Evaluating a Buyer's Shares From the Seller's Perspective
Stock consideration is rarely discussed in RIA transactions, but it is a common financing feature in other industries. We expect to see more stock for stock deals in RIAs for two reasons. As public investment management firm multiples continue to push higher, buyers will be tempted to take advantage of multiple-arbitrage in certain situations. 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? Jeff Davis has a few thoughts.
There’s been a great deal of interest in RIA acquisitions in recent years from a diverse group of buyers ranging from consolidators, other RIAs, banks and diversified financial services companies, and private equity. These acquirors have been drawn to RIA acquisitions due to the high margins, recurring revenue, low capital needs, and sticky client bases that RIAs often offer. Following these transactions, acquirors are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. In this post, we describe what a purchase price allocation is and discuss the common intangible assets acquired in the purchase of private asset and wealth management firms – existing customer relationships, tradename, non-competition agreements with executives, and the assembled workforce.
What Is a Fairness Opinion?
Process and value are at the core of a Fairness Opinion. It is backed by a rigorous valuation analysis and review of the process that led to the transaction. In this second of a two-part series, we discuss some of the issues that are considered in a Fairness Opinion.
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.
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.
Guest Post by Louis Diamond of Diamond Consultants
For both buyers and sellers, knowing where your firm fits into the RIA M&A landscape is an important first step towards identifying compatible transaction partners. The universe of RIA sellers can be categorized based on firm culture, the motive behind the transaction, management’s expectations for post-transaction roles, liquidity needs, the status of next-generation management, and the like. As RIA transactions have proliferated in recent years, several different buyer profiles have emerged that address the concerns of these different seller types. In this week’s guest post, Louis Diamond of Diamond Consultants identifies four common buyer profiles and the types of sellers that fit well with each.
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.
In last week’s blog post, we covered five considerations for designing earn-outs. While there is no one set of rules for structuring an earn-out, keeping those conceptual issues in mind can help anchor the negotiation. This week, we look at an example RIA transaction to illustrate how the considerations come into play when buyers and sellers are working out deal pricing and structure.
The Role of Earn-Outs in RIA Transactions (Part Two)
Like old sports cars, acquisitions don’t come with warranties, so protecting yourself against buyer’s remorse is critical. Even with escrows and punitive terms, you can’t guarantee that you’ll get what you pay for in an acquisition; but, with a properly structured earn-out, you can at least pay for what you get.
In part one of this series of posts, we explore the basic economics of contingent consideration and the role it plays in negotiating RIA transactions.
Executives Seek Revenue Streams That Aren’t Tied to Interest Rate Movements
COVID-19 adversely affected sector M&A for a couple of months when most of the U.S. was under shelter at home/safer in place orders. However, deal activity is recovering quickly and now could be further accelerated as banks look to replace lost interest income with fee-based revenue. An increasing number of clients on the banking side of our practice are showing interest in the wealth management space, and it’s easy to understand why. Long-term rates hovering at historic lows have significantly impaired net interest margins, so banks are exploring other income sources to fill the void. Wealth management is a natural place to start since so many banks already offer financial advisory services of one form or another.
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.
RIA M&A Amid COVID-19 (Part II)
The outlook for RIA M&A at the end of the first quarter was murky. As anticipated, previously announced deals in the final stages of negotiations did close despite COVID-19, but new deal activity slowed some in the second quarter. Interestingly, independent RIAs, rather than consolidators, drove much of this deal activity.
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.
Recent Deal Flurry Highlights Investor Appetite for Cost Savings and Recurring Revenue
This week’s post explores the motivations and implications of February’s record month for RIA Dealmaking.
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.
Drivers of Valuation in Wealth Management M&A
Fidelity recently published a study on M&A activity in the wealth management industry highlighting sellers’ ambitious expectations of the value of their firms Fidelity’s conclusion: sellers of investment management firms often “don’t entirely understand what drives valuation.” In this post we hope to provide insight to the owners of wealth management firms on how likely buyers value their firm.
Barbarians at the Gate 2 – Electric Boogaloo
Investment management is a great business. Firms that don’t need to sell, don’t sell. If transaction activity is up, does this mean that more firms need to sell? If pricing and deal terms are better, are the transactions available today really that much more attractive than those available a few years ago? And is the culture of consolidation that has emerged in the RIA community sustainable?
Asset and Wealth Manager M&A Continues Decade-Long Upward Trend
Asset and wealth manager M&A continued at a rapid pace during the fourth quarter of 2019, rounding out a record year by many metrics. Total deal count in 2019 rose 6% over 2018, reaching the highest level seen over the last decade. While reported deal volume declined by 50% in 2019, this metric can be a less reliable indicator of transaction activity given the lack of disclosed deal terms and the influence of large transactions. In 2020, we expect several trends to continue as many of the forces that shaped the industry over the last decade remain in place.
Is Private Equity the Solution to Your Succession Planning Needs?
Private equity pervades the RIA industry, but most of their recent interest is through consolidators or roll-up firms. In this week’s post, we’ll discuss the implications of this trend and other considerations for RIA owners’ contemplating the PE route.
Advisor Growth Strategies’ New Study Offers Insights into RIA Deal Mechanics
RIA M&A has been a well-publicized topic in the industry. There was a record level of RIA M&A in 2018, and so far in 2019 there are no signs that deal pace is slowing down. Against this backdrop, a new study conducted by Advisor Growth Strategies (AGS) and sponsored by BlackRock provides some insight into the state of deal terms in the RIA M&A market from the perspective of both buyers and sellers. We’ve highlighted some of the key takeaways from the study in this week’s post.
Asset and Wealth Manager M&A Keeping Pace with 2018’s Record Levels
Through the first three quarters of 2019, asset and wealth manager M&A has kept up with 2018, the busiest year for sector M&A during the last decade. Transaction activity is poised to continue at a rapid pace as business fundamentals and consolidation pressures continue to drive deal activity. Several trends which have driven the uptick in sector M&A in recent years have continued into 2019, including increasing activity by RIA aggregators and mounting cost pressures.
As banks of all sizes seek new ways to differentiate themselves in a competitive market, we see many banks contemplating the acquisition of an existing asset management firm as a way to expand and diversify the range of services they can offer to clients. Transaction structures between banks and asset managers can be complicated, often including deal term nuances and clauses that have significant impact on fair value. Asset management firms are unique entities with value attributed to a number of different metrics (assets under management, management fee revenue, realized fee margin, etc.). It is important to understand how the characteristics of the asset management industry, in general, and those attributable to a specific firm, influence the values of the assets acquired in these transactions.