A weekly update on issues important to the Investment Management industry
Succession planning has been an area of increasing focus in the investment management industry, particularly given what many are calling a looming succession crisis. The demographics suggest that increased attention to succession planning is well warranted: over 60% of RIAs are still led by their founders, and only about a quarter of them have non-founding shareholders. Yet when RIA principals are asked to rank their firm’s top priorities, developing a succession plan is often ranked last.
AUM multiples are an often-cited valuation metric in the RIA industry as a back-of-the-envelope way to quickly estimate a firm’s value. The simplicity of AUM multiples is also the greatest pitfall. In our post this week we focus on the key drivers of AUM multiples and other ways to improve the value of your assets under management.
Last weekend I had a chance to join my dad for the annual Concours on Amelia Island, a fantastic gathering of car collectors and interesting automobiles of all kinds and eras. Coinciding with the weekend’s events were collector car auctions from all the major houses. A cursory review of prices paid and those auction sell-through rates suggest that there’s not much of a recessionary cloud hanging over the economy yet—at least not the economy inhabited by classic car buyers.
One car that caught my attention last weekend sold for a comparatively modest sum. The beautiful 1949 Packard convertible pictured above and featured at the RM Sotheby’s auction brought just under $45,000. If you’re younger than 65, you can be forgiven for not knowing Packard, as the marque was discontinued in the late 1950s. Bad markets and a bad transaction got the best of a great automaker, which is a cautionary tale for anyone planning the future of their business. This week, we review lessons from the consolidation of the automobile industry that have merit in the RIA space.
Stock consideration is rarely discussed in RIA transactions but is a common financing feature in other industries. We expect to see more stock-for-stock deals in RIAs for two reasons. As debt financing becomes more expensive (and scarce) and consolidators start to question how much leverage they want to maintain, buyers will be tempted to use equity consideration instead of cash. And if capital gains tax rates rise and sellers can use rollover equity to defer gains, the structure will become more attractive to sellers. How can a seller decide whether or not to accept a suitor’s stock? Find out in this week’s post.
Revenue multiples are cited perhaps as much as any other valuation metric in the RIA industry. In this week’s post, we focus on their key drivers and ways to improve the value of your management fees.
Early last year, as market conditions began to deteriorate, we (along with many others) predicted a coming slowdown in RIA M&A activity. Despite this environment, we were initially proven wrong: RIA M&A activity seemingly defied gravity as the pace of deal activity continued to keep pace with record 2021 levels. Now, the data suggests that deal activity is beginning to lose momentum. So, is the slowdown here to stay? What does this mean for the future of deal activity? In this week’s post, we discuss a few predictions for the year ahead.
Investment management is a people business, and there are aspects to a people business which do not yield to financial modeling. This week, Matt Crow addresses industry conundrums for which there are no easy answers.
For this week’s post we’re introducing our whitepaper on compensation structures for investment management firms. This whitepaper is designed to help you navigate the various compensation models to optimize firm growth and employee retention.
Earlier this month, the Federal Trade Commission (FTC) announced a proposed ban on non-compete agreements in employment contracts. If enacted, the proposed ban would prohibit a common provision of employment agreements that employers use to limit employees’ ability to compete.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Last week, The Association of Trust Organizations held its annual meeting at the JW Marriott in Las Vegas to discuss industry trends, practice management, and recruitment during the Great Resignation. As a sponsor and panelist, we outline 5 takeaways from the meeting in this week’s blog.
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.
