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.
A Resurgent Year for Investment Management Firms
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.
Compensation Structures for Investment Management Firms Whitepaper
Labor is the single largest expense for any investment management firm, but beyond that simple fact, there is surprisingly little similarity regarding how the thousands of wealth managers, asset managers, independent trust companies, and investment consulting firms pay their people. Compensation studies show considerable variances in how much firms pay for certain positions, and the character of remuneration — salary, bonuses, equity compensation, benefits — varies as a function of firm history, economics, and culture.
Steady Interest Rates Calm Investor Nerves, Boosting RIA Performance
The second quarter of 2023 saw share prices for asset and wealth management firms reflect the broader market’s growth, particularly following the S&P 500’s transition into a bull market in June. However, smaller asset managers underperformed compared to their larger counterparts and the S&P 500, while earnings multiples for publicly traded RIAs saw an 8.8% increase due to a favorable interest rate environment and higher AUM balances. The upcoming report on Q2 M&A activity is set to provide further insight into these trends, and while comparisons with closely held RIAs require caution, focusing on core business practices can offer protection from market volatility.
Asset Management Firms Struggle as Market Downturn and Fund Outflows Persist
2022 was a tough year for the RIA industry and the stock market, as persistent inflation, rising interest rates, and geopolitical tensions shook the economy. Asset management firms felt the pressure, but what factors drove this decline and how did it impact the industry? Discover the challenges faced by both active and passive funds, and explore the outlook for asset managers in the face of an uncertain future.
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.
Who’s in the Driver’s Seat?
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.
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.
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.
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.
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.
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.
Publicly traded hedge fund managers and PE firms almost doubled in value during 2021 before nearly giving it all back in the first quarter. In this week’s post, we also examine the performance of other classes of RIAs and comment on the current market for privately held RIAs.
What Public Company and Transaction Data Multiples May Tell Us About RIA Investor Preferences
This week we look to understand why private market multiples for RIAs have consistently embodied more optimism than that of their publicly traded peers. In doing so, we identify RIA investor preferences unique to the industry, and why such multiples may even be misleading indications of your firm’s value.
Publicly traded hedge fund managers and PE firms nearly doubled in value during 2021. In this week’s post, we review the investment manager performance in 2021 by sector and AUM size and provide implications for your RIA in 2022 based on the results.
The asset management industry fared well in 2021 against a backdrop of rising markets and improved net inflows. Strong performance in equity markets was a major contributor to this performance. In addition, 2021 saw modest organic growth, although there were significant variances by asset class. In this week’s post, we discuss these issues and present our outlook for the industry.
Aggregators Continue to Drive Deal Volume in 2021
Deal count is projected to reach new highs in the fourth quarter of 2021 as market activity continues to gain momentum, likely rounding out another record-breaking year for the RIA industry. In keeping with the rest of 2021, deal volume was driven by secular trends and supportive capital markets. As market activity remains robust, competition for deals continues to favor RIA aggregators such as Mercer Advisors, Mariner Wealth Advisors, Wealth Enhancement Group, and Focus Financial Partners (FOCS), to name a few. In this week’s post, we provide more information about the aggregators and offer our thoughts for the future.
After a Strong Summer, Public Asset Managers See Stock Prices Dip as Market Pulls Back in September
RIA stocks saw mixed performance during the third quarter amidst volatile performance in the broader market. In September, the S&P 500 had its worst month since March 2020, and many publicly traded asset and wealth management stocks followed suit.
In this week’s post, we illustrate what this means for your RIA and give a prediction on the outlook of the RIA industry.
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.
Publicly Traded Asset / Wealth Managers See Continued Momentum Through Second Quarter as Market Backdrop Improves
On balance, the outlook for RIAs has generally improved with market conditions over the last several months. AUM has risen with the market over this time, and it’s likely that industry-wide revenue and earnings have as well. With markets near all time highs, most RIAs are well positioned for strong financial performance in the back half of the year. This week’s post details the past performance and outlook for traditional asset and wealth managers, alternative asset managers, as well as aggregators and multi-boutiques.
When Do You Need A Fairness Opinion?
Fair is often the first-four-letter word that most children learn, and it often leads to more arguments than other choice words. Although children eventually learn that life is not always fair, we spend a lot of time ensuring that major economic events are. Transactions are rarely straightforward, and as the pace of M&A activity in the investment management community continues to accelerate, more shareholders are scrutinizing both the pricing and terms of transactions. In this post (and in the next), we explain when you should consider getting a Fairness Opinion and what that involves.
Publicly Traded Asset/Wealth Managers See Continued Momentum Through First Quarter as Market Backdrop Improves
The outlook for RIAs depends on a number of factors. Investor demand for a particular manager’s asset class, fee pressure, rising costs, and regulatory overhang can all impact RIA valuations to varying extents. The one commonality, though, is that RIAs are all impacted by the market. The impact of market movements varies by sector, however. On balance, the outlook for RIAs has generally improved with market conditions over the last several months. AUM has risen with the market over this time, and it’s likely that industry-wide revenue and earnings have as well. The first quarter was generally a good one for RIAs, but who knows where the rest of 2021 will take us.
Is human input in investment management a feature, or a bug? Our experience has been that human input finds unique solutions, secures and strengthens relationships, and ultimately provides clients with the best outcomes. Algorithms can be great tools, so long as their user has great skills.