A weekly update on issues important to the Investment Management industry
Abu Dhabi has been on a buying spree, announcing this week that their sovereign wealth fund was acquiring CI Financial, taking it private just over a year after a Bain-led consortium invested US$1 billion in the publicly traded investment management firm. We suspect the terms of the Bain deal formed the predicate to this week’s announcement.
Alternative asset managers fared particularly well during favorable market conditions for the RIA sector. Over the past year, both alternative asset managers and large RIAs (with assets under management, or AUM, exceeding $250 billion) outperformed the S&P 500, achieving gains of 64.6% and 37.7%, respectively. As these dynamics continue into Q4 2024, the outlook for continued multiple expansion and robust deal activity for alternative asset managers remains favorable.
Following a year where deal volume in the RIA industry nearly matched the all-time high of 2022, RIA M&A activity has cooled in 2024. Fidelity’s September 2024 Wealth Management M&A Transaction Report listed 155 deals through September 2024, down 11% from the 174 deals executed during the same period in 2023. As RIA deal activity experienced a greater decline than the broader M&A market, we explore what this means for your RIA.
RIAs outperformed the S&P in the third quarter of 2024, with alternative asset managers experiencing the strongest returns amid multiple expansion. All groups examined experienced growth in AUM and revenue year-over-year. We explore further in our Q3 2024 Market Update.
Despite the growth of the defined contributions sector, many RIAs have avoided retirement plans in favor of larger opportunities. This leads to the question: are retirement plans an underappreciated growth opportunity for RIAs?
For several years, RIA consolidation was fueled by cheap debt, compelling acquisition multiples, and AUM growth underpinned by rising markets. Today, debt isn’t free, acquisition multiples have been bid up, and public markets have become dependent on a very narrow list of equities for growth. Despite headwinds, the P.E. thesis of investing in the RIA space: sticky revenue, low capital intensity, and dependable margins, has survived the pandemic and rough market years like 2022. The missing element was and is the inaccessibility of public market equity to cash out the P.E. investment thesis and to provide replenishment capital to do new deals.
Most economists and market participants now believe the Federal Reserve will start cutting interest rates at its September meeting as inflationary trends show signs of easing. Naturally, we’re interested in how expected rate cuts will affect the investment management industry’s transaction multiples. Many industry observers believe anticipated rate cuts will have little or no impact on the sector since most RIAs don’t have any debt on their balance sheets. While it’s true that most investment management firms do not employ leverage in their capital structure, lower interest rates will nonetheless impact their cost of equity and, consequently, their valuations.
One of the most frequently ignored sectors in the wealth management industry may be its first cousin, the independent trust industry. While many still associate trust administration with banks, which account for more than 75% of the space, the growing prominence of independent trust companies is capturing the attention of many participants in the investment management community. In this post, we examine current trends impacting independent trust companies.
Following a year where deal volume in the RIA industry nearly matched the all-time high of 2022, RIA M&A activity has cooled in 2024. Fidelity’s May 2024 Wealth Management M&A Transaction Report (most recent available data) listed 86 deals through May 2024, down 17% from the 103 deals executed during the same period in 2023. In this post, we explore what this means for your RIA now and looking forward.
RIAs underperformed in the second quarter of 2024, with even the largest asset managers facing a decline in stock price in spite of a stronger asset base on which to collect revenue. Despite the price drop, all groups examined experienced growth in fundamentals year-over-year. We explore further in our Q2 2024 Market Update.
Consolidation is a theme that has a lot of traction in the RIA industry. The prevailing narrative is that a growing multitude of buyers are scrambling to compete for a limited number of firms. With the rapid pace of deal activity in the RIA industry, you might expect to see the number of firms decline. Despite consolidation pressures and record levels of acquisition activity, the reality is that the number of RIAs continues to increase, with new formations outpacing consolidation.
Despite persistent inflation, elevated interest rates, and heightened geopolitical tensions, the asset management industry and the stock market as a whole saw a resurgence during 2023. Our index of publicly traded asset management firms generally tracked the movement in the broader market, with stock prices for smaller asset managers (AUM under $250 billion) up 30.3% and large asset managers (AUM over $250 billion) up 22.0% over the year ended March 31, 2024, while the broader market (S&P 500) was up 29.9%. Read more about the market’s resilience and future outlook in this week’s post.
Share prices for most publicly traded asset and wealth management firms trended up alongside the broader market in Q1 of 2024. Alternative asset managers continued to outperform the S&P 500 and other RIAs, ending the quarter up about 12.6%. On a year-over-year basis, all sectors of RIAs experienced growth as the markets rebounded from the 2022 slump. Read more for a full overview of RIA performance.
The CFA Institute Research & Policy Center’s recent report reveals the significant influence of financial influencers (finfluencers) on the investment decisions of Gen-Z, underscoring the urgent need for the wealth management industry to adapt to the digital age. Highlighting a concerning gap, the report notes that a substantial portion of finfluencer content lacks necessary disclosures, potentially leading young investors to make decisions based on biased information.
Despite the challenges posed by finfluencers, the report suggests they offer a unique opportunity for RIAs to engage with the next generation of investors, advocating for strategic partnerships complemented by rigorous compliance and transparency measures. Read the details in this week’s post.
The M&A space in the RIA sector has seen a marked increase in transaction activity over the past ten years, along with advancements in its supporting infrastructure. Professionalization of the buyer market has led to a more detailed examination of target companies’ earnings. Mercer Capital’s whitepaper highlights the importance of Quality of Earnings (QofE) analysis in presenting a more accurate picture of a company’s earnings and cash flows for both potential buyers and sellers.
In 2023, the RIA industry witnessed growth and rebounded from the previous year’s slump, despite earlier concerns about inflation and high interest rates. This growth occurred alongside a shift in the financial landscape, where public firms in wealth management underperformed compared to the broader market and alternative asset managers. Additionally, RIAs have found the importance of data use, with many advisors using data to enhance portfolio decisions, operational efficiencies, and client relationships.
Despite challenging macroeconomic conditions in 2023, RIA M&A activity demonstrated resilience, with Fidelity’s November 2023 report showing a 3% increase in deals compared to 2022. The total transacted AUM saw a notable 25% increase, with an average AUM per transaction rising by 21%. Factors contributing to this growth included consolidation forces in the industry, confidence in the macroeconomic environment, and significant investments by firms such as Mercer Advisors and CAPTRUST, as well as partnerships with private equity firms.
In Q4 2023, most publicly traded asset and wealth management firms saw share prices rise, with alternative asset managers seeing 21% growth, outperforming the S&P 500. Despite market growth, there was a decline in year-over-year revenue for most RIA sectors, attributable to fee compression. This report also highlights that larger RIAs (with AUM over $100 billion) generally outperformed the S&P 500, while smaller RIAs (with AUM under $10 billion) underperformed.
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 2024. For now, please enjoy the finest only holiday poem written about money management.
The recent analysis by Bloomberg highlights the potential for a bear market to intensify the challenges faced by active money managers, including fee pressures, asset outflows, and growing competition from passive investing strategies. Despite headwinds and the rising popularity of passive products, the resilience of some active management firms suggests a future where the industry might see less competition and more opportunity for alpha. Despite higher market caps than in 2008, asset management firms face a contraction in earnings multiples, suggesting a complex outlook that balances risks with the potential for restructuring and consolidation within the sector.
In the midst of robust M&A activity, the RIA industry defies typical consolidation trends, continuing to grow with new firm creation outstripping the pace of acquisitions. This expansion has been propelled by a shift from the broker-dealer model to a fiduciary model, alongside the allure of building valuable, saleable enterprises.
In the recent financial landscape, alternative asset managers have significantly outpaced other categories, particularly in the RIA sector, demonstrating resilience and impressive gains amidst market volatility. While traditional asset managers have seen some pressure, larger entities, especially those in private equity, experienced notable growth and stability, largely due to their robust structures and strategic partnerships. The current trends underscore the importance of understanding nuanced market shifts, what these developments mean for various asset managers, and investment approaches in an evolving economic climate.
Although inflation has begun to subside and the stock market has rallied after a turbulent start to 2023, elevated interest rates and macroeconomic uncertainty have contributed to a slight decline in deal volume so far in 2023. Despite the slight decline in deal volume, total transacted AUM increased. In this week’s post we discuss some of the contributing factors of this, and what it means for your RIA.
In Q3 2023, while most publicly traded asset and wealth management firms experienced share price decreases in tandem with the broader market, alternative asset managers stood out with about 10% growth. This deviation can be attributed to factors like market volatility since 2020, which has boosted demand for stocks of alternative asset managers due to their more predictable revenue streams. Furthermore, the shifting market conditions highlighted potential implications for individual RIAs.
