifetime, however, and that’s where the CEO of Goldman Sachs, David Solomon, saw an opportunity.